CONTACT US
2,423
1,727
2.2%
319
14,517
Margin (% of net sales)²
EBITDA pre²
-696
Margin (% of net sales)²
Margin (% of net sales)²
Operating result (EBIT)²
Net sales
in %
Change
€ million
2017
EBITDA²
-28.7%
11.6%
16.7%
2,615
3,396
Earnings per share pre (€)²
Earnings per share (€)
Profit after tax
29.3%
25.6%
-10.5%
-446
4,246
3,800
28.7%
23.8%
-15.3%
-636
4,164
3,528
2018
781
€ million
MERCK GROUP
1668
Since
pushing boundaries and making new discoveries.
countries share a passion for
66
Employees in
hearts at Merck beat for science.
the name Merck has stood for
Around 52,000
€ 2.2 BILLION
Merck
do.
... is at
the heart
of every-
thing we
Merck
ANNUAL REPORT 2018
science
invested in research and development in 2018.
the positive power of science.
MERCK
ANNUAL REPORT 2018 FINANCES
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/
You can find out what else
makes our research hearts
beat faster at
Online
MAGAZINE
SCIENCE
Key figures¹
7.76
14,836
1.77
June 20
years of Merck
350 +
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
May 3
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.
Merck sells Consumer Health
April 19
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.
February 21
Highlights of 2018
HIGHLIGHTS OF 2018
4
Performance
Materials
Science
Healthcare
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.
Life
June 20
June 20
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.
FDA agrees to review request for approval of
cladribine tablets
July 30
FUTURE
INSIGHT
PRIZE
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.
Research heroes wanted
July 17
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.
Transformation program for Performance
Materials
July 3
HIGHLIGHTS OF 2018
6
5.99
U-
5
HIGHLIGHTS OF 2018
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.
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.
Merck
中国
² Not defined by International Financial Reporting Standards (IFRSS).
14,517
2017¹ •
14,836
2018¹-
€ million
Net sales
MERCK GROUP
2 Not defined by International Financial Reporting Standard (IFRSS).
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%
2,508
Business free cash flow²
29.9%
29.5%
-13.9%
-0.82
5.92
5.10
Business Sectors
2016
15,024
3,193
12,845
1 Excluding the Consumer Health business divested in fiscal 2018.
Key figure for fiscal 2017 adjusted.
2015
3,388
2014 —
3,630
2015
4,490
2016
4,246
-
3,800
2018¹-
2014
€ million
MERCK GROUP
EBITDA pre²
11,363
2017¹-
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.
VALUING CULTURAL DIVERSITY
People at Merck
Fundamental Information about the Group
Combined Management 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.
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.
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.
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.
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.
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.
92
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.
A HOLISTIC RECRUITMENT APPROACH
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.
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.
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.
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.
Furthering and asking more of talent
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.
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 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.
Combined Management Report.
Driving innovation through
curious people
— People at Merck
Fundamental Information about the Group
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.
1,153
— People at Merck
Asia-Pacific (APAC)
10,486
93
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
91
People at Merck
"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.
-
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.
OVERVIEW OF OUR HEADCOUNT FIGURES
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
DISTRIBUTION OF EMPLOYEES
by region
21%
North America
10,978
50%
Europe
25,792
0
6%
Latin America
3,340
20%
2%
Middle East and
Africa (MEA)
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.
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.
TARGETED ADVANCED TRAINING AND MAXIMIZING
PERFORMANCE CAPABILITY
Differentiated solutions to support
employee well-being
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
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 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.
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.
FOSTERING WORK-LIFE BALANCE
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.
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,
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, 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
⚫ Health and well-being
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.
• Service offers
96
Combined Management Report
Fundamental Information about the Group
People at Merck
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.
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.
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.
REGULAR GLOBAL EMPLOYEE SURVEYS
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.
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.
The results are used to identify strategic focus areas and they
feed into the company-wide work on an ongoing basis.
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.
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.
95
— People at Merck
Fundamental Information about the Group
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.
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 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.
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.
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.
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.
Building empowered leaders
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.
94
Combined Management Report
Fundamental Information about the Group
People at Merck
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 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 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.
USING THE OPPORTUNITIES PROVIDED
BY DIGITALIZATION
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 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.
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.
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.
DIVERSITY AND MANAGEMENT
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.
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.
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.
MANAGEMENT PROGRAMS FOR EXECUTIVES
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
Combined Management Report.
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.
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
Fundamental Information about the Group _ Research and Development
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.
Psoriasis
Phase II5
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.
Phase II
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.
Akt
APRIL
ATM
ATR
BLYS
BTK
IgA
IL
mAb
MetAP2
PD-L1
PeEF2
ADAMTS-5
PK
Systemic lupus erythematosus
Rheumatoid arthritis
Combined Management Report
Fundamental Information about the Group _ Research and Development
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)
Phase II
Evobrutinib (BTK inhibitor)
M6495 (anti-ADAMTS-5 nanobody)
M5049 (immune receptor inhibitor)
General Medicine
M5717 (PeEF2 inhibitor)
Indication
Status
Osteoarthritis
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.
Systemic lupus erythematosus
Phase II
IgA nephropathy
Phase II
M1095 (ALX-0761, anti-IL-17 A/F nanobody)
TGFB
Phase II
A proliferation-inducing ligand
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.
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.
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.
An expanded portfolio to benefit our customers
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.
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.
Combined Management Report
Fundamental Information about the Group _ Research and Development
89
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.
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.
Partnerships and agreements to broaden our reach
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.
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%.
Recognized for award-winning innovation
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 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.
90
Combined Management Report
Fundamental Information about the Group _ Research and Development
Performance Materials
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.
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.
Display Solutions
A disintegrin and metalloproteinase with thrombospondin motifs
Protein kinase B
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.
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.
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.
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.
Ataxia Telangiectasia Mutated kinase
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.
Ataxia Telangiectasia and Rad3-related kinase
B-lymphocyte stimulator
Bruton's tyrosine kinase
Immunoglobulin A
Interleukin
Methionine aminopeptidase 2
Programmed cell death ligand 1
Plasmodium eukaryotic elongation factor 2
Protein kinase
Transforming growth factor ẞ
88
Monoclonal antibody
•
• Meet customer needs
Combined Management Report
• Partner with the global scientific community
Invest in new and disruptive technologies for the long term
Improve and expand our portfolio
•
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.
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:
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
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
Business free cash flow
3,193
EPS pre
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
€ 5.92
EBITDA pre
4,246
Q1/2018
plant and equipment,
as well as digitalization
initiatives, higher inven-
Ongoing adjustment processes
in the Liquid Crystals business
that will not be offset despite
the enhanced diversification of
Performance Materials and active
cost management
Moderately negative foreign
exchange effect, particularly
owing to the development of
the U.S. dollar and currencies
of various growth markets
Low double-digit
percentage decline
Lower EBITDA pre and
investments in property,
tories due to changes
in the product mix and
volume growth
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
Forecasts for 2018 in the
interim report:
business sector
Net sales
14,517
Corporate and Other
Forecast for 2018 in the
2017 Annual Report¹
For Life Science we had expected organic EBITDA pre growth to be
similarly dynamic as in 2017 at around +8% due to the expected
Q2/2018
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.
Performance Materials
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.
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.
BUSINESS FREE CASH FLOW
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.
106
Combined Management Report
Report on Economic Position
Review of Forecast against Actual Business Developments
MERCK GROUP
Actual results 2017
in € million
Main comments
Q3/2018
(-10.5%:
in € million
~2,340 to 2,630
€ 5.00 to € 5.30
Exchange rate effect - 8% to
-10%
3,800
2,508
-21.4%
5.10
-13.9%
-1.6% Organic,
0.0% Portfolio,
0.0% Portfolio,
-3.9% Currency)
1The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
-8.9% Currency)
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%.
~3,700 to 3,900
Organic decline -1% to -3% vs.
2017
+6.1% Organic,
14,836
(+2.2%:
Moderately negative foreign
exchange effect -3% to 5%
Organic growth + 3% to +5%
Exchange rate effect -4% to -6%
~15,000 to 15,500
(excluding Consumer Health
~14,000 to 14,500)
Organic decline -1% to -3% vs.
2017
Exchange rate effect -5% to -7%
~3,950 to 4,150
(excluding Consumer Health
~ 2,460 to 2,770 EPS pre € 5.30 to € 5.65
(excluding Consumer
(excluding
Consumer Health
Results 2018
~ 2,310 to 2,620)
€ 5.00 to € 5.40)
~14,100 to 14,600
Organic growth + 3% to +5% vs.
2017
~ 3,750 to 4,000)
~ 3,750 to 4,000
Organic decline -1% to -3% vs.
2017
~2,380 to 2,670
€ 5.00 to € 5.40
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
Health business
Healthcare
Life Science
EBITDA PRE
4.7%
4.6%
4.8%
Men
10.6%
10.7%
12.5%
global, total
14.7%
14.5%
14.5%
global, total
62.5%
62.1%
61.1%
global, total
22.8%
23.4%
24.4%
41.3
41.4
41.7
Asia-Pacific (APAC)
global, total
5,698
5,267
4,507
32.3%5
in Germany
28.7%³
29.7%³
30.9%5
global, total
5.7%³
6.0% 3,4
6.5%5
Percentage of executives who
are not German citizens
36.7
64.7%³
63.6%5
Number of nationalities
703
653
705
576
588
604
5.1%
4.4%
4.1%
64.4%³
36.9
36.9
Europe
4 Ratio adjusted retrospectively.
5 Not including the Sigma-Aldrich legal entity in Steinheim (Germany) or Allergopharma.
98
Combined Management Report
Fundamental Information about the Group
People at Merck
REPORT ON ECONOMIC POSITION
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.
REPORT ON ECONOMIC POSITION
101
Macroeconomic and Sector-Specific Environment
3 Not including Sigma-Aldrich legal entities in Germany or Allergopharma.
104
111
Course of Business and Economic Position
Merck Group
Healthcare
Life Science
Performance Materials
Corporate and Other
Combined Management Report
Report on Economic Position
Macroeconomic and Sector-Specific Environment
101
Review of Forecast against Actual Business Developments
30.3%³
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.
14.5
42.4
42.5
42.8
Latin America
39.9
40.3
40.4
Middle East and Africa (MEA)
39.3
39.4
39.2
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.
North America
44.1
44.1
Germany
global, total
42.9
43.0
43.3
9.9
9.8
10.0
14.2
14.0
44.3
28.8%³
38.9%
39.1%
Merck (overall)
Dec. 31, 2018²
global, total
50,414
52,941
51,749
Asia-Pacific (APAC)
10,754
11,294
10,486
Europe
24,438
Merck (overall)
Dec. 31, 2017
25,980
by region
Latin America
4,140
4,050
3,340
Middle East and
Africa (MEA)
1,045
1,097
1,153
North America
25,792
10,037
Merck (overall)
Dec. 31, 2016
Average length of service
Combined Management Report.
Fundamental Information about the Group
— People at Merck
97
OVERVIEW OF EMPLOYEE FIGURES¹
Number of employees
Number of employees (FTE - full-time equivalents)
Number of countries
Number of legal entities
Number of nationalities
Number of nationalities working in Germany
Average length of service in Germany
Percentage of employees with German citizenship
Percentage of employees working outside Germany
Percentage of employees with global managers
Percentage of women in leadership positions (= role 4 or higher)
global, total
in Germany
global, total
Percentage of executives (= role 4 or higher)
Number of employees in vocational training in Germany
Vocational training rate
Number of employees in the "mywork@merck" model (Germany)
Percentage of employees working part-time
Percentage of employees aged 17-29 years
Percentage of employees aged 30-49 years
Percentage of employees aged 50+
Average age globally
Average age by region
Percentage of women in the workforce
Report on Economic Position
Macroeconomic and Sector-Specific Environment
10,520
global, total
global, total
global, total
215
217
207
129
131
136
91
97
95
66
23.1%
24.1%
75.3%
74.9%
73.9%
9.7%
10.2%
10.6%
42.8%
43.1%
44.0%
38.6%
23.2%
10,978
66
10,959.6
49,652.7
52,223.5
51,039.8
Asia-Pacific (APAC)
10,725.3
11,272.1
10,462.9
Europe
23,727.1
25,302.5
25,126.8
66
by region
4,136.5
4,046.2
3,339.5
Middle East and
Africa (MEA)
1,041.8
1,096.1
1,151.1
North America
10,022.0
10,506.7
Latin America
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.
99-136
(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%).
HEALTHCARE
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%).
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 € 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.
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%).
Combined Management Report
Report on Economic Position
Macroeconomic and Sector-Specific Environment
103
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, 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 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.
4 Growth of display area is a pure volume indicator, which is counteracted by a negative price momentum.
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
PERFORMANCE MATERIALS
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.
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 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%.
104
Combined Management Report
Report on Economic Position
Review of Forecast against Actual Business Developments
Review of Forecast against Actual Business
Developments
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.
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.
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".
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.
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.
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.
2.2%
0.0%
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%
Growth of wafer area for semiconductor chips
Growth of LC display surface area
Global sales of cosmetics and care products
Development
Development
2018¹
2017
4.8%
2.7%
2.6%
7.4%
9.7%
9.2%
9.2%
7.4%
5.1%
-0.7%
3.6%
3.4%
27.9%
25.9%
7.6%
10.0%
8.6%
6.0%
3.3%
3.5%
Global automobile sales volumes
Due to the emerging unfavorable development of the exchange
rate between the euro and the U.S. dollar and various currencies in
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.
NET SALES
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
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
Market for type 2 diabetes therapies²
Market for multiple sclerosis therapies²
Global pharmaceutical market
Healthcare
Macroeconomic and Sector-Specific Environment
Combined Management Report.
102
Report on Economic Position
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
Life Science
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%.
105
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report
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.
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.
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
-1.7%
2,406
14,836
16%
100%
1.7%
In contrast, expected currency hedging gains
should have a compensating effect in 2018
6.1%
-3.4%
-3.9%
Q2/2018
~ 360 to 320
~ 500 to 450
~ 400 to -360
40%
Q1/2018
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)
~ 400 to 360
• 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%
~ 490 to -440
~-500 to -550
1The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
-381
30.6%
•
5,882
-4.3%
-3.6%
2,615
781
29.9%
Earnings per share (€)
7.76
5.99
1.77
29.5%
Earnings per share pre (€)²
Business free cash flow²
5.10
2,508
5.92
3,396
-0.82
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
-13.9%
29.3%
25.6%
-10.5%
Margin (% of net sales)²
EBITDA pre²
Margin (% of net sales)²
Profit after tax
2018
2017
€ million
in %
14,836
14,517
319
2.2%
1,727
2,423
-696
-28.7%
11.6%
16.7%
3,528
4,164
-636
-15.3%
23.8%
28.7%
3,800
4,246
-446
Merck Group
The net sales in the individual quarters as well as the respective
organic growth rates in 2018 are presented in the following graph:
MERCK GROUP
Net sales and organic growth¹ by quarter²,3
MERCK GROUP
Net sales by business sector¹
€ million
Healthcare
Life Science
Performance Materials
Merck Group
42%
Healthcare
6,246
2018
Share
Organic
growth²
Exchange rate
effects
Acquisitions/
divestments
Total change
2017
Share
6,246
42%
5.2%
0.9%
6,190
43%
6,185
42%
8.8%
Life Science
6,185
5.2%
42%
Performance Materials
€ million/organic growth in %
Q1
2018
3,486
2017
3,657
% -
-3.2%
Q2
Q3
Q4
3,714
3,749
3,888
3,695
3,517
3,648
5.2%
8.8%
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%
2,406
Forecasts for 2018 in the interim report:
Business free cash flow
2017 Annual Report¹
Combined Management Report
108
-22.0%
1,025
~1,030 to 1,110
~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%
Report on Economic Position
exchange effect
Review of Forecast against Actual Business Developments
Actual results 2017
Business free cash flow
1,402
Negative foreign exchange effect,
particularly owing to the development
of the U.S. dollar
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,
Process Solutions is likely to remain the
strongest growth driver, followed by
Applied Solutions
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
Main comments
Forecast for 2018 in the
2017 Annual Report¹
in € million
LIFE SCIENCE
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%
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
2,446
EBITDA pre
1,773
Net sales
6,190
Main comments
Forecast for 2018 in the
2017 Annual Report¹
in € million
Actual results 2017
HEALTHCARE
107
Review of Forecast against Actual Business Developments
Report on Economic Position
Combined Management Report
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,
particularly owing to the development
of the U.S. dollar and currencies
of various growth markets
Forecasts for 2018 in the
interim report:
~1,580 to 1,650
(excluding Consumer Health
~1,580 to 1,650)
~1,770 to 1,830
Organic decline of -1% to -2%
Exchange rate effect -5% to -7%
1The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
0.0% Portfolio,
-4.3% Currency)
+5.2% Organic,
6,246
(+0.9%:
Slightly below the prior-year level
Moderately negative foreign
exchange effect
-4% to -6%
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
Solid organic growth
+4% to +5%
Improved EBITDA pre
Higher inventories reflect the expected
sales growth and changed product mix
Forecasts for 2018 in the
interim report:
+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
0.0% Portfolio,
-3.4% Currency)
¹The 2018 forecast in the 2017 Annual Report included the Consumer Health business.
Organic decline -14% to -16% vs.
2017
Exchange rate effect - 8% to -10%
~ 480 to 550
Forecast for 2018 in the
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
Organically slightly to moderately below
the year-earlier level
Moderately negative foreign
exchange effect
110
-6.9% Currency)
0.0% Portfolio,
-12.9% Organic,
786
(-19.8%:
~ 510 to 580
~ 745 to 785
Organic decline -14% to -16%
Exchange rate effect - 6% to -8%
~ 510 to 580
~ 725 to 765
~745 to 785
Organic decline -14% to -16%
Exchange rate effect -6% to -8%
588
-35.1%
Main comments
2017 Annual Report¹
906
~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%:
Moderately negative foreign
exchange effect -3% to -5%
Organic growth +7% to +8%,
considerably above medium-term
average market growth of 4% p.a.
Moderately negative foreign
exchange effect
-3% to -5%
Organic growth of +5% to +6%,
slightly above medium-term average
market growth of 4% p.a.
Moderately negative foreign
exchange effect
4% p.a.
Organic growth slightly above the
medium-term market average of
Results 2018
in € million
Q3/2018
Q2/2018
Q1/2018
~1,830 to 1,880
Organic growth of around +8%
Exchange rate effect -3% to -5%
~1,830 to 1,880
Organic growth of around +8%
Exchange rate effect -3% to -5%
~1,310 to 1,400
Business free cash flow
EBITDA pre
980
Net sales
2,446
in € million
Actual results 2017
PERFORMANCE MATERIALS
109
Review of Forecast against Actual Business Developments
Forecast for 2018 in the
Report on Economic Position
-3.9% Currency)
0.0% Portfolio,
+7.0% Organic,
-0.7%
1,393
1,840
(+3.0%:
~1,300 to 1,390
~1,310 to 1,400
Combined Management Report
17%
-1.5%
14,517
13,764
-1.8%
-513
in %
€ million
in %
79.1%
28,166
€ million
Other intangible assets
in %
75.0%
€ million
Change
Dec. 31,2017
Dec. 31, 2018
Goodwill
of which:
Non-current assets
Balance sheet structure
27,652
7,237
Property, plant and equipment
4,811
of which:
Current liabilities
Other non-current liabilities
Non-current financial liabilities
Other non-current provisions
Provisions for pensions and other post-employment benefits
of which:
Non-current liabilities
Equity
Total assets
Cash and cash equivalents
Other current assets
Current financial assets
Trade accounts receivable
Inventories
of which:
Current assets
1,840
Other non-current assets
MERCK GROUP
Current provisions¹
Merck Group
Combined Management Report
1,066
950
Q4
Q3
963
920
Q2
-19.1%
%
1,023
1,195
967
2018
Q1
€ million/change in %
EBITDA pre¹ and change by quarter²,3
MERCK GROUP
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:
115
2017
962
-13.7%
-5.9%
116
2 Not presented: Decline in Group EBITDA pre by € - 381 million due to Corporate and Other.
Healthcare
1,556
37%
1 Not defined by International Financial Reporting Standards (IFRSS).
Life Science
1,840
44%
786
Performance Materials
19%
€ million/in %
business sector² - 2018
EBITDA pre¹ by
MERCK GROUP
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%).
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.
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRSS).
-1.3%
Report on Economic Position
Merck Group
Trade accounts payable/Refund liabilities
Total equity and liabilities
-117
24.2%
8,635
23.1%
8,517
-502
-1,352
-7
-1.4%
80
8,033
788
2,257
1,340
6,681
780
2,336
-13.8%
1,842
600
2,215
2,238
2.2%
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.
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 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,
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.
3.6%
1,267
273
43
143
-576
100.0%
35,621
3,191
2,195
2,790
457
100.0%
36,888
3,464
-1,782
Other current liabilities¹
36.3%
30.2%
2,170
1,345
24
2,931
2,764
23.9%
1,781
20.9%
2,632
7,455
9,236
299
85
-1,080
183
1,755
4,512
8,317
13,582
25.0%
133
2,923
8
11,138
22.5%
3,167
39.5%
14,066
46.7%
17,233
3.6%
1,267
100.0%
35,621
100.0%
36,888
1,582
589
124
1,221
-66
90
12,919
Report on Economic Position
Current financial liabilities
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".
4%
14,517
544
2.2%
-2.9%
-3.9%
2.9%
6.1%
4%
100%
544
14,836
100%
Merck Group
Middle East and
7%
996
-4.6%
-14.8%
10.2%
6%
950
Africa (MEA)
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:
6.1%
-311
2.2%
in %
€ million
319
100.0%
-34.9%
65.1%
14,517
-5,071
9,446
in %
2017
in %
100.0%
-36.3%
63.7%
14,836
-5,382
9,454
2018
Change
Gross profit
Cost of sales
Net sales
€ million
Consolidated Income Statement¹
MERCK GROUP
33%
8
4,761
-3.5%
effects
Exchange rate
Organic
growth²
Share
2018
€ million
Net sales by region¹
MERCK GROUP
Acquisitions/
divestments
performance:
113
Merck Group
Report on Economic Position
Combined Management Report
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.
Combined Management Report
100%
In 2018, the Merck Group recorded the following regional sales
Total change
2017
Share
7.8%
33%
4,965
Asia-Pacific (APAC)
26%
3,810
0.2%
-4.5%
4.7%
26%
3,818
North America
30%
4,406
3.5%
4.9%
31%
4,559
Europe
4.3%
0.1%
Latin America
Marketing and selling expenses
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.
> 100.0%
-12
769
-0.1%
17.9%
-10
2,605
-0.2%
22.7%
-22
3,374
Net income
2 Not defined by International Financial Reporting Standards (IFRSS).
Non-controlling interests
> 100.0%
-57.3%
> 100.0%
-796
-1,464
2,246
781
3.0%
17.6%
0.4%
18.0%
428
2,557
57
2,615
15.5%
22.9%
3,396
29.9%
114
Combined Management Report
Report on Economic Position
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).
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.
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.
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.
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").
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.
1 Not presented: Research and development costs of € 47 million allocated to Corporate and Other.
77%
Healthcare
1,686
Performance Materials
242
11%
Life Science
249
12%
€ million/in %
by business sector¹ - 2018
Research and development costs
MERCK GROUP
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.
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%).
Merck Group
2,303
7.4%
29.5%
-29.5%
-6.7%
-117
-14.5%
2.3%
10.5%
-95
-6.2%
0.8%
-35
-4,349
-899
-2,108
332
2,423
11.6%
1,727
Operating result (EBIT)²
-0.8%
-126
Remaining operating expenses and income
-15.0%
-2,225
Research and development costs
1,093
-4,384
-993
5.6%
-458
-30.0%
Administration expenses
-2.5%
> 100.0%
Profit after tax from discontinued operation
Profit after tax
Profit after tax from continuing operations
Income tax
-9.6%
-31.4%
28
-668
-2.0%
14.7%
-294
2,129
9.8%
-368
-1.8%
-266
Profit before income tax
Financial result
-28.7%
-696
1,461
16.7%
62
48
Africa (MEA)
Middle East and
-10.2%
Asia-Pacific
(APAC)
12
North America
920
-5.0%
64%
Latin America
-3.5%
4%
1%
3%
€ million
816
437
255
71
28%
4.3%
100%
6,190
-11.7%
100%
54
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
Healthcare
123
HEALTHCARE
Sales and organic growth¹ of Rebif® and ErbituxⓇ by region - 2018
Total
€ million
1,438
Europe
395
Rebif®
Organic growth¹ in %
-6.5%
% of sales
ErbituxⓇ
1,494
0.4%
2017
Share
Europe
2,203
35%
4.6%
-2.2%
2.4%
2,152
35%
North America
1,432
23%
0.1%
-4.2%
-4.1%
Asia-Pacific (APAC)
24%
0.9%
Total change
Organic growth¹ in %
Exchange rate Acquisitions/
divestments
Organic
growth²
-0.8%
% of sales
100%
53%
-0.3%
31%
8.7%
9%
0.1%
7%
1 Not defined by International Financial Reporting Standards (IFRSS).
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
effects
-4.3%
Neurology & Immunology
4%
> 100.0%
5
0%
Fertility
1,162
19%
11.1%
-5.0%
6.2%
1,094
18%
of which: Gonal-f®
708
11%
5.3%
-4.8%
0.5%
704
11%
-33.3%
General Medicine &
> 100.0%
90
1,501
21
0%
1,529
24%
-1.1%
-4.2%
-5.4%
1,616
26%
of which: RebifⓇ
1,438
23%
-6.5%
-4.1%
-10.7%
1,611
26%
of which: MavencladⓇ
1%
5.2%
Endocrinology
38%
Other
Healthcare
363
6%
1.9%
- 3.8%
-1.9%
370
6%
234
4%
-3.1%
-6.3%
-9.4%
259
4%
270
6,246
4%
100%
226
of which: SaizenⓇ
2,341
of which: Euthyrox®
444
5.8%
-4.4%
1.5%
2,308
37%
of which: GlucophageⓇ
733
12%
15.1%
-4.4%
10.7%
662
11%
of which: ConcorⓇ
475
8%
11.2%
-4.5%
6.7%
7%
24%
€ million
-217
-3.1%
-316
16
1,773
28.6%
-5
-31.9%
-9
-34.5%
342
> 100%
-8
-51.0%
-217
-12.2%
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).
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%).
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%).
27
Combined Management Report
17
1,556
-605
-67.6%
-45.3%
761
12.2%
691
11.2%
(11)
(-51)
69
(63)
1,492
23.9%
2,028
32.8%
-536
10.0%
(>100%)
-26.4%
12
18
26
8
24.9%
21.6%
Report on Economic Position
125
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
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
€ million
EBITDA pre²
Change
2018
2017
1,556
1,773
> 100.0%
in %
-12.2%
Investments in property, plant and equipment, software as well as
advance payments for intangible assets
1 Not defined by International Financial Reporting Standards (IFRSS).
Healthcare
22.1%
339
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
%
-34.9%
Q2
379
450
-16.0%
Q3
Q4
381
414
397
-3.9%
8.7%
1,337
731
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).
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
7%
Depreciation/amortization/impairment losses/reversals
6,190
0.9%
5.6%
1,421
23%
Latin America
661
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%
436
11.7%
of impairment losses
EBITDA²
-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
3.8%
731
11.8%
-494
-2,339
- 301
(of which: adjustments)
-0.6%
78.4%
Restructuring expenses
Integration expenses/IT expenses
Gains (-)/losses (+) on the divestment of businesses
Acquisition-related adjustments
Other adjustments
EBITDA pre²
Change
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
6.4%
4,850
-30
-10.8%
20%
1%
19
10,144
118
Combined Management Report
Report on Economic Position
Merck Group
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
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:
MERCK GROUP
Free cash flow¹
Change
€ million
2018
2017
Cash flow from operating activities according to the cash flow statement
2,219
2,696
€ million
-477
in %
-17.7%
6,701
Payments for investments in intangible assets
-167
-1,433
- 3,129
-17.8%
2,170
24
589
90
1,582
> 100.0%
6,701
10,144
-66
-3,443
-72.9%
-33.9%
2018
2017
10,144
11,513
126
-429
768
624
17
-1,301
93
-1,928
-106
286
Q1
2018
718
2017.
747
%
-3.8%
Q2
514
Q3
711
1,006
890
-48.9%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
-20.1%
Q4
565
2.7%
Business free cash flow¹ and change by quarter²
€ million/change in %
-392
MERCK GROUP
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".
-72.9%
Payments from the disposal of intangible assets
67
4
62
> 100.0%
Payments for investments in property, plant and equipment
-910
-919
9
-0.9%
Payments from the disposal of property, plant and equipment
Free cash flow¹
¹ Not defined by International Financial Reporting Standards (IFRSS).
31
1,301
44
1,433
-12
-132
- 28.0%
-9.2%
The distribution of business free cash flow across the individual quar-
ters and the percentage changes in comparison with 2017 were as
follows:
550
10,823
11.4%
Cash and cash equivalents
Current financial assets
Net financial debt¹
¹ Not defined by International Financial Reporting Standards (IFRSS).
MERCK GROUP
Reconciliation of net financial debt¹
€ million
January 1
Currency translation
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
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
less:
€ million
Financial liabilities
Liabilities from derivatives (financial transactions)
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
€ million
Bonds and commercial papers
Bank loans
Liabilities to related parties
Loans from third parties and other financial liabilities
Finance lease liabilities
8,896
in %
0.3%
in %
-11.3%
620
1,653
-1,034
-62.5%
824
767
57
7.4%
72
73
-1
-1.4%
90
113
-23
-20.6%
4
4
-927
8
8,213
€ million
29
28
1
1.8%
2,764
2,632
133
5.0%
-2,238
-2,195
-43
1.9%
3,486
3,387
99
2.9%
Change
Dec. 31, 2018
Dec. 31, 2017
7,286
> 100.0%
Combined Management Report
Merck Group
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
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.
The net sales in the individual quarters as well as the respective
organic growth rates in 2018 are presented in the following graph:
HEALTHCARE
Net sales and organic growth¹ by quarter²,3
€ million/organic growth in %
Q1
2018
1,435
2017
1,531
% -
0.9%
Q2
1,584
1,587
-22.0%
Q3
-289
1,025
0.9%
731
1,337
-605
-45.3%
11.7%
21.6%
1,492
2,028
-536
-26.4%
23.9%
32.8%
1,556
1,773
-217
-12.2%
24.9%
28.6%
1,314
56
1,596
Q4
Share
Oncology
of which: Erbitux®
944
15%
4.2%
-4.5%
-0.3%
946
15%
816
13%
0.4%
-4.8%
-4.3%
853
14%
of which: BavencioⓇ
69
2017
1,498
Total change
Organic
growth²
1,630
1,573
4.7%
9.9%
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
Report on Economic Position
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
Share
Exchange rate
effects
Report on Economic Position
6,190
€ million
The development of key balance sheet figures was as follows:
MERCK GROUP
Key balance sheet figures
in %
Equity ratio¹
Equity
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
46.7%
39.5%
36.7%
33.8%
45.4%
Total assets
Non-current assets
Asset ratio¹
Merck Group
75.0%
Report on Economic Position
120
119
MERCK GROUP
Business free cash flow¹ by business sector² - 2018
€ million/in %
- 395
Performance Materials
588
46%
Life Science
1,393
34%
Healthcare
1,025
¹ Not defined by International Financial Reporting Standards (IFRSS).
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.
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).
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.
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.
Combined Management Report
in %
79.1%
80.7%
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).
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.
Healthcare
HEALTHCARE
Key figures¹
Combined Management Report
Report on Economic Position
Healthcare
121
Change
€ million
Net sales
Operating result (EBIT)²
Margin (% of net sales)²
EBITDA²
Margin (% of net sales)²
EBITDA pre²
Margin (% of net sales)²
Business free cash flow²
2018
6,246
2017
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.
80.0%
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).
OVERALL ASSESSMENT OF BUSINESS PERFORMANCE AND
ECONOMIC SITUATION
59.7%
Total assets
Equity
Asset coverage¹
62.3%
49.9%
45.9%
41.8%
76.0%
Non-current assets
Current liabilities
Finance structure¹
43.3%
40.1%
37.5%
37.2%
46.5%
Liabilities (total)
1 Not defined by International Financial Reporting Standards (IFRSS).
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.
-375
MERCK GROUP
126
Healthcare
The development of business free cash flow items in the individual
quarters in comparison with 2017 is presented in the following over-
view:
HEALTHCARE
Business free cash flow¹ and change by quarter²,3
€ million/change in %
Q1
2018
299
2017
342
%
-12.8%
Q2
232
433
-46.5%
Report on Economic Position
Combined Management Report
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.
-19
5.2%
Changes in inventories
-55
-34
-21
63.1%
Q4
Changes in trade accounts receivable as well as receivables from royalties and licenses
Business free cash flow²
-49
-32
64.6%
1,025
1,314
-289
-22.0%
-81
254
Q3
343
-25.9%
23.2%
195
Working capital¹
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.
240
Africa (MEA)
Middle East and
2%
37
-12.1%
-8.3%
Latin America
2%
32
Performance Materials
80%
€ million
Net sales
Cost of sales
-3.8%
8
- 20.0%
0%
Gross profit
PERFORMANCE MATERIALS
The development of results of operations is set out below:
1 Not defined by International Financial Reporting Standards (IFRSS).
100%
2,446
-1.7%
-3.4%
1.7%
100%
0%
10
Results of operations
-1.6%
-18.4%
2,406
Change
Organic
growth²
in %
100.0%
-51.2%
48.8%
Administration expenses
-90
-3.7%
-72
-2.9%
-18
5.2%
25.1%
-242
-10.1%
-225
-9.2%
-17
7.5%
Research and development costs
-13
-9.9%
-242
2017
2,446
-1,145
1,301
in %
100.0%
-46.8%
53.2%
1,945
€ million
in %
-40
-1.7%
-86
7.5%
-127
-9.7%
Marketing and selling expenses
-255
-10.6%
2018
2,406
-1,231
1,175
-0.7%
-3.5%
2.9%
-40
508
689
-181
-1.7%
-26.3%
21.1%
28.2%
769
32.0%
947
-178
-18.8%
38.7%
2,446
786
32.7%
588
-194
-19.8%
906
-318
-35.1%
DEVELOPMENT OF NET SALES AND RESULTS
OF OPERATIONS
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.
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.
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:
980
40.1%
PERFORMANCE MATERIALS
in %
2017
Q4
338
282
-36.6%
-1.3%
20.1%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
132
Combined Management Report
Report on Economic Position
Performance Materials
€ million
Performance Materials
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
Business free cash flow¹
1 Not defined by International Financial Reporting Standards (IFRSS).
Change
2018
2,406
PERFORMANCE MATERIALS
Remaining operating expenses and income
Net sales and organic growth¹ by quarters²
Q1
Share
growth¹
Exchange rate
effects
Acquisitions/
divestments
Total change
2017
Share
Europe
220
9%
-4.8%
-0.3%
2018
-5.0%
9%
North America
214
9%
0.3%
-4.6%
-4.3%
223
9%
Asia-Pacific (APAC)
1,932
80%
231
€ million/organic growth in %
€ million
Net sales by region
2018
564
2017 -
645
%
-4.0%
Q2
587
612
Q3
626
611
Organic
Q4
579
0.4%
3.4%
7.8%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
Combined Management Report
Report on Economic Position
Performance Materials
133
Net sales of the Performance Materials business sector by region
developed as follows:
PERFORMANCE MATERIALS
629
-81
769
-73
Report on Economic Position
Performance Materials
135
The development of business free cash flow items in the individual
quarters in comparison with 2017 is presented in the following over-
view:
PERFORMANCE MATERIALS
Business free cash flow¹ and change by quarter²
€ million/change in %
Q1
Q2
Combined Management Report
Q3
2018
137
143
152
155
2017
233
239
%
Q4
-41.0%
¹ Not defined by International Financial Reporting Standards (IFRSS).
-318
€ million
-194
in %
-19.8%
Investments in property, plant and equipment, software as well as
advance payments for intangible assets
-118
-125
7
-5.6%
Changes in inventories
-35.1%
-44
-30
> 100.0%
Changes in trade accounts receivable and receivables from royalties and licenses
Business free cash flow¹
-36
65
-101
> 100.0%
588
906
-14
980
222
-40.5%
-437
-111
25.5%
-488
-391
-97
24.8%
-381
-292
-548
-89
-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
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.
1,481
30.6%
212
in %
2017
-31.3%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
-26.7%
136
Combined Management Report
Report on Economic Position
Corporate and Other
Corporate and Other
€ million
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
CORPORATE AND OTHER
Key figures¹
€ million
Operating result (EBIT)²
EBITDA²
EBITDA pre²
Business free cash flow²
Change
2018
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.
786
2017
2018
38.7%
(-5)
-178
1.3%
(-19.1%)
-18.8%
Restructuring expenses
Integration expenses/IT expenses
Gains (-)/losses (+) on the divestment of businesses
Acquisition-related adjustments
Other adjustments
947
EBITDA pre¹
1
15
5
20
1
-4
-78.5%
-6
-27.1%
¹ Not defined by International Financial Reporting Standards (IFRSS).
-1
32.0%
EBITDA¹
-3.0%
-7
9.8%
Operating result (EBIT)¹
508
21.1%
689
28.2%
-181
416
-26.3%
reversals of impairment losses
261
10.9%
258
10.5%
3
(of which: adjustments)
(21)
(26)
Depreciation/amortization/impairment losses/
1
7
786
196
239
-18.2%
1 Not defined by International Financial Reporting Standards (IFRSS).
2 Quarterly breakdown unaudited.
Q3
203
Q4
191
249
Q2
228
-16.4%
DEVELOPMENT OF BUSINESS FREE CASH FLOW
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
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.
PERFORMANCE MATERIALS
Business free cash flow¹
€ million
EBITDA pre¹
Change
-18.3%
-25.7%
%
263
32.7%
980
40.1%
-6
-194
-89.5%
-19.8%
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%
(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.
134
Combined Management Report
Report on Economic Position
Performance Materials
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.
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 development of EBITDA pre in the individual quarters in com-
parison with 2017 is presented in the following overview:
PERFORMANCE MATERIALS
EBITDA pre¹ and change by quarter²
€ million/change in %
Q1
2018
196
2017
-3.3%
33.5%
24
423
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.
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
€ 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 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.
Net sales of the business sector by region developed as follows:
LIFE SCIENCE
Net sales by region
€ million
2018
1 Previous year's figures have been adjusted due to an internal realignment.
2 Not defined by International Financial Reporting Standards (IFRSS).
Share
Exchange rate
effects
Acquisitions/
divestments
Total change
2017
Share
Europe
2,136
35%
Organic
growth¹
6.4%
100%
5.2%
Research Solutions
2,048
33%
4.1%
-3.6%
0.5%
2,038
35%
Applied Solutions
5,882
1,650
6.3%
Life Science
6,185
100%
8.8%
- 3.8%
-3.6%
2.5%
1,609
27%
27%
-0.8%
5.6%
2,022
Middle East and
Africa (MEA)
1%
-8.7%
-1.7%
-10.4%
Life Science
6,185
100%
5%
8.8%
5.2%
98
5,882
2%
100%
¹ Not defined by International Financial Reporting Standards (IFRSS).
Combined Management Report
Report on Economic Position
Life Science
129
-3.6%
273
-6.0%
-16.5%
34%
North America
2,173
35%
8.4%
-4.6%
3.8%
2,093
35%
Asia-Pacific (APAC)
1,532
25%
13.6%
-3.8%
9.8%
1,395
24%
Latin America
256
4%
10.5%
38%
The results of operations of the Life Science business sector devel-
oped as follows:
2,234
-3.5%
Life Science
LIFE SCIENCE
Key figures
Combined Management Report
Report on Economic Position
Life Science
127
€ million
Net sales
8.8%
Operating result (EBIT)¹
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 (IFRSS).
Change
2018
2017
Margin (% of net sales)¹
€ million
Q2
Q4
Share
2018
€ million
Net sales by business unit¹
LIFE SCIENCE
Life Science
Report on Economic Position
Combined Management Report
128
Q3
8.8%
¹ Not defined by International Financial Reporting Standards (IFRSS).
9.8%
7.7%
1,496
1,408
1,495
1,628
1,527
1,543
2 Quarterly breakdown unaudited.
in %
6,185
5,882
OF OPERATIONS
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).
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
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%.
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:
LIFE SCIENCE
Net sales and organic growth¹ by quarter²
€ million/organic growth in %
Q1
DEVELOPMENT OF NET SALES AND RESULTS
2018
2017
Acquisitions/
divestments
Total change
2017
Share
Process Solutions
2,487
40%
14.8%
1,487
-0.7%
9
1,402
304
5.2%
1,036
834
202
24.2%
16.7%
14.2%
1,755
1,580
175
11.1%
28.4%
26.9%
1,840
1,786
54
3.0%
29.8%
30.4%
1,393
11.3%
%
LIFE SCIENCE
€ million
2018
455
452
460
474
2017
445
454
426
Q4
461
2.1%
-0.6%
8.1%
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%
Q3
Q1
22
1,786
28
-61
-97.2%
-19
30.4%
54
-86.5%
3.0%
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
Q2
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%.
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 %
-
Change
€ million
2018
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
1,393
Business free cash flow¹ and change by quarter²
Q1
Q2
Q3
2018
375
269
411
2017
281
€ million/change in %
Exchange rate
effects
-41
-17
EBITDA pre¹
1,840
2017
1,786
€ 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
28
-144
> 100.0%
Changes in trade accounts receivable as well as
receivables from royalties and licenses
Business free cash flow¹
¹ Not defined by International Financial Reporting Standards (IFRSS).
29.8%
Results of operations
1,840
> 100%
2.4%
Administration expenses
-282
-4.6%
-261
-4.4%
-22
8.3%
Research and development costs
-41
-249
-241
-4.1%
-8
3.4%
Remaining operating expenses and income
-121
-2.0%
-224
-3.8%
-4.0%
104
-29.5%
-28.7%
Net sales
Cost of sales
Change
2018
6,185
-2,723
3,463
in %
100.0%
-44.0%
56.0%
2017
5,882
-2,588
3,294
in %
100.0%
-44.0%
€ million
-1,734
in %
5.2%
-135
5.2%
56.0%
169
5.1%
Gross profit
Marketing and selling expenses
-1,775
304
-46.2%
Operating result (EBIT)¹
1,036
(>100%)
1,755
28.4%
1,580
26.9%
175
11.1%
3
86
(20)
-8
5
114
1
63
-2
-45.0%
-29
-25.0%
-9
2
(3)
(23)
-3.6%
16.7%
834
14.2%
202
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
88
%
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.
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
Low
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
High
High
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
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
Probability of occurrence
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.
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.
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
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.
Medium
< 20%
51-80%
> 80%
High
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
20-50%
Impact
€ 5-20 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
< € 5 million
Report on Risks and Opportunities
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.
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.
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.
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.
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.
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.
144
Report on Risks and Opportunities
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.
Opportunities due to an expanding local presence
in high-growth markets
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.
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.
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.
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.
Despite extensive precautionary measures, non-compliance with
laws and regulations leading to related consequences can never be
completely excluded.
Combined Management Report
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.
143
Combined Management Report
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
In 2018, we expanded our competencies with a PMatX incubator
for electronics of the next generation in Israel in the Performance
Materials area.
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.
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
Report on Risks and Opportunities
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
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 AND OPPORTUNITIES FROM THE USE
OF SOCIAL MEDIA
The manufacture of biopharmaceuticals, or biomanufacturing, is
a growing industry that is increasingly focused on optimized produc-
tion and high quality. However, the drug development process is long
and complex, and requires biotech companies to make significant
financial investments.
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.
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.
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.
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.
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.
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.
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.
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.
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-
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 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).
-
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.
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.
COUNTERPARTY RISKS
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 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.
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.
LIQUIDITY RISKS
Report on Risks and Opportunities
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 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.
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
Overall, we rate this as a low risk.
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.
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
145
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.
RISKS AND OPPORTUNITIES FROM PENSION
OBLIGATIONS
146
Legal risks
2018
2016 2017
2015
2013 2014
2011 2012
2010
2009
2008
2004 2005 2006 2007
Scope
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.
• Moody's
BBB/Baa2
Rete/Reel
A-/A3
A/A2
S&P/Moody's / Scope
Overview of rating development
REPORT ON RISKS AND OPPORTUNITIES
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.
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
Report on Risks and Opportunities
Combined Management Report
• S&P
Combined Management Report
Risks of dependency on suppliers
Nevertheless, potentially critical negative impacts of the litigation
on the financial position cannot be ruled out.
NET SALES
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.
EBITDA PRE
In 2019, the Life Science business sector is expected to show a sharp
increase in organic EBITDA pre totaling nearly double-digit growth
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 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.
BUSINESS FREE CASH FLOW
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.
Combined Management Report
Report on Expected Developments
153
- Increase in investments in property, plant and equipment in strategic projects
FORECAST FOR THE PERFORMANCE MATERIALS BUSINESS SECTOR
Actual results
2018
Forecast for 2019
Net sales
2,406
- Organically moderate decline
from the prior-year level
- Foreign exchange effect
roughly neutral
Organic high single-digit to
low double-digit percentage
decline
- Foreign exchange effect
roughly neutral
EBITDA pre
Business free
cash flow
786
€ million
Improved EBITDA pre
Negative foreign exchange effect, particularly on account of the development
of emerging market currencies
-
Report on Expected Developments
BUSINESS FREE CASH FLOW
In 2019, we expect business free cash flow of the Healthcare business
sector to show an increase in the low twenties percentage range.
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).
FORECAST FOR THE LIFE SCIENCE BUSINESS SECTOR
Actual results
€ million
2018
Net sales
6,185
EBITDA pre
Business free
cash flow
1,840
1,393
Forecast for 2019
Key assumptions
- Organic growth slightly above
medium-term market growth
of 4% p.a.
- Slightly negative foreign
exchange effect
- Organic growth ranging from
strong to a double-digit per-
centage rate
- Moderately negative foreign
exchange effect
Moderately below 2018 levels
- 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
Organic income growth on account of the expected sales growth and slight
margin expansion
- In addition, positive contribution to organic income growth from the switch to
IFRS 16
588
- Decline in the low teens
percentage range
Key assumptions
- 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
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 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.
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 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.
The company is not authorized to acquire its own shares.
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 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 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
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.
156
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.
Combined Management Report
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.
Report in accordance with Section 315a (1) of the German Commercial Code (HGB)
-
- Drop in liquid crystal prices cannot be offset by growth in other businesses
and active cost management
- Neutral foreign exchange effect due to the development of the exchange rate
of the euro against the U.S. dollar
- Decline in EBITDA pre
NET SALES
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.
EBITDA PRE
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
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.
BUSINESS FREE CASH FLOW
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.
Corporate and Other
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.
154
Corporate Governance
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)
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 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.
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.
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 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
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 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
Corporate Governance
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.
152
155
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.
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.
Overall view of the risk and
opportunity situation and
management assessment
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
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
precautions - we take counteraction, in particular against significant
individual 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 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.
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.
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.
150
Combined Management Report
Report on Expected Developments
Report on Expected Developments
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.
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.
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.
FORECAST FOR THE MERCK GROUP
Actual results
€ million
2018
Forecast for 2019
Net sales
14,836
- Moderate organic growth
- Slightly negative foreign ex-
change effect of -1% to -2%
Pronounced organic percent-
age growth in the low teens
range
- Negative foreign exchange
effect of between -3% and
-4%
businesses
EBITDA pre
Business free
cash flow
Risks of the divestment, acquisition
and integration of companies and
Report on Risks and Opportunities
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
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.
RISKS DUE TO ANTITRUST AND OTHER
GOVERNMENT PROCEEDINGS
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.
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.
148
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, 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.
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 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.
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.
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.
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.
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.
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.
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 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.
Combined Management Report
149
3,800
Information technology risks
- Moderate increase
6,246
EBITDA pre
1,556
Moderate organic growth
- Moderately negative foreign
exchange effect
- Pronounced organic growth
rate in the low-to-mid-twen-
ties percentage range
-Strongly negative foreign
exchange effect
Business free
cash flow
-
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
2,508
Net sales
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.
- 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
-
-
- 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
1,025
-Increase in the low teens
percentage range
- 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
-
NET SALES
Key assumptions
Negative foreign exchange effect due to trend of exchange rates on several
growth markets
Forecast for 2019
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
EBITDA PRE
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.
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.
NET SALES
Higher EBITDA pre and positive effects in working capital offset higher
investments in property, plant and equipment as well as digitalization initiatives
- Foreign exchange effect primarily resulting from several emerging market
currencies
-
-First-time application of IFRS 16 with a positive contribution of around
€ 130 million
Combined Management Report
-
- Growth driven by Healthcare and Life Science, which more than offsets the
decline of Performance Materials
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.
-
- Growth driven by Life Science and Healthcare, which more than offsets the
decline of Performance Materials
Key assumptions
Report on Expected Developments
151
BUSINESS FREE CASH FLOW
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
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.
FORECAST FOR THE HEALTHCARE BUSINESS SECTOR
Foreign exchange effect primarily resulting from several emerging market
currencies
€ million
Actual results
2018
-40
- 18.9%
Cost of materials
2017
4,341
-1,505
-271
18.0%
212
-1,776
172
2017
-22
637
4,785
467
4,807
-193
170
-22
in %
-4.4%
36.5%
-0.5%
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.
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
159
in %
-0.5%
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
RESULTS OF OPERATIONS
Change
€ million
Sales
Other income
2018
€ million
€ million
4,785
4,807
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.
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.
Investment income/Write-downs of financial assets
−1,305
917
-334
-36.4%
Profit transfers
-454
-553
99
-17.9%
Taxes
32
-193
225
Profit after profit transfers and taxes
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%).
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.
Depreciation, amortization and write-downs fell by 38.8% as
a result of the decline in fixed assets following the spin-off.
584
Personnel expenses
Profit before profit transfers and taxes
-61
-1,258
-47
3.7%
Depreciation, amortization and write-downs
-112
-183
71
-38.8%
Other operating expenses
-2,152
-1,801
-351
19.5%
2018
4,148
1,234
847
387
45.7%
Financial result
-262
-201
30.3%
Change
4,807
-22
292.1
11,820.7
13,612.8
D. Deferred income
Total LIABILITIES
1 After operating spin-off, holding company spin-off and temporary leaseback.
17.9
19,939.5
17.9
292.1
11,489.1
13,281.3
20,015.3
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
Business development
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.
€ million
Healthcare
Life Science
Performance Materials
158
Other sales
1,500.0
Other liabilities
60.3
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".
187.1
187.1
5,327.9
5,327.9
B. Provisions
Provisions for pensions and other post-employment benefits
1,500.0
200.4
Other provisions
1,112.1
946.1
1,312.5
1,056.8
C. Liabilities
Financial liabilities
Trade accounts payable
110.7
Total
Change
2018
Group sales
Sales to third parties
Total
At 86.7% (2017: 90.3%), the share of exports in 2018 was below
the previous year's level.
€ million
Outside Germany
Germany
Total
Change
2018
2017
€ million
€ million
4,500
-23
in %
-0.5%
308
4,785
307
4,807
1
0.3%
4,477
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%
2017
€ million
2,310
2,404
-94
in %
-3.9%
780
777
3
0.4%
1,386
1,399
-13
-0.9%
309
4,785
228
82
35.8%
-22
-0.5%
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.
19,940
ASSETS
408
196
48.0%
Life Science
46
35
11
31.4%
Performance Materials
604
260
40
18.2%
13
22
-9
-40.9%
923
685
238
220
34.7%
Healthcare
€ million
12,629
11,489
154
1,141
52.7%
9.9%
17
18
21,040
-1
1,100
-6.1%
5.5%
in %
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 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.
RESEARCH AND DEVELOPMENT COSTS
Change
€ million
2018
2017
The increase in current assets (€ + 573 million) was mainly attri-
butable to higher receivables from affiliates for profit transfers and
other group cross-charging.
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
161
648
590
574
79
128
10,983
10,473
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.
671
Forecast for Merck KGaA
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.
162
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
60.3
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.
2,515
2,674
3,072
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:
Dividend
For 2018, we are proposing to the General Meeting the payment of
a dividend of € 1.25 per share.
PERSONNEL
Average number of employees during the year
Production
Administration
Research
Logistics
Sales and marketing
Other
Total
2018
2017
3,756
3,536
3,213
292
The Financial result deteriorated due to lower fair values of plan
assets.
1,500
9.8%
-23.4%
17,532
16,486
1,046
6.3%
2,336
1,763
573
32.5%
-274
725
37
5.3%
315
181
134
73.7%
1,293
892
401
688
45.0%
1,173
-51.2%
€ million
Fixed assets
Intangible assets
Tangible assets
Financial assets
Current assets
Inventories
Trade accounts receivable
Other receivables and other assets
899
Cash and cash equivalents
Prepaid expenses
Dec. 31, 2018
Dec. 31, 2017
€ million
18,670
239
18,148
490
522
in %
2.9%
-251
Change
3
1
2
Dec. 31, 2017
€ million
5,329
5,328
1
1,119
1,312
-193
288
Dec. 31, 2018
200
832
1,112
-280
in %
0.0%
-14.7%
43.2%
-25.2%
14,575
13,281
1,295
87
Change
Deferred income
Other liabilities
142.9%
34
28
6
21.1%
21,040
19,940
1,100
5.5%
160
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
EQUITY AND LIABILITIES
€ million
Net equity
Provisions
Provisions for pensions and other post-employment benefits
Other provisions
Liabilities
Financial liabilities
Trade accounts payable
1,500
446
701.6
Other R&D spending that cannot be allocated to individual business sectors
Total
397.2
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.
MONITORING
166
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 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)
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 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.
General partners with no equity interest
MERCK KGAA
Executive Board of Merck KGaA
Total capital of Merck KGaA
3,813.7
Forecast 2019
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.
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
Corporate Governance
Capital Structure and Corporate Bodies of Merck KGaA
165
Capital Structure and
Corporate Bodies of Merck KGaA
565,211,241.95 €
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.
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.
Combined Management Report
Merck KGaA
Dec. 31, 2017
Merck KGaA
Jan. 1, 2018¹
489.7
1,173.0
16,485.7
191.8
821.6
17,510.7
18,148.4
18,524.2
688.3
688.3
181.3
181.3
891.6
591.6
1.4
1.4
1,762.6
1,462.6
28.5
20,015.3
168.0
397.2
3,813.7
701.6
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.
168.0
Net retained profit: shareholders
Profit carried forward E. Merck KG
28.5
19,939.5
Capital reserves
Retained earnings
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.
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.
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
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
A. Fixed assets
Intangible assets
Tangible assets
Financial assets
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
Inventories
General partner's equity
B. Current assets
Subscribed capital
A. Net equity
EQUITY AND LIABILITIES
157
C. Prepaid expenses
Cash and cash equivalents
Other receivables and other assets
Total ASSETS
Trade accounts receivable
400
379
400
2018
2017
2018
2017
Present value of the
defined-contribution pension
obligation as of Dec. 31
Contribution
level
Service cost of pension
IFRS
Marcus Kuhnert³
Belén Garijo²
Kai Beckmann¹
Udit Batra
633
Member of the Executive Board
obligations earned in the
current year
Total
4,637
400
12,987
€ thousand
11,284
1,610
1,599
1,600
2,958
2,512
421
426
400
4,162
394
398
400
4,402
3,977
395
396
990
Defined-contribution obligation
3,120
Statement on Corporate Governance
4,263
3,640
1,000
9,800
5,638
4,810
1,300
limit overall
compensation
Maximum
Incentive Plan
Merck Long-Term
Maximum profit
sharing limit
compensation
Fixed
Maximum limit
Marcus Kuhnert
Belén Garijo
Walter Galinat (left on: September 30, 2018)
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).
8,000
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:
1,000
8,000
Corporate Governance
174
1 For accounting purposes, this corresponds to a defined-benefit obligation within the meaning of IAS 19.8.
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.
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.
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.
PENSION ENTITLEMENTS
8,000
3,300
2,860
900
8,000
4,675
3,900
1,100
8,000
3,300
2,860
800
3,575
Defined-benefit obligations
2016
1,559
Member of the Executive Board
Marcus Kuhnert
Belén Garijo
Walter Galinat (left on: September 30, 2018)
Kai Beckmann
Udit Batra
Stefan Oschmann
Member of the Executive Board
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:
Average profit-
sharing rate in
per mille in 2018
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
Three-year average profit after tax of the E. Merck Group
(2016-2018)
1,724
Three-year average profit after tax of the E. Merck Group
(2015-2017)
3,324
2,549
2018
2017
Kai Beckmann
2,477
Performance
factor for
individual perfor-
mance 2018
1.49
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.
Approval and market introduction of Cladribin/MavencladⓇ in the
European Union.
Many important gains in the pharmaceutical pipeline (BavencioⓇ,
Evobrutinib, TGF-ẞ trap).
•
.
• 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.
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:
1
0.89
1.3
1.57
1
0.89
1
0.97
1
1.13
1
2015
1,066
Profit after tax of the E. Merck Group
(€ million)
Key performance indicator
10,955
9,802
1,369
166
1,401
168
1,569
1,240
Total
65
490
Walter Galinat (left on: September 30, 2018)
64
750
Stefan Oschmann¹
2018
2017
2018
Present value of the
defined-benefit pension
obligation as of Dec. 31
Service cost of pension
obligations earned in the
current year
2017
Pensionable Percentage
compensation entitlement
IFRS
6,958
€ thousand
1,535
7,025
17,980
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
Statement on Corporate Governance
Corporate Governance
176
The members of the Executive Board did not receive any advances
or loans in fiscal 2018.
LOANS AND ADVANCES
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.
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.
MISCELLANEOUS
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).
PAYMENTS TO FORMER EXECUTIVE BOARD MEMBERS AND
THEIR SURVIVING DEPENDENTS
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.
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.
BENEFITS IN THE EVENT OF TERMINATION OF DUTIES AS
AN EXECUTIVE BOARD MEMBER
175
Statement on Corporate Governance
Corporate Governance
1The percentage entitlement increases until retirement by two percentage points per year of service up to 70%.
16,760
Udit Batra
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:
Member of the Executive Board
Additional benefits
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.
Fixed compensation
ADDITIONAL BENEFITS
PERFORMANCE-INDEPENDENT COMPENSATION AND
¹Excluding additional benefits and company pension.
Fixed compensation
Performance-
independent
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.
• Individual absolute capped amount
Key performance indicator: Three-year average of the profit after tax of the
E. Merck Group
•
Profit sharing
• Absolute capped amount totaling 250% of the individual grant
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
• Consideration of individual performance via the performance factor in a range
from 0.7 to 1.3
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.
Corporate Governance
Statement on Corporate Governance
Payout 2018
(€)
of the E. Merck Group
individual
X
X
Three-year average of the profit after tax
factor for
Adjustment
Individual
rate in %
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.
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
Individual absolute capped amount
Three years
Three-year average of the profit after tax of the
E. Merck Group
Period
Limit
mance indicator
Key perfor-
PROFIT SHARING
Profit sharing
compensation
Performance-
related
COMPENSATION ELEMENTS AND COMPENSATION STRUCTURE1
169
Compensation report
Statement on Corporate Governance
Corporate Governance
168
s. Wolfgang Büchele
s. Stefan Oschmann
For the Supervisory Board
For the Executive Board
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
Darmstadt, February 26, 2019
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."
"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 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.
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%.
THE GENERAL MEETING OF MERCK KGAA
167
Statement on Corporate Governance
Corporate Governance
(The compensation report is part of the notes to the audited consol-
idated financial statements).
Profit after tax
COMPENSATION PHILOSOPHY
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.
Statement on Corporate Governance
Corporate Governance
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:
OVERVIEW OF THE STRUCTURE AND THE COMPONENTS
OF THE COMPENSATION SYSTEM
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.
• Distribution of responsibilities among Executive Board members
Granting of loans and salary advances
Assumption of honorary offices, board positions or other sideline
activities
Contract terms of members of the Executive Board
•
•
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
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.
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 GROUP STRATEGY
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.
GOOD CORPORATE GOVERNANCE
REGULATORY REQUIREMENTS AND PRINCIPLES OF
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:
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.
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.
Stefan Oschmann
Profit after tax
+
x
Number
of MSUS
actually
achieved
0%-150%
Organic
sales
growth
EBITDA
pre margin
of the Merck
share price
vs. the DAX®
Performance
Performance cycle
the grant
Weighting: 50%
MSUS for
Potential
beginning
Reference
Merck share
price at the
Grant in €
FY 2020
FY 2019
FY 2018
FY 2017
number of
Weighting: 25%
Weighting: 25%
Reference
Merck share
price at
€ thousand
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.
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.
OVERALL COMPENSATION LIMIT
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.
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
Share Ownership Guideline
173
Statement on Corporate Governance
Corporate Governance
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.
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.
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.
Clawback provision
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%).
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.
out in € (0%-
250% of the
grant in €)
Amount paid
the end
0%-200%
Statement on Corporate Governance
Corporate Governance
172
c) the organic sales growth of the Merck Group as a proportion
of a defined target value with a weighting of 25%.
•
171
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
FY 2016
+
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).
Profit after tax
Adjustment criteria for lowering profit sharing could include the
following:
•
b) EBITDA pre margin, as a proportion of a defined target value
with a weighting of 25%, and
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, 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:
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
Absolute capped amount totaling 250% of the individual grant
Three years
• Organic sales growth (25% weighting)
• EBITDA pre margin (25% weighting)
Reference price (share price
for conversion into numbers
or for payment)
Limit
Cycle
• Share price performance relative to the DAX® (50% weighting)
Key performance indicators
MERCK LONG-TERM INCENTIVE PLAN (LTIP)
Merck Long-Term Incentive Plan
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.
•
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;
• Violations of internal rules and guidelines (for example, the Merck
Code of Conduct), legislation or other binding external requirements
in the area of responsibility;
170
Merck Long-Term Incentive Plan
(with a long-term incentive effect)
Statement on Corporate Governance
1,100
800
900
Additional benefits
32
26
49
66
21
26
Total
832
626
1,149
1,166
821
926
Profit sharing
2,200
2,200
3,000
1,100
3,900
600
2018
8,642
7,154
4,593
400
4,564
-2,028
3,485
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
800
379
2,200
Multi-year variable compensation
6,059
5,491
4,146
Karl-Ludwig Kley
Bernd Reckmann
Member of the Executive Board
(left on: April 29, 2016)
2018
2017
2018
Allocation (€ thousand)
Fixed compensation
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
7,925
2,200
421
394
LTI 2014 (2014 to 2016)
LTI 2015 (2015 to 2017)
Total
Service cost
Total compensation², 3
140
1,194
866
105
599
599
3,172
2,931
5,343
5,665
3,887
3,725
168
3,340
166
3,097
2,582
1,604
1,369
1,401
4,080
394
1,560
394
10,135
1,604
421
421
421
5,881
4,382
1,347
7,507
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).
180
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
394
6,643
Kai Beckmann
8,510
2,582
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
Service cost
Total compensation²,3
Member of the Executive Board
2018
2017
2,800
2,800
2,400
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
Corporate Governance
326
599
7,241
5,785
4,214
4,164
5,513
3,700
3,700
Profit sharing
1,081
2018
2017
2018
1,300
1,300
1,000
1,000
1,000
1,000
Additional benefits
Total compensation
164
12
38
36
81
Total
1,464
1,486
1,012
1,038
1,036
186
2,769
2,077
499
(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
Wehrheim, Full-time member of the Merck Joint Works Council
Gabriele Eismann
Seeheim-Jugenheim, Senior Product Manager
no board positions
Edeltraud Glänzer
(a) - Bundesdruckerei GmbH, Berlin
no board positions
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
Stefan Oschmann
Munich, Chairman
Udit Batra
Wellesley (Massachusetts, United States), CEO Life Science
Kai Beckmann
Darmstadt, CEO Performance Materials
Walter Galinat
Eppertshausen, Member of the Executive Board until September 30, 2018
Belén Garijo
Frankfurt am Main, CEO Healthcare
Marcus Kuhnert
Königstein, Chief Financial Officer
(b) EMD Millipore Corporation, Billerica, Massachusetts, United States
(President)
Hanover, Vice Chairperson of IG Bergbau, Chemie, Energie
(IG BCE), Hanover
Michaela Freifrau von Glenck
(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) - Gelita AG, Eberbach (Vice Chairman)
(b) comparable German and foreign supervisory bodies of corporations
(a) statutory supervisory boards and
Memberships of
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
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.
Cures GmbH, Wuppertal
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
1 Internal board position.
2 Members appointed according to Article 6 (5) of the Articles of Association.
Gregor Schulz
2,200
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.
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.
Helga Rübsamen-Schaeff
Gregor Schulz
Theo Siegert
Tobias Thelen
Veit Ulshöfer
Total
Fixed compensation
2018
Compensation for
meeting attendance
Total compensation
2017
2018
2017
2018
2017
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
Alexander Putz
50,000.00 50,000.00
Dietmar Oeter
Siegfried Karjetta
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
COMPENSATION FOR 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 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:
in €
Wolfgang Büchele
(Chairman)
Michael Fletterich
(Vice Chairman)
Crocifissa Attardo
Mechthild Auge
Gabriele Eismann
Edeltraud Glänzer
Michaela Freifrau von Glenck
Albrecht Merck
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).
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.
The Executive Board informs the supervisory bodies at least once
a year about the key compliance issues.
RISK AND OPPORTUNITY MANAGEMENT
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.
AVOIDANCE OF CONFLICTS OF INTEREST
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.
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.
-
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 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.
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).
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).
OWNERSHIP, PURCHASE OR SALE OF SHARES IN THE
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
ADHERENCE TO ENVIRONMENTAL AND
SAFETY STANDARDS
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.
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
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.
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.
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.
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.
Corporate Governance
Statement on Corporate Governance
183
FURTHER REPORTS
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.
3,900
599
3,000
2,400
1,430
14,954
1,361
4,797
-388
Walter Galinat
2018
600
26
2,200
1,320
14,391
835
3,661
2,051
(left on: September 30, 2018)
2017
800
32
2,200
36
1,320
1,000
Kai Beckmann
4,916
2,791
Udit Batra
2017
1,000
12
3,900
1,705
17,830
1,623
5,435
-335
2018
1,000
81
2,400
1,430
15,590
904
4,385
2,387
2017
1,078
13,804
4,288
14,391
835
3,961
2,203
Marcus Kuhnert
2017
800
21
2,200
1,320
13,804
1,256
4,277
-385
Total
2018
2017
5,900
6,000
423
314
17,200
16,300
9,900
9,900
1,320
1,256
2,200
900
91
2018
1,100
66
3,900
1,870
20,386
1,183
6,249
2,969
Belén Garijo
2017
1,100
49
3,000
1,870
19,555
1,779
5,928
-376
2018
26
18,588
1,705
2,800
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%
28%
31%
29%
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.
116.7%
126.7%
31%
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
Upper target
corridor limit
-20%
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%
28%
29.6%
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
1,300
186
3,700
2,255
24,584
1,426
6,612
3,536
Stefan Oschmann
2017
1,300
164
3,700
2,255
23,581
2,146
7,310
-375
2018
1,000
38
2018
Member of the Executive Board
(€ thousand)
(€ thousand)
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
for share-
based com-
Performance-related components
Total
107,930
103,528
pensation³
(without a
long-term
Fixed com- Additional
pensation
benefits
incentive
effect)
(€ thousand) (€ thousand)
Grant value
(€ thousand) (€ thousand)
Number of
MSUS
Time value²
(€ thousand)
Profit sharing
6,261
9,421
2,800
15,937
2,400
3,120
2,200
2,200
2,860
Multi-year variable compensation
LTI 2017 (2017 to 2019)
1,361
1,256
LTI 2018 (2018 to 2020)
904
3,575
835
3,300
Total
4,797
Service cost
-2,028
Total compensation¹
2,769
4,385
395
4,780
2,400
1,081
Profit sharing
626
Additional benefits
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
626
626
7,776
4,288
3,661
2018 (min.) 2018 (max.)
1,100
800
900
900
900
66
21
26
26
26
Total
1,149
29,784
1,166
1,166
821
926
926
926
Profit sharing
2018
2017
2018 2018 (min.) 2018 (max.)
1,100
1,100
66
66
626
6,786
395
1,476
395
8,171
168
166
166
166
4,456
3,827
2018 (min.) 2018 (max.)
792
Belén Garijo
Member of the Executive Board
Marcus Kuhnert
Member of the Executive Board
Benefits granted (€ thousand)
2017
Fixed compensation
1,100
Additional benefits
49
6,952
2018
1,166
2018 (min.) 2018 (max.)
1,000
2018 (min.) 2018 (max.)
1,000
Additional benefits
164
186
186
186
12
38
38
38
Total
1,464
1,486
1,486
1,486
1,012
1,038
1,038
1,038
Profit sharing
2018
1,000
3,700
1,000
2018 (min.) 2018 (max.)
1,300
1,300
2017
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
2017
2018
Fixed compensation
1,300
1,300
2017
3,700
Benefits granted (€ thousand)
2,800
1,369
379
400
400
400
8,711
7,981
2,855
13,303
5,814
1,369
5,316
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
4,810
2018
1,000
1,438
1,369
9,341
Total compensation
3,640
2,800
1,401
Multi-year variable compensation
LTI 2017 (2017 to 2019)
2,146
1,623
1,426
5,638
1,078
4,263
LTI 2018 (2018 to 2020)
7,310
6,612
1,486
11,934
Service cost
5,435
4,916
Total
8,941
1,038
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
Research drives us all
Research
drives us all
Sales Expert, Life Science,
CADORE
São Paulo, Brazil
Healthcare, Billerica, United States
Group Leader Immunology,
Hearts
beats
SHINJI OKITSU
ANA LUISA
11
HEARTBEATS
Semiconductors as a new driver of growth 26-27
HEARTBEATS
Research drives us all 12-17
2. Vibrant China
Get to know our Merck team from
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.
Big plans for China 20-22
The health platform for everyone 22-23
1
New partner 24-25
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
Real meat without the side effects 34-35
New heroes wanted 36-37
10
3. Beyond tomorrow
around the world at
Research drives us all
annualreport/2018/magazine/heartbeats
Group Leader Immunology, Healthcare,
Billerica, United States
UVEX
HEARTBEATS
15
"Even as a child, I
SHINJI OKITSU
dreamed of helping
MARC FEIGLIN
Head of Alliance Management & Partnership,
Yavne, Israel
16
the passion.
HEARTBEATS
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."
https://www.merckgroup.com/en/
"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."
HEARTBEATS
MARC FEIGLIN
Head of Alliance
Management & Partnership,
Yavne, Israel
FRANZISKA HÖLY
Deputy Foreman,
Performance Materials,
Darmstadt, Germany
SUNNY CHOI
Talent and Development
Manager,
Seoul, Korea
Research drives us all
Research drives us all
HEARTBEATS
"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
13
Why science? What fascinates us about it?
We wanted to find out - so we followed
"I am passionate about science,
because sometimes it only takes
a small finding for the big
breakthrough that improves the
lives of many people."
Magazine
1. Heartbeats
São Paulo, Brazil
Sales Expert, Life Science,
ANA LUISA CADORE
BavencioⓇ in combination with INLYTAⓇ
to combat kidney cancer
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.
October 17
From Darmstadt to 90 countries
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.
November 12
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.
HIGHLIGHTS OF 2018
September 11
7
Table of Contents
راق
9
TABLE OF CONTENTS MAGAZINE
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.
November 28
Research drives us all
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
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.
Frank Stangenberg-Haverkamp
Darmstadt, Chairman of the Executive Board and
General Partner of E. Merck KG, Vice Chairman
Wolfgang Büchele
Munich, Chairman of Exyte AG, Stuttgart
Helga Rübsamen-Schaeff
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective
Cures GmbH, Wuppertal
Michael Kleinemeier
Mannheim, Senior Management Consultant at BASF SE, Ludwigshafen
Katharina Kraft
Helene von Roeder
Frankfurt am Main, Member of the Executive Board of Vonovia SE, Bochum
Daniel Thelen
Simon Thelen
Köln, Senior Physician at the Clinic for Trauma and Hand Surgery,
University Hospital Düsseldorf
Memberships of
(a) statutory supervisory boards and
Heidelberg, Member of the Executive Board of SAP SE, Walldorf
Köln, Head of Infrastructure Development at DB Netz AG, Frankfurt am
Main
(a) - Merck KGaA, Darmstadt
Member
- Oras Invest Ltd, Helsinki, Finland
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
(a) Merck KGaA, Darmstadt
- Gelita AG, Eberbach (Vice Chairman)
(b) Kemira Oyj, Helsinki, Finland
(a) Merck KGaA, Darmstadt
(a) - Merck KGaA, Darmstadt
- 4SC AG, Martinsried
Vienna, Austria, Vice Chairman of the Executive Board and
General Partner of E. Merck KG, Chairman
· Supervisory Board of Bonn University Hospital
(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
189
On January 27, 2019, a new election of the Board of Partners was
held. The Board of Partners now consists of the following members:
(a) - Merck KGaA, Darmstadt
Johannes Baillou
no board positions
(b) comparable German and foreign supervisory bodies of corporations
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
(b) comparable German and foreign supervisory bodies of corporations
Vienna, Austria, Vice Chairman of the Executive Board and
General Partner of E. Merck KG, Chairman
(b) - Fortas GmbH, Rösrath (Chairman)
Frank Stangenberg-Haverkamp
General Partner of E. Merck KG, Vice Chairman
(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
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, Chairman of Exyte AG, Stuttgart
Wolfgang Büchele
Darmstadt, Chairman of the Executive Board and
no board positions
Statement on Corporate Governance
-
•
Recognition and measurement of provisions for tax liabilities
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
194
Corporate Governance
Report of the Supervisory Board
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:
• Impairment testing of interests in associates
• Goodwill impairment tests
Recognisition and measurement of income tax liabilities and
deferred tax liabilities
• Measurement of provisions for patent disputes
• Measurement of disposal gains/losses from the divestment of the
Consumer Health business
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.
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.
CORPORATE GOVERNANCE AND DECLARATION
OF CONFORMITY
•
Corporate governance is a topic of high priority for the Supervisory
Board.
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:
ANNUAL FINANCIAL STATEMENTS
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
193
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 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 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.
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.
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.
The Supervisory Board also took note of the written risk report as
well as the report from Group Internal Auditing for 2017.
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.
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.
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.
COOPERATION WITH THE EXECUTIVE 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.
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 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.
Number of independent members, no material conflicts of
interest
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.
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.
Objectives of the Supervisory Board with respect to Its Composition and Profile of Skills and Expertise
PROFILE OF SKILLS AND EXPERTISE
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.
(b) - Fortas GmbH, Rösrath (Chairman)
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.
Corporate Governance
196
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.
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.
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
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.
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.
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 following
objectives regarding its composition and reports on the status of
implementation below:
Internationality
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.
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.
PERSONNEL MATTERS
EDUCATIONAL BACKGROUND
Corporate Governance
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.
190
Stipulations to promote the
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 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:
• 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).
percentage of management positions
held by women pursuant to section 76
(4) and section 111 (5) of the German
Stock Corporation Act (AktG)
Corporate Governance
PERSONNEL 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,
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.
Oras Invest Ltd, Helsinki, Finland
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.
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
(a) Merck KGaA, Darmstadt
- Gelita AG, Eberbach (Vice Chairman)
(b) - Kemira Oyj, Helsinki, Finland
(a)
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.
Merck KGaA, Darmstadt
Supervisory Board of Bonn University Hospital
(a) innogy SE, Essen
-
No board positions
(b) AVW Versicherungsmakler GmbH, Hamburg
- Vonovia Finance B.V., Amsterdam, Netherlands
No board positions
No board positions
- 4SC AG, Martinsried
Statement on Corporate Governance
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.
STIPULATIONS PURSUANT TO SECTION 111 (5) AKTG
(TARGET FOR THE PERCENTAGE OF POSITIONS ON THE
SUPERVISORY BOARD HELD BY WOMEN)
Corporate Governance
Statement on Corporate Governance
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 young-
est 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 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 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.
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.
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.
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 Mate-
rials, respectively.
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.
191
MANAGEMENT EXPERIENCE
The key prerequisites for high-performance leadership teams are
both the diversity of the individual competency profiles and a balance
192
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.
GENDER
289f (2) No. 6 of the German
Commercial Code (HGB)
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
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 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:
that are listed or subject to co-determination stipulates binding targets Diversity policy pursuant to section
Management
experience
Gender
Internationality,
global mindset
Age
Industry
knowledge
(see also pages 186 et seq. for the description of Supervisory Board
procedures).
Educational
background
Pursuant to section 111 (5) AktG, the Supervisory Board of companies
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.).
-7
-51
-5
-2,062
-2,011
581
-1,989
619
626
10
Changes recognized in equity
Reclassification to profit or loss
Changes taken directly to equity
4
-32
5
→ 37
568
-47
Other comprehensive income¹
-1,847
thereof: from discontinued operation
thereof: attributable to Merck KGaA shareholders
202
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".
69
67
2,330
700
1,634
thereof: from continuing operations
767
3,964
Comprehensive income
6
22
→ 36
thereof: attributable to non-controlling interests
761
3,943
767
3,964
Comprehensive income
-7
Cash flow hedge reserve
12
Note
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
Changes recognized in equity
Tax effect
2018
Reclassification to assets
Fair value adjustments
Changes recognized in equity
Tax effect
Reclassification to profit or loss
Fair value adjustments
Available-for-sale financial assets³
Changes recognized in equity
Tax effect
Consolidated Financial Statements
Reclassification to profit or loss
-31
2017
2,615
12
52
88
-71
→ 37
7
-1
8
1
3,396
142
29
-1
29
142
-41
2
141
-34
-7
→ 25
-13
Consolidated Balance Sheet
14,066
€ million
Reserves¹
Equity capital
→ 36
Total equity
35,621
7,455
9,236
36,888
→ 5
589
2,170
→ 33
490
460
→ 14
731
886
22
-
90
Gains/losses recognized in equity¹
Equity attributable to Merck KGaA shareholders
Non-controlling interests
565
15,006
1,629
17,200
33
17,233
52
→ 28
Other non-current liabilities
8,033
6,681
→ 35
Non-current financial liabilities
2,257
788
2,336
780
24
→ 26
→ 25
Provisions for pensions and other post-employment benefits
Non-current liabilities
Reclassification to profit or loss
63
14,003
1,081
12,358
565
Other non-current provisions
34
2,923
2,931
→ 19
Dec. 31, 2017
Dec. 31, 2018
Note
Total assets
Assets held for sale
Cash and cash equivalents
Income tax receivables
Other current assets
13,764
Current financial assets
Inventories
Current assets
Deferred tax assets
Other non-current assets
Non-current financial assets
Property, plant and equipment
Other intangible assets
Goodwill
Non-current assets
Trade accounts receivable
Consolidated Balance Sheet
13,582
7,237
→ 24
2,632
2,764
23
->
28,166
27,652
1,106
1,091
- 20
→ 14
138
→ 22
444
610
→ 34
4,512
4,811
→ 21
8,317
205
Fair value adjustments
→ 13
to profit or loss in subsequent periods
(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
(61) Financial liabilities 308
(60) Financial assets 306
(58) Property, plant and equipment 306
(59) Leasing 306
(57) Other intangible assets 305
(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
(47) Information on preparation and approval 287
(48) Subsequent events 288
264 (3) HGB or section 264b HGB 287
(46) Companies opting for exemption under section
(45) Corporate governance 287
(68) Other provisions and contingent liabilities 310
(69) Share-based compensation programs 311
List of Shareholdings 312-321
(70) List of shareholdings 312
Marketing and selling expenses
9,446
9,454
-5,071
-5,382
→ 9
14,517
14,836
→8
(43) Executive Board and Supervisory Board compensation 286
(44) Auditor's fees 287
2017
Note
Gross profit
Cost of sales
Net sales
€ million
Consolidated Income Statement¹
Consolidated Income Statement
Consolidated Financial Statements
200
2018
(42) Related-party disclosures 286
Other Disclosures 286-288
(41) Net cash flows from financing activities 285
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
(17) Earnings per share 230
(16) Personnel expenses/headcount 229
(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
(1) Company information 206
(9) Cost of sales 223
(7) Segment reporting 216
Consolidated Cash Flow Statement 203
Consolidated Balance Sheet 202
Consolidated Statement of
Comprehensive Income 201
Result from Operating Activities
and Income Taxes 216-230
Consolidated Income Statement 200
FINANCIAL STATEMENTS
CONSOLIDATED
197-321
(8) Net sales 221
→ 10
(2) Reporting principles 206
sources of estimation uncertainty 208
(39) Information on fair value measurement 274
(40) Other financial obligations 283
(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
(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
(3) Management judgments and
(26) Other provisions 247
(27) Contingent liabilities 252
(28) Other liabilities 253
(24) Trade accounts receivable 240
(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
(4) Changes in the scope of consolidation 210
(5) Acquisitions and divestments 210
Group structure 210-215
(25) Provisions for pensions and other
post-employment benefits 241
-4,384
-4,349
Administration expenses
5.87
2.51
5.99
7.76
0.12
5.25
5.87
2.51
5.99
5.25
7.76
thereof: from discontinued operation
diluted
thereof: from continuing operations
basic
Earnings per share (in €)
10
22
→ 36
thereof: attributable to non-controlling interests
2,605
→ 17
3,374
0.12
thereof: from discontinued operation
Items of other comprehensive income that may be reclassified
Changes recognized in equity
Tax effect
Fair value adjustments
Equity instruments²
Changes recognized in equity
Tax effect
Changes in remeasurement
Net defined benefit liability
thereof: from continuing operations
to profit or loss in subsequent periods
Profit after tax¹
€ million
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".
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Items of other comprehensive income that will not be reclassified
Debt instruments²
thereof: attributable to Merck KGaA shareholders (net income)
3,396
2,423
1,727
Operating result (EBIT)³
-880
-780
354
Other operating expenses
1,212
627
Finance income
→ 12
27
→ 38
Impairment losses and reversals of impairment losses on financial assets (net)2
-2,108
-2,225
→ 11
Research and development costs
-899
-993
Other operating income
2,615
Finance costs
-
Profit after tax
57
2,303
→ 5
Profit after tax from discontinued operation
2,557
1,093
Profit after tax from continuing operations
428
Profit before income tax
-368
Income tax
2,129
1,461
-345
-343
→ 32
51
77
32
→ 14
Deferred tax liabilities
-172
1,288
11,138
3,229
Total equity
interests
to Merck KGaA
Non-controlling
translation Equity attributable
difference
Cost of hedging
reserve¹
Cash flow
hedge reserve
-191
24
instruments¹
financial assets¹
Currency
Fair value
reserve for debt
Available-for-sale
Gains/losses recognized in equity
205
Consolidated Statement of Changes in Net Equity
Consolidated Financial Statements
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".
13,989
61
14,050
3
-2,057
-4
69
7
-1,847
-4
-1,843
-2,057
69
7
7
10
2,605
14,050
61
13,989
3,229
3
-191
24
2,615
-1,340
12,525
3,814
-1,358
9,930
3,814
168
397
4
January 1, 2018 (restated)
Adjustment on application of IAS 29¹
-
.6
-1,358
Adjustment on initial application of IFRS 91
Adjustment on initial application of IFRS 15¹
3,814
168
397
January 1, 2018
-1,358
9,903
3,814
168
9,903
23
761
3,374
Other comprehensive income
168
397
December 31, 2018
-16
59
-46
Changes in scope of consolidation/Other
-55
Transactions with no change of control
Profit after tax
-515
-162
29
-41
3,374
29
-41
Profit transfer to/from E. Merck KG
Dividend payments
Comprehensive income
including changes in reserves
397
6
-155
Consolidated Financial Statements
206
17,233
33
17,200
1,790
-33
-128
-1
-96
-93
-3
55
-55
-515
-515
-175
-13
-162
Notes to the
Consolidated Financial Statements
General Disclosures
(1) Company information
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.
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.
• IFRIC 23 "Uncertainty over Income Tax Treatments"
Amendment to IAS 28 "Investments in Associates and Joint Ventures"
• Amendment to IFRS 9 "Financial Instruments"
The following standards will take effect as of fiscal 2019:
• IFRS 16 "Leases"
Regulations applicable as of fiscal 2019
The other new regulations applicable for the first time in fiscal
2018 did not have a material impact on the consolidated financial
statements.
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.
• 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"
Amendment to IFRS 4 "Insurance Contracts"
3,964
• Amendment to IFRS 2 "Share-based payment"
• IFRIC 22 "Foreign Currency Transactions and Advance Consideration"
Amendment to IAS 40 "Investment Property"
• IFRS 15 "Revenue from Contracts with Customers"
• IFRS 9 "Financial Instruments"
The following regulations take effect as of fiscal 2018:
Regulations applicable as of fiscal 2018 and other presentation
and measurement changes
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".
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.
(2) Reporting principles
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.
•
22
3,943
619
63
14,003
1,171
-1
-121
-31
31
14,066
63
14,066
14,003
-1
-121
31
1
1
-593
-593
-159
4
1,171
767
-15
1
-32
-7
568
-1
569
619
-32
-7
3,396
-15
22
14,055
63
13,992
1,171
-1
-121
-1
4
4
3,374
→ 14
1
-155
Repayment of other current and non-current financial liabilities
Payments from new borrowings of other current and non-current financial liabilities
Repayment of bonds
Repayment of financial liabilities to E. Merck KG
Payments from new borrowings of financial liabilities from 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 the disposal of other financial assets
Payments for acquisitions less acquired cash and cash equivalents
Payments for investments in financial assets
Payments from the disposal of property, plant and equipment
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
Net cash flows from financing activities
thereof: from discontinued operation
Changes in cash and cash equivalents
Note
→ 18
-7
11
-346
-2,733
-1,256
-288
103
199
Other non-cash income and expenses¹
234
-221
-109
-184
1,758
1,812
2,615
3,396
2017
2018
104
Neutralization of gains/losses on disposal of assets
Changes in other assets and liabilities
Changes in provisions
→ 14
472
→ 30
2,195
1,766
29
2,790
2,215
→ 35
1,176
457
→ 26
Income tax liabilities¹
Refund liabilities²
Trade accounts payable²
Current financial liabilities
Current provisions¹
Current liabilities
12,919
1,489
600
2,219
24
1,016
Liabilities directly related to assets held for sale
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
Consolidated Cash Flow Statement
203
Consolidated Cash Flow Statement
Other current liabilities
Consolidated Financial Statements
35,621
36,888
Total equity and liabilities
8,635
8,517
→ 5
2,175
2,288
→ 28
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".
-593
2,696
-106
Transactions with no change of control
including changes in reserves
Profit transfer to/from E. Merck KG
Dividend payments
Comprehensive income
Other comprehensive income²
Profit after tax²
January 1, 2017 (restated)
Adjustment due to mandatory
retrospective adoption of IFRS 9¹
January 1, 2017 (as reported)
€ million
For details see Note (36) "Equity".
Consolidated Statement of Changes in Net Equity
Consolidated Statement of Changes in Net Equity
Consolidated Financial Statements
204
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
589
2,170
Changes in scope of consolidation/Other
December 31, 2017²
Equity capital
Retained earnings
142
2,605
142
2,605
-1,501
8,046
3,814
168
397
→ 33
-3
for equity
instruments
of defined
benefit plans
Retained earnings/
net retained profit
8,049
3,814
Remeasurement Fair value reserve
Capital reserves
(share premium)
Merck KGaA
partner's equity Subscribed capital
Merck KGaA
Merck KGaA
168
397
General
-1,501
Cash and cash equivalents as of December 31 (consolidated balance sheet)
939
589
-162
-42
3,042
-1,147
2,191
→ 31
156
3,129
11
-155
185
-17
44
-219
-75
31
-919
-910
4
67
-392
55
103
-13
-593
Cash and cash equivalents as of January 1
-30
-5
Changes in cash and cash equivalents due to currency translation
- 320
1,586
-1,870
182
5
-496
4
-1,821
-2,825
147
32
-932
-323
-314
-319
349
375
-466
→ 41
CONSOLIDATED
FINANCIAL STATEMENTS
Notes to the Consolidated Financial Statements
→ 5
no
Date on which assets and liabilities are classified as "held for sale"
high
IFRS 5
210
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Group Structure
(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
Assets held for sale
Additions
Establishment
Acquisitions
Materiality
Liquidations/mergers
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
1
10
Retirements
IAS 12
33
IAS 12
no
Recognition and measurement of contingent liabilities
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)
Measurement of sales deductions, and refund liabilities
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
-16
→ 26,27
-13
59
-370
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
-43
Subtotal
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:
Transaction costs related to the disposal
-8
101
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
301
-1,381
Other provisions and contingent liabilities
IAS 19
leases of intangible assets within the scope of IAS 38 will not be
recognized in accordance with IFRS 16;
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"
sources of estimation uncertainty
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
ary scope/
estimation
uncertainty
Carrying
amount Dec.
31, 2018
(€ million)
See Note for
details
Sensitivity
analysis
(3) Management judgments and
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
material significance
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
IFRSS
13,764
→ 19
yes
medium
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
Identification of impairments (or reversal of impairments)
€ million
no
2,764
Determination of recoverable amount
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
→ 23
Non-current assets
DIVESTMENT OF BIOSIMILARS BUSINESS
Property, plant and equipment
85
-256
63
1,755
2,028
1,492
-87
3
23
53
13
743
1,580
206
696
747
834
1,036
1,337
731
57
51
5,882
6,185
6,190
6,246
2017
726
1,556
1,773
1,840
1,402
1,393
1,314
1,516
1,621
1,629
1,159
55
19
310
327
313
359
379
59
-1,254
-1,333
-2,985
-2,893
20,422
20,860
8,184
7,568
30.4%
29.8%
28.6%
24.9%
1,786
2018
2017
2018
Life Science
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.
215
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
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).
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
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).
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.
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.
If so, Merck had to determine whether Merck's contractually
promised goods or services contained in the collaboration agreement
could be separated or not.
In this context, Merck had to assess the extent to which the
requirements of IFRS 15 had to be applied directly or indirectly.
In the past, Merck occasionally recognized income for upfront and
milestone payments as well as license fees received under collabora-
tion agreements.
COLLABORATION AGREEMENTS
SIGNIFICANT MANAGEMENT JUDGMENTS AND
SOURCES OF ESTIMATION UNCERTAINTY -
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).
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.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
214
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),
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.
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).
ACQUISITIONS IN THE PREVIOUS YEAR
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.
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".
Goodwill
IN PREVIOUS YEAR
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.
Business free cash flow³
DEVELOPMENT AGREEMENT WITH AVILLION LLP,
UNITED KINGDOM, TO DEVELOP MERCK'S ANTI-IL-17-A/F
NANOBODY®
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.
Healthcare
Net cash flows from operating activities
Investments in intangible assets 4
Investments in property, plant and equipment4
Liabilities by business sector
Assets by business sector
EBITDA pre margin (in % of net sales)³
EBITDA pre (Segment result)³
Adjustments³
EBITDA³
Reversals of impairment losses
Impairment losses
Depreciation and amortization
Operating result (EBIT)³
Intersegment sales
Net sales²
€ million
INFORMATION BY BUSINESS SECTOR¹
(7) Segment reporting
Result from Operating Activities and Income Taxes
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
216
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.
DEVELOPMENT AGREEMENT WITH THE SFJ
PHARMACEUTICALS GROUP, UNITED STATES,
TO DEVELOP ABITUZUMAB
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.
IMMUNO-ONCOLOGY COLLABORATION WITH F-STAR
DELTA LTD., UNITED KINGDOM
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
1,025
AGREEMENT WITH BRISTOL-MYERS SQUIBB COMPANY,
UNITED STATES, FOR THE CO-COMMERCIALIZATION OF
GLUCOPHAGE® IN CHINA
3 Not defined by International Financial Reporting Standard (IFRSS).
54
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
7
213
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.
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
2 Excluding intersegment sales.
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
10,520
10,978
2,151
2,234
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
46
827
436
Other non-current assets
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.
Deferred tax 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
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
13,302
13,513
Current liabilities
25,791
1,407
4,828
5,012
Net sales by company location²
3,810
3,818
223
211
945
1,002
4,406
4,559
Net sales by customer location²
2017
2018
2017
2018
2017
North America
thereof: Germany
2018
2017
2018
€ million
4 According to the consolidated cash flow statement.
25,979
Europe
INFORMATION BY COUNTRY AND REGION¹
1,416
390
thereof: Switzerland
3,871
927
1,024
-186
360
-166
Number of employees
-1,050
647
-902
-681
-920
-1,840
-1,938
Research and development costs
1,385
1,503
623
3,031
2,895
Goodwill and other intangible assets
575
5,562
2,124
614
2,839
14,868
14,694
Property, plant and equipment
3,835
6,537
divestment of businesses
Gains (+)/losses (-) on the
-142
-1
-99
-3
-46
Acquisition-related adjustments
thereof: other
operating income
and expenses
-6
Total
costs
expenses
expenses
thereof:
research and
development
thereof:
administration
Other adjustments
-1
thereof:
marketing
and selling
-39
-39
-2
-45
-3
Adjustments (total)¹
Reversals of impairment losses
cost of sales
-55
-3
-19
-14
- 18
Impairment losses
-272
-6
-23
-190
-13
reversals of impairment losses¹
Adjustments before impairment losses/
-58
2
-2
-25
-25
-50
-2
thereof:
20171
Restructuring expenses
Adjustments (total)²
Reversals of impairment losses
Impairment losses
Adjustments before impairment losses/reversals of impairment losses²
Other adjustments
Acquisition-related adjustments
Gains (+)/losses (-) on the divestment of businesses
Integration expenses/IT expenses
Restructuring expenses
€ million
The adjustments comprised the following:
219
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
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).
2,129
1,461
Profit before income tax
-294
-63
-266
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
-46
-61
2018
€ 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:
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 Biosimilars business in the previous year, and were included in
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 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.
-64
-327
87
Integration expenses/IT expenses
-68
-82
-272
-81
-58
-63
-2
310
-25
-188
-142
-55
-27
North America
-2
2,203
100%
14,836
-11
100%
2,406
100%
6,185
100%
6,246
58
1%
58
Total
Middle East and Africa (MEA)
Latin America
Asia-Pacific (APAC)
Europe
(customer location)
Net sales by region
Total
35%
2,136
35%
220
Financial result
11%
661
33%
4,965
80%
1,932
25%
1,532
24%
agreements
1,501
3,818
9%
214
35%
2,173
23%
1,432
31%
4,559
9%
26%
Income from co-commercialisation
14
Commission income
-5
Total¹
and expenses¹
costs¹
expenses¹
expenses¹
operating income
thereof: other
thereof:
research and
development
thereof:
administration
-12
and selling
thereof:
marketing
Restructuring expenses
2017
€ million
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
220
¹Not defined by International Financial Reporting Standards (IFRSS).
-327
-26
thereof:
cost of sales¹
-209
-41
-61
License income
Consolidated Financial Statements
-5
-42
-10
-13
Other adjustments
-63
-56
-5
-3
-1
310
310
of businesses
Gains (+)/losses (-) on the divestment
Integration expenses/IT expenses
-188
-3
-131
-21
-31
Acquisition-related adjustments
2,423
588
Operating result (EBIT)²
100
15
14
13
116
119
-21,554
-19,655
35,621
36,888
3,073
-16,832
4,414
-14,940
-484
-489
3,942
4,046
29.3%
25.6%
40.1%
32.7%
4,246
3,800
116
910
919
13
2018
2017
2018
Merck Group
Middle East and Africa
Latin America
thereof: China
Asia-Pacific
thereof: United States
2,696
3,193
-292
2,508
-497
906
256
2,219
-1,418
-1,303
969
742
392
106
-429
2017
-381
786
-437
-548
689
508
-57
-51
14,517
14,836
2,446
2,406
2017
2018
2017
2018
2017
2018
Merck Group
Corporate and Other
Performance Materials
217
Notes to the Consolidated Financial Statements
1,727
2,423
240
232
82
272
99
107
33
17
4,164
3,528
-391
-488
980
947
-87
86
58
4
26
21
1,742
1,743
41
60
769
2018
2017
2018
218
52,880
51,713
1,060
1,121
4,027
3,337
3,324
3,550
11,294
10,486
-2,108
-2,225
-12
-14
-17
-17
-26
-30
-73
-69
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
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.
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.
-82
-272
Adjustments²
-1,741
-1,801
Depreciation/amortization/impairment losses/reversals of impairment losses
4,246
3,800
-292
- 381
-165
10,339
EBITDA pre of the Merck Group²
4,538
20171
2018
4,181
EBITDA pre of the operating businesses²
€ million
The following table presents the reconciliation of EBITDA pre of all
operating businesses to the profit before income tax of the Merck
Group:
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.
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.
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.
Corporate and Other included income and expenses, assets and
liabilities as well as cash flows that could not be directly allocated to
Corporate and Other
4,512
4,811
45
1,659
4,532
4,718
3,672
3,704
14,517
14,836
544
544
996
1,416
950
1,869
4,761
4,965
3,623
3,627
2017
2018
2017
2018
2017
1,583
1,727
879
357
43
114
127
214
266
531
585
923
1,020
-185
10,800
21,899
959
21,001
2
39
32
665
570
14,675
14,857
14,517
14,836
364
2
4%
100%
2%
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.
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).
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
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.
Other operating income
Remaining 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
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
225
(13) Other operating expenses
-104
2017¹
2018
Other operating expenses
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
Gains from the release of provisions for litigation
Expenses for the company's 350-year anniversary (including employee bonus)
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:
Expenses for the revaluation of contingent considerations
-156
350
Gains on disposal of businesses and non-current assets
-795
-808
-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
Sales promotion
Internal sales services
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
-509
-504
-702
-649
564
368
Income from upfront payments, milestone payments, rights and royalties
2017¹
2018
€ million
Other operating income was as follows:
(12) Other operating income
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
83
224
€ 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
(11) Research and development costs
-74
-108
-62
-14
-3
Other operating expenses
- 5
-33
Research and development costs
-21
-30
-19
-45
- 39
-12
-1
-33
-15
-17
-6
-6
-23
20171
2018
-1
Total
-45
-64
428
-368
1,137
290
-14
-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.
20171
TAX RECONCILIATION
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
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2018
20171
(including employee bonus)
-2
-23
-6
-13
-23
-7
-25
-40
-31
-2
-6
-31
-36
-64
-45
-27
-46
-54
-53
-86
-58
-3
-38
Notes to the Consolidated Financial Statements
-36
-218
on non-financial assets
Restructuring expenses
2018
Administration expenses
Marketing and selling expenses
Cost of sales
€ 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
-185
Consolidated Financial Statements
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
226
32
Consolidated Financial Statements
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.
€ million/in %
LIFE SCIENCE
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
222
100%
6,246
4%
270
Total
Other
4%
234
thereof: SaizenⓇ
6%
363
thereof: Euthyrox®
8%
475
thereof: ConcorⓇ®
12%
Process Solutions
Research Solutions
Applied Solutions
Total
596
20%
476
55%
1,332
2018
100%
6,185
27%
1,650
733
33%
40%
2,487
2018
Total
Other
Semiconductor Solutions
Surface Solutions
Display Solutions
€ million/in %
PERFORMANCE MATERIALS
2,048
25%
thereof: GlucophageⓇ
2,341
€ million/in %
HEALTHCARE
lines/products:
The following tables present a breakdown of net sales by key product
100%
14,836
100%
2,406
100%
6,185
100%
6,246
4%
544
8
1%
88
7%
448
6%
950
Oncology
thereof: ErbituxⓇ
thereof: BavencioⓇ
Neurology & Immunology
General Medicine & Endocrinology
11%
708
19%
1,162
1%
90
23%
1,438
24%
38%
1,529
69
13%
816
15%
944
2018
thereof: Gonal-f®
Fertility
thereof: MavencladⓇ
thereof: Rebif®
1%
1
Services
15
235
-82
Impairment losses
-6
-33
-16
-14
-68
Reversals of impairment losses
87
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:
€ million
-5
-219
-43
-50
historical return rates of individual product groups,
•
The measurement of sales deductions and refund liabilities resulting
from rights of return took
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
•
EBITDA pre²
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
-81
Adjustments before impairment losses/
reversals of impairment losses²
•
Investments in property, plant and equipment,
software as well as advance payments for intangible assets
2018
3,800
98%
Life Science
5,413
87%
Performance Materials
2,404
Group
13,902
94%
4
343
6%
6,085
347
84
1%
424
7%
2
510
4%
4
4
1
2%
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".
Healthcare
Equipment/hardware
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
2018
Business free cash flow²
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 %
Net sales by nature of the products
Goods
2,508
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.
Marketing authorizations
3,953
3,726
191
4,012
143
6,786
146
7,243
197
9,272
160
9,856
680
15,570
623
16,239
thereof:
Consumer Health
Total
Total Consumer Health¹
thereof:
2017
2018
172
Other
15,445
15,073
Operating Assets, Liabilities and Contingent Liabilities
231
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
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.
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 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).
(18) Net cash flows from operating
activities
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.
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.
(17) Earnings per share
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.
965
53,760
Average number of employees
3,456
51,990
3,100
11
1,563
7
2,253
1,973
(19) Goodwill
Marketing and Sales
Research and Development
2017
2018
€ million
Personnel expenses comprised the following:
(16) Personnel expenses/headcount
Material costs in 2018 amounted to € 2,598 million (2017: € 2,322 mil-
lion) and were largely reported under cost of sales.
(15) Cost of materials
⚫the existing tax planning of the respective Group company.
⚫ results planning and
⚫ results history,
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:
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.
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-
The recognized income tax liabilities and provisions were partially
based on estimates and interpretations of tax laws and ordinances
in different jurisdictions.
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 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".
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).
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.
229
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Wages and salaries
Supply Chain
4,111
619
Administration
Production
The following table provides the number of employees by function
(annual average):
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.
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).
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
230
4,632
4,820
Personnel expenses (as reported in the functional costs)
211
204
Consumer Health
4,843
5,024
Personnel expenses (including Consumer Health)
304
295
Pension expenses
586
Compulsory social security contributions and special financial assistance
to the retained earnings of subsidiaries, for which no deferred taxes
are recognized, amounted to € 9,934 million (December 31, 2017:
€ 2,856 million).
€ million
Changes in scope of consolidation
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
13,764
1,334
10,896
1,534
464
57
408
-282
-31
-251
-1
13,582
1,278
10,519
1,785
13,582
232
1,278
Consolidated Financial Statements
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.
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
-
OF ESTIMATION UNCERTAINTY
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
As in 2017, goodwill was not subject to impairment in fiscal 2018.
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").
Notes to the Consolidated Financial Statements
Cost as at January 1, 2017
10,519
-25
-1,425
13,582
Currency translation
Classification as held for sale or transfer to a disposal group
Transfers
Disposals
Additions
Changes in scope of consolidation
Cost as at January 1, 2018¹
Net carrying amount as of December 31, 2017
December 31, 2017
Currency translation
Reversals of impairment losses
Transfers
Disposals
Impairment losses
Accumulated amortization and impairment losses, January 1, 2017
Changes in scope of consolidation
December 31, 2017
Currency translation
Classification as held for sale or transfer to a disposal group
Transfers
Disposals
Additions
December 31, 2018
1,785
Accumulated amortization and impairment losses, January 1, 2018
Impairment losses
1,278
-174
-1,250
10,519
1,785
-1
-25
17
Total
15,015
1,452
11,752
17
1,811
Performance
Materials
Life Science
Healthcare
Goodwill
December 31, 2018
Currency translation
Classification as held for sale or transfer to a disposal group
Reversals of impairment losses
Transfers
Disposals
Changes in scope of consolidation
Net cash flows
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
1,106
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
290
Deferred taxes (consolidated income statement)
-164
135
Changes in scope of consolidation/currency translation/other
15
-2
Deferred taxes credited/debited to equity
-41
-30
Changes from reclassification into assets held for sale
1,235
201
93
-15
CHANGES IN TAX LOSS CARRYFORWARDS
2017¹
Tax loss carryforwards were structured as follows:
Tax loss carryforwards
160
56
211
152
59
deferred tax asset is recognized
Tax loss carry forwards for which a
1,171
1,054
117
1,187
1,069
118
Total
Abroad
Germany
Total
Abroad
Germany
Dec. 31, 2017
Dec. 31, 2018
€ million
216
2018
€ million
-37
Tax effect of companies with a negative contribution to consolidated profit
Income tax for previous periods
263
150
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
Finite useful life
-71
Change in deferred tax assets (consolidated balance sheet)
Change in deferred tax liabilities (consolidated balance sheet)
-79
Tax effect on tax loss carryforwards
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.
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
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.
-20.1%
25.2%
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
34
193
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 credits
1,489
Tax loss carry forwards for which no
59
35
190
66
236
92
485
37
454
Provisions for pensions and other post-employment benefits
Other provisions
2
21
5
25
Current and non-current receivables/other assets
14
554
18
564
Inventories
41
5
Liabilities
3
67
69
1,288
-442
-442
-515
-515
1,091
Deferred taxes (consolidated balance sheet)
Offset deferred tax assets and liabilities
1,931
1,548
1,803
1,606
Deferred taxes (before offsetting)
86
58
98
60
Tax refund claims/other
32
33
Tax loss carryforwards
9
12
deferred tax asset is recognized
12
98
32
25
7
33
24
9
tax loss carryforwards
Recognized deferred tax assets on
288
269
19
281
254
27
tax loss carry forwards
Potential deferred tax assets for
955
894
61
976
917
Not recognized deferred tax assets
Current and non-current financial assets
on tax loss carryforwards
230
23
84
34
1,555
111
1,479
119
Liabilities
Dec. 31, 2017
Assets
Liabilities
Assets
Property, plant and equipment
Intangible assets
€ million
Dec. 31, 2018
DEFERRED TAXES (CONSOLIDATED BALANCE SHEET)
Deferred tax assets and liabilities correspond to the following balance
sheet items:
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.
256
244
12
248
18
⚫ Sales growth
Classification as held for sale or transfer to a disposal group
• Profit margins
24
Classification as held for sale or transfer to a disposal group
Reversals of impairment losses
-40
26
7
-19
-1,231
-57
-1
14
5
-21
-747
-427
Transfers
Disposals
Impairment losses
Amortization
-11,260
-357
-596
38
-8,438
2
Currency translation
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:
235
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
7,237
329
289
1,543
5,076
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
-104
-12,544
-426
-596
-9,195
-2,326
December 31, 2018
-3
-40
-61
65
Total
-1,868
19,780
Disposals
106
55
35
14
1
Additions
Changes in scope of consolidation
Cost at January 1, 2018
19,577
705
1,017
10,685
7,171
8,317
348
421
2,246
5,303
Net carrying amounts as of December 31, 2017
258
-11,260
-6
Accumulated amortization and impairment losses, January 1, 2018
Changes in scope of consolidation
-37
-8
755
885
10,739
7,402
December 31, 2018
342
6
71
265
Currency translation
-87
-7
-51
-29
Classification as held for sale or transfer to a disposal group
4
4
-56
57
Transfers
-162
-111
Total
€ million
Customer relationships, brands and trademarks
Customer relationships
49
Patents, licenses and similar rights
thereof: acquisition of AZ Electronic Materials S.A.
Others
0.5-14.3
2.3 14.3
323
643
966
1,156
616
616
741
61
6
10
77
54
Not yet available for use
285
4
289
421
32
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.
32
62
Rebif®
561
329
653
1,543
2,246
Xalkori®
SaizenⓇ
Gonal-fⓇ
Other marketing authorizations
1.0
369
3.0
68
1.0
31
369
737
68
93
31
95
The additions to marketing authorizations, patents, licenses, sim-
ilar rights and other not yet available for use amounted to € 35 million
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 software and software in development in the
amount of € 55 million (2017: € 110 million) were mainly attributable
to new ERP developments.
569
0.5-8.5
3,693
3,496
1
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
569
681
4.5-8.9
806
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.
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").
236
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
SIGNIFICANT MANAGEMENT JUDGMENTS AND
SOURCES OF ESTIMATION UNCERTAINTY - OTHER
INTANGIBLE ASSETS
In-licensing of intangible assets
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.
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.
Determination of impairment amount
15
-357
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.
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).
Marketing authorizations, patents, licenses,
similar rights and other
695
655
655
8.9
thereof: acquisition of Sigma-Aldrich Corporation
881
813
7
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).
-596
Net carrying amounts as of December 31, 2018
100
-8,438
2018
2017
2018
Decrease in net
cash flows
Increase in cost of capital
after tax
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%
5.8%
0.50%
0.50%
1,278
8.4%
8.8%
6.8%
2017
7.2%
2018
in percentage points
Performance Materials
> 5
> 5
1.8
0.9
> 2
1.2
> 5
> 2
> 2
Life Science
Consumer Health¹
> 5
> 5
> 2
> 2
> 2
> 2
Healthcare (excluding Consumer Health)
in %
in percentage points
2017
> 2
1.75%
10,519
€ 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
1
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
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)
Derived from the respective peer group
Market risk premium:
Risk-free interest rate: Derived from the returns of long-term government bonds
Beta factor:
⚫ 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
2018
1.75%
2017
2017
10,896
1,334
Performance Materials
Life Science
8.2%
6.6%
2.00%
251
Consumer Health¹
8.9%
8.5%
6.7%
6.4%
0.00%
0.00%
1,534
1,534
Healthcare (excluding Consumer Health)
2017
2018
2017
2018
2018
> 2
Consolidated Financial Statements
> 2
Amortization
-10,259
-356
-585
-7,759
-1,560
Accumulated amortization and impairment losses, January 1, 2017
Changes in scope of consolidation
19,577
705
1,017
10,685
7,171
-1,053
-25
-1
-190
-838
2
2
4
8
Impairment losses
-8
Disposals
Reversals of impairment losses
>2
-1,868
142
December 31, 2017
Currency translation
Classification as held for sale or transfer to a disposal group
17
1
-2
2
33
27
5
1
-67
-17
-50
-1,243
-41
-751
-451
Transfers
6
17
-32
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
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
-2
> 5
patents, licenses, similar
in develop-
234
ment
rights and other
-1
398
110
24
20
21
-1
20,239
-27
263
766
639
Advance
payments
Total
Not yet
Finite
useful life
-5
available
for use
8,011
10,824
Determination of impairment amount
(operational)
Derivatives without a hedging relationship
through profit or loss
Subsequent measurement at fair value
295
Other receivables
Subsequent measurement at amortized cost
EQUIPMENT
€ million
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.
239
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
(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.
Derivatives with a hedging relationship
Current
Other assets comprised:
45
Financial items
4
1
4
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - PROPERTY, PLANT AND
46
46
276
29
Total
Non-current
Dec. 31, 2017
45
247
312
17
Current
Total
Non-current
Dec. 31, 2018
(operational)
5
1,092
1
Net carrying amounts as of December 31, 2018
-5,740
-977
-3,150
-1,609
66
-44
-5
-23
2,228
-16
40
Dec. 31, 2017
December 31, 2018
Currency translation
Classification as held for sale or transfer to a disposal group
30
-24
Reversals of impairment losses
13
1,163
328
4,811
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:
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").
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.
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".
9
15
731
299
Currency effects
Classification as held for sale or transfer to disposal group
Reclassification from non-current to current
Reclassification to receivables
Additions
January 1, 2018
€ million
The following table provides details on contract assets representing
completed performances not yet invoiced:
Changes in scope of consolidation/other
Notes to the 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".
936
205
1,024
Consolidated Financial Statements
138
December 31, 2018
This item comprises the following items:
24
-1
-1
52
1
1
-78
-78
95
(23) Inventories
94
35
Total
Contract assets
Non-current
Current
Finished goods/goods for resale
Inventories
Work in progress
Raw materials and supplies
€ million
35
886
Other assets
568
8
99
121
5
117
Prepaid expenses
277
38
107
239
8
318
Receivables from non-income related taxes
367
91
277
361
63
326
Contract assets¹
52
1
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
45
116
481
42
January 1, 2017
Accumulated depreciation and impairment losses
9,852
1,026
1,176
4,136
3,514
December 31, 2017
-1,361
-306
-33
-103
-131
Currency translation
39
-2
41
Classification as held for sale or transfer to a disposal group
-40
-5
-2,949
-5,171
209
32
138
39
Disposals
-5
-2
-2
-858
Impairment losses
-9
21
-103
-266
-147
Depreciation
2
- 31
Changes in the scope of consolidation
-516
-543
96
258
3,391
Total
to vendors and
contractors
progress and
advance payments
Construction in
operating and
office equipment
Plant and
machinery
land
4,068
Cost at January 1, 2017
on third-party
Other facilities,
Land, land rights
and buildings,
including buildings
(21) Property, plant and equipment
237
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
1
€ million
1,136
807
9,402
184
Transfers
-241
-16
-34
-142
-50
Disposals
936
818
35
54
30
Additions
28
-24
2
49
Changes in the scope of consolidation
Transfers
2
Reversals of impairment losses
35
10,551
1,096
1,305
4,313
3,837
December 31, 2018
90
10
Accumulated depreciation and impairment losses
6
43
Currency translation
-134
-2
-20
-69
-43
Classification as held for sale or transfer to a disposal group
31
-696
January 1, 2018¹
-2,978
59
11
-18
-2
-1
-3
-12
-517
-1,474
-115
-156
Transfers
Disposals
Impairment losses
Depreciation
Changes in the scope of consolidation
-5,343
-887
-246
140
237
319
1,022
291
1,158
2,042
-5,340
122
-40
69
4,512
Net carrying amounts as of December 31, 2017
-1,472
December 31, 2017
63
37
Currency translation
1
-41
Classification as held for sale or transfer to a disposal group
-2,978
21
-886
Cost at January 1, 2018¹
Transfers
-152
-28
-46
-64
-14
Disposals
890
786
47
41
16
Additions
Changes in the scope of consolidation
9,857
1,026
1,178
4,136
3,517
35
52
13
Actuarial gains (+)/losses (-)
Other changes
Reclassification to liabilities directly related to assets held for sale
Currency translation differences recognized in equity
Changes in the scope of consolidation
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
Other
Actuarial gains (+)/losses (-)
arising from experience adjustments
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
arising from changes in demographic assumptions
Actuarial gains (+)/losses (-)
Remeasurements of defined benefit obligations
3
-8
thereof: attributable to the divested Consumer Health business
6
-217
Remeasurements of plan assets
December 31, 2017
5
8
20
112
-2
114
13
-13
36
36
76
-51
127
141
121
121
121
7
8
5
-5
-211
-5
7
20
20
7
Items recognized in income
-2
-3
Other effects recognized in income
244
-2,329
2,391
-4,719
December 31, 2018
Other
40
-13
53
Other changes
2
-13
15
-5
5
-10
Currency translation differences recognized in equity
43
-5
48
assets held for sale
Reclassification to liabilities directly related to
Changes in the scope of consolidation
123
13
Consolidated Financial Statements
-14
Notes to the Consolidated Financial Statements
January 1, 2017
-33
40
Currency translation differences recognized in income
-8
-8
-2
-2
43
43
-86
-86
-160
-160
-2,313
Net defined
benefit liability
Effects of the
asset ceilings
Fair value of the
plan assets
2,386
-4,698
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
€ million
110
6
-46
Investment funds
94
94
105
105
Direct investments in real estate
957
957
993
993
Debt instruments
458
814
592
592
Equity instruments
77
77
147
147
Cash and cash equivalents
Total
an active market
active market
814
458
420
1
Dec. 31, 2018
510
The following overview shows how the present value of all defined
benefit obligations would have been impacted by changes to relevant
ctuarial assumptions.
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.
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
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - PROVISIONS FOR
PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS
0
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.
2,452
176
2,276
2,391
182
2,209
Fair value of the plan assets
8
8
19
19
81
81
77
77
Other
Insurance contracts
421
Total
an active market
No quoted
market price in
price in an
Cumulative actuarial gains (+)/losses (-) recognized in equity, December 31
Reclassification within retained earnings
Actuarial gains (+)/losses (-) arising from experience adjustments
Effects of the asset ceilings
Remeasurements of plan assets
Actuarial gains (+)/losses (−) arising from experience adjustments
Actuarial gains (+)/losses (-) arising from changes in demographic assumptions
Actuarial gains (+)/losses (-) arising from changes in financial assumptions
Remeasurements of defined benefit obligations
Cumulative actuarial gains (+)/losses (−) recognized in equity, January 1
Currency translation differences
€ million
The development of cumulative actuarial gains (+) and losses (-)
I was as follows:
245
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
The actual loss on plan assets amounted to € 73 million in 2018 (2017:
return of € 164 million).
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.
-2,256
2,452
-4,707
15
-59
74
-12
1
-13
21
2018
67
-1,668
-40
Quoted market
No quoted
market price in
price in an
active market
€ million
Quoted market
Dec. 31, 2017
Dec. 31, 2018
The fair value of the plan assets can be allocated to the following
categories:
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
246
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.
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).
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
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.
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.
-1,668
65
-1,637
121
-115
7
-18
8
139
5
2017
-1,820
11
14
arising from changes in financial assumptions
48
-2,452
-2,391
2,328
4,707
4,719
Dec. 31, 2017
Dec. 31, 2018
Future pension increases
Future salary increases
Discount rate
The calculation of the defined benefit obligations was based on the
following actuarial parameters:
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
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
242
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 com-
prise both obligations from current pensions and accrued benefits
for pensions payable in the future.
2,255
(25) Provisions for pensions and other
post-employment benefits
1
1
Medical plan
Other
Installments
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.
2017
3.16% 2.99%
3.21% 3.66%
1.77% 1.94%
2018
Other countries
United Kingdom
2018 2017
2.95% 2.56%
2.00% 2.00%
2.94% 3.04%
2018
2017
1.00% 0.70%
1.74% 1.80%
Switzerland
Germany
2018
2017
1.97% 1.90%
2.51% 2.51%
1.75% 1.75%
2,257
2,336
1
7
2,256
2,329
Present value of defined benefit obligations
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.
-86
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
Subsequently measured at amortized cost
€ million
(24) Trade accounts receivable
241
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
1,420
795
834
21
3
3,004
3,004
-73
6
-16,590
1
16,395
3,277
-4
-9
counts receivable
3,290
-14
Change in scope of consolidation/other
December 31, 2018
Classification as held for sale or transfer to disposal group
Currency effects
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
3,290
Fair value of the plan assets
Gross trade ac-
Switzerland
arising from changes in demographic assumptions
Actuarial gains (+)/losses (-)
Remeasurements of defined benefit obligations
-5
2
-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
Actuarial gains (+)/losses (-)
-85
arising from changes in financial assumptions
arising from experience adjustments
Germany
48
75
-49
124
-34
-115
81
-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
Remeasurements of plan assets
Actuarial gains (+)/losses (-)
-161
Actuarial gains (+)/losses (-)
-2,256
778
3,172
1,137
26
26
10
10
6
6
39
33
6
67
777
563
1
3,137
93
93
84
Total
450
1
2,602
Other countries
-161
Dec 31, 2018
United Kingdom
456
313
1,407
656
Effects of the
asset ceilings
4,719
Fair value of the
plan assets
2,452
-4,707
Present value
of the defined
benefit obligations
Gains (+) or losses (-) on settlement
Past service cost
Plan administration costs recognized in income
Net defined
benefit liability
Interest expense
Current service cost
January 1, 2018
€ million
Interest income
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:
148
2,391
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.
Consolidated Financial Statements
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
243
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.
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.
Notes to the Consolidated Financial Statements
450
Rights of return
thereof: attributable to performance obligations satisfied
Rebates/bonus payments
Reclassification to liabilities directly related to assets held for sale
Change in scope of consolidation/other
December 31, 2018
Currency translation
in prior periods
(30) Refund liabilities
Utilizations/reversals
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").
Additions
The following table shows the development of refund liabilities in the
period under review:
January 1, 2018
€ million
Cumulative catch-up adjustments to revenue
thereof:
1,273
Total
379
1,317
23
Given the first-time application of IFRS 15 as of January 1, 2018,
some items previously recognized in trade accounts payable were
-1,193
44
951
thereof:
431
52
244
Total
United States
Total
United States
32
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.
Non-current
Notes to the Consolidated Financial Statements
2
410
506
194
311
Total
412
Current
The following table provides details on the development of contract
liabilities related to payments received before performance completion:
2,529
December 31, 2018
-902
Reclassification to liabilities directly related to assets held for sale
Currency translation
Change in scope of consolidation/other
Contract liabilities
(29) Trade accounts payable
-582
-583
Consolidated Financial Statements
254
of which € 299 million was recognized in fiscal 2018.
As of January 1, 2018, contract liabilities amounted to € 506 million,
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.
336
-2
4
2
-2
2
2
-193
193
332
-43
Interest expenses and similar expenses
-1,235
77
Finance income
Currency differences from financing activities
-
1
5
167
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
20171
2018
Income from fair value changes
Interest income and similar income
€ million
23
(32) Financial result/net gains or losses from financial instruments
27
Capitalized borrowing costs of qualifying assets
7
Reclassification from non-current to current
8
5
7
-294
51
-268
Interest component of the additions to pension provisions and other non-current provisions
Other interest expenses
from debt instruments with subsequent measurement at fair value through profit or loss
Expenses from fair value changes of share-based compensation programs
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
Finance costs
-22
Capital Structure, Investments and Financing Activities
Notes to the Consolidated Financial Statements
1
1
12
12
-28
3
13
-3
-25
-34
-3
-3
-30
-31
-24
255
-16
-19
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.
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.
(31) Net cash flows from investing
activities
Please refer to Note (8) "Net sales" for further information on
judgments and sources of estimation uncertainty.
-3
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
472
Cumulative catch-up adjustments to revenue
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".
Additions
1,063
1,110
33
43
18
25
78
95
95
94
94
174
174
172
172
Total
1,059
21
thereof: payroll liabilies
thereof: interest accruals
Liabilities from derivatives with a hedging
relationship (operative)
Financial items
Dec. 31, 2018
39
Current
1,019
Total
Current
Dec. 31, 2017
Non-current
13
1,032
1,038
Non-current
1,102
58
1,077
Deferred income¹
21
21
303
211
514
150
Other non-financial liabilities
99
Non-financial items
1,211
19
1,230
-14
99
Other financial liabilities
5
186
23
20
Accruals for personnel expenses
687
687
665
144
665
332
4
336
Liabilities from non-income related taxes
171
15
Contract liabilities¹
€ million
Other liabilities comprised the following:
(28) Other liabilities
Dec. 31, 2018
14
-15
-10
8
Dec. 31, 2017
15
-2
Increase (+)/decrease (-) of the provision
16
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.
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.
With respect to provisions for pensions and other post-employment
benefits, see Note (25) "Provisions for pensions and other post-em-
ployment benefits".
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.
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
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - OTHER PROVISIONS
FOR ENVIRONMENTAL PROTECTION
+10%
-10%
+10%
January 1, 2018
€ million
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.
354
2,175
2,341
-10%
52
Other liabilities
1,427
315
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
251
2,288
Recognition of income/reversal
The calculation of the present value of the future settlement amount
of provisions for environmental protection required estimates to be
made of
.
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
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.
Dec. 31, 2018
47
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.
Identification and measurement
The identification and measurement of contingent liabilities are
largely subject to management judgments and estimation uncertain-
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.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
253
SIGNIFICANT MANAGEMENT JUDGEMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - CONTINGENT LIABILITIES
⚫ the future settlement date,
Contingent liabilities from legal disputes and tax matters
Other contingent liabilities
(27) Contingent liabilities
the actual severity of the identified contamination,
⚫ the applicable remediation methods,
⚫ the associated future costs, and
⚫ 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.
€ million
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
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
payables. In previous periods, such items were disclosed in income
tax liabilities in full.
-13
511
-2
182
thereof: non-current
thereof: current
1,381
211
46
30
137
316
90
551
December 31, 2018
-15
-3
-4
-1
-6
2
2
14
1
5
2
32
6
-2
Interest portion
Currency translation
Changes in scope of consolidation/other
Reclassification to liabilities directly related
to assets held for sale
-1
112
26
19
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.
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.
Antitrust and other proceedings
Antitrust review proceedings for the Sigma-Aldrich acquisition: 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 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.
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.
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.
In addition to provisions for the mentioned litigation, provisions
existed as of the balance sheet date for various other pending legal
disputes.
Notes to the Consolidated Financial Statements
249
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - OTHER PROVISIONS
FOR LEGAL DISPUTES
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
⚫ 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.
Consolidated Financial Statements
11
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.
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.
46
184
600
370
58
203
Product-related and patent disputes
111
27
780
248
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
LITIGATION
11
-206
-90
-10
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
(26) Other provisions
Other provisions developed as follows:
the discount rate is 50 basis points lower
€ million
Additions
Utilizations
Release
Interest and
Litigation Restructuring
Personnel
January 1, 2018
Environmental
protection
Increase (+)/decrease (-) in present value of all defined benefit obligations if
the discount rate is 50 basis points higher
-198
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
247
Dec. 31, 2017
-435
-438
€ million
503
151
155
-130
-133
251
256
508
The main parameters when determining the amount of provisions
Acceptance
and follow-on
related to
176
1,112
-22
-22
-78
-8
13
-3
-174
-21
-9
-66
-2
-7
-40
penalties
15
203
obligations
income taxes
Other
Total
526
92
9
254
26
43
166
1,245
65
30
137
-1
were
⚫ the likelihood of possible outcomes of the proceedings,
through profit or loss
Financial liabilities
Subsequent measurement at amortized cost
-54
Subsequent measurement at fair value
through profit or loss
2017
€ 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.
12
1
22
735
-669
-294
-14
5
97
Subsequent measurement at fair value
-39
Interest Impairment losses impairment losses
Reversals of
Net gains and losses
105
-77
-259
21
Debt instruments
Equity instruments
through other comprehensive income
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
256
The currency differences from financing activities mainly comprised
gains or losses from hedging intragroup transactions in foreign
currency.
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
-294
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:
-266
-345
-343
-1
-51
-56
-15
Financial result
Fair value
adjustments
2018
Interest result
Subsequent measurement at fair value
-47
Subsequent measurement at amortized cost
Financial assets
gains/losses
Disposal
€ million
Fair value
adjustments
Impairment
losses
Interest
expenses
Interest
income
Dividends
Currency
translation
Net gains and losses
Reversals of
impairment
losses
Disposal gains/
losses
-203
Variation of DAX® value
2016 tranche
Jan. 1, 2016 -
Dec. 31, 2018
3 years
87.92
10,669.76
2017 tranche
DAX® value (60-day average of the DAX®
prior to the start of the performance cycle)
Jan. 1, 2017 -
Dec. 31, 2019
3 years
Jan. 1, 2018 -
Dec. 31, 2020
3 years
95.63
10,822.06
91.73
13,089.39
2018 tranche
Potential number of MSUS
Reference price of Merck shares in €
(60-day average Merck share price prior
to the start of the performance cycle)
Performance cycle
⚫ 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.
Term
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.
250
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:
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.
⚫ the duration of proceedings in pending litigation,
Potential number offered for the first time in 2016
Forfeited
16,336
39,889
23,760
643,954
774,850
829,632
Transferred as part of the disposal of Consumer Health
Dec. 31, 2018
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).
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
The three-year tranche issued in 2015 ended at the end of 2017; an
amount of € 23 million was paid out in 2018.
763,463
37,953
47,676
24,392
Dec. 31, 2016
739,071
Potential number offered for the first time in 2017
853,624
Forfeited
13,988
31,105
Dec. 31, 2017
707,966
828,727
Potential number offered for the first time in 2018
891,345
Forfeited
24,897
767
Loans from third parties and other financial liabilities
Non-current
Reclassification to assets
Reclassification to profit or loss
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
Forward
component of
Time value
of options currency forwards
Cash flow hedge
-96
-60
54
60
Potential net
amount
due to financial
collateral
due to
master netting
agreements
Potential netting volume
51
-139
29
-29
Potential net
amount
due to financial
collateral
agreements
Cost of hedging
3
3
-5
38
5
Reclassification to profit or loss
-68
-3
-48
1
Fair value adjustment (directly recognized in equity)
-60
-64
3
-1
January 1, 2018
-60
-64
3
-4
-25
-2
13
-1
-2
85
5
-68
-123
1
-1
December 31, 2017
Tax effect
due to
master netting
14
Potential netting volume
The reserves for cash flow hedges and the cost of cash flow hedging
30
13
9
46
27
9
86
13
86
27
46
13
9
62
18
15
30
18
25
Non-current
Current
Non-current
Current
Operative transactions
Financial transactions
Negative market values
15
30
25
27
86
25
-155
-155
113
113
Net presentation
Netting
presentation
Gross
-168
-168
80
80
Net presentation
Netting
presentation
Gross
Derivative financial liabilities
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
of the Group applied to the following hedging instruments:
400
Reclassification to assets
10
22
Subsequent measurement at amortized cost
Loans against third parties
1
9
10
1
9
9
Subsequent measurement at fair value through
other comprehensive income
8
278
13
285
274
274
Debt instruments
8
4
12
Subsequent measurement at fair value through profit and loss
16
324
340
Equity instruments
Contingent considerations
259
Equity instruments
59
12
29
Short-term cash investments (up to 3 months)
Cash and cash equivalents
Dec. 31, 2018
780
Dec. 31, 2017
481
1,391
108
2,170
589
Changes in cash and cash equivalents as defined by IAS 7 are pre-
sented in the consolidated cash flow statement.
Cash and cash equivalents included restricted cash amounting to
€ 295 million (December 31, 2017: € 238 million). This relates mainly
to cash and cash equivalents with subsidiaries which the Group only
had restricted access to owing to foreign exchange controls.
The maximum default risk is equivalent to the carrying value of
the cash and cash equivalents.
(34) Financial assets
€ million
Available-for-sale financial assets
Loans and receivables
Derivative assets (financial transactions)
Dec. 31, 2018
Current
Non-current
Total
Current
Dec. 31, 2017
Non-current
Total
35
420
454
47
259
Tax effect
Other debt instruments
50
1.700%
0.750%
million
400
Currency
USD
800
€
4.250%
70
€
Bonds (current)
869
335
Commercial paper
335 March 2018
Sept. 2019
Dec. 2019
113
Bank loans
370
803
Liabilities to related parties
824
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
838
70
799
Eurobond 2009/2019
Derivatives without a hedging relationship (financial transactions)
Financial assets
16
14
30
24
610
635
90
444
535
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
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.
258
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(35) Financial liabilities/
capital management
The composition of financial liabilities as well as a reconciliation to
net financial debt are presented in the following table:
Nominal value
Dec. 31,
2018
Dec. 31,
2017
Interest rate
€ million
€ million
Maturity
%
USD bond 2015/2018
Eurobond 2015/2019
50
Current
Non-current
Operative transactions
60
E. Merck KG
430
Merck KGaA
171
E. Merck KG
537
Merck KGaA
162
2017
2018
Profit carried forward
Dividend proposal
Withdrawal by E. Merck KG
Retained earnings Merck KGaA
Transfer to revenue reserves
Withdrawal from revenue reserves
25
Profit carried forward previous year
€ million
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
262
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
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
Net income
39
16
187
-7
-611
-548
-63
Total
Merck KGaA
Merck & Cie
Total
-509
Merck KGaA
-447
-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
-20
-7
-5
-7
€ million
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:
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
261
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.
Result of E. Merck KG before reciprocal profit transfer, adjusted
for trade tax
1,653
620
2,799
2022
<1 year
variable
303
581
370
549
variable
250
250
250
250
3,931
Net income of Merck KGaA before reciprocal profit transfer
Corporation tax
Basis for appropriation of profits
7
(29.726%)
-548
548
-447
447
(70.274%)
780
-16
637
-24
(100%)
56
20
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
5
-5
-5
1
Negative market values
1
4
Non-current
Current
Non-current
Current
Operative transactions
Financial transactions
Positive market values
Fair value/carrying amount
265
Notes to the Consolidated Financial Statements
Financial transactions
Consolidated Financial Statements
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
4,376
1,360
1,898
1,360
Non-current
Current
1,898
Nominal volume
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.
Operative transactions
Current
Non-current
Financial transactions
Current
Positive market values
Fair value/carrying amount
20
58
73
16
46
4
14
16
45
16
16
73
73
16
45
14
14
16
20
58
1
4
-
20
58
Non-current
Current
1,466
6,859
5,286
1,100
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
Notes to the Consolidated Financial Statements
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.
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
-430
-62
Profit transfer to E. Merck KG/
withdrawal by E. Merck KG
-16
-24
transfer adjusted for trade tax
Result of E. Merck KG before reciprocal profit
-593
-531
-63
-515
-454
-62
including changes in reserves
Profit transfer to E. Merck KG
22
22
1
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.
Cash, bank balances and checks
OTHER CHANGES IN EQUITY
264
1,100
5,286
366
1,573
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
€ million
DEC. 31, 2018
The following derivatives were held by Merck as of the balance sheet
date:
(37) Derivative financial instruments
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
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.
variable
€ million
(33) Cash and cash equivalents
1,328
1,389
€
550
1.375%
Sept. 2022
994
548
USD
1,000
2.950%
€
1,350
USD
548
992
498
497
850
250
7,040
6,304
€
500
3.375%
Cash and cash equivalents comprised the following items:
€
1,000
2.625%
USD
1,600
3.250%
March 2025
Dec. 2074¹
Dec. 2074²
750
2.400%
4.500%
€
70
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
16
Liabilities from derivatives (financial transactions)
19
20
Hybrid bond 2014/2074
51
Bonds (non-current)
Liabilities to related parties
70
€
800
0.750%
4.250%
799 Sept. 2019
70 Dec. 2019
626 March 2020
1,347 March 2020
833 March 2022
1,348
872
655
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
Bank loans
54
400
86
70
1,000
0.75%/
4.25%
550
874
2.625%
656
1,398
3.375%
3.25%
1.375%/2.95%
1The nominal volumes of bonds denominated in U.S. dollars were converted into euros at the
closing rate on December 31, 2018.
2 For the hybrid bonds repayment is assumed at the earliest possible date.
Merck repaid a USD bond with a volume of € 323 million in March
2018.
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.
1.350
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".
2025
2023
90
73
10,144
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.
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).
€ million
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
259
• Eurobond • USD bond¹ • Hybrid bond²
500
2019
2020
2021
2022
2024
4.5%/2.4%
800
Consolidated Financial Statements
Maturity of
financing
commitments
2020
700
700
variable
Notes to the Consolidated Financial Statements
257
589
2,170
24
6,701
10,823
8,896
8,033
6,681
260
2
Interest
variable
2,000
Consolidated Financial Statements
2
Notes to the Consolidated Financial Statements
2,000
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
CAPITAL MANAGEMENT
Financing
commitments
from banks
Dec. 31, 2017
Financing
commitments
Utilization
from banks
Utilization
Dec. 31, 2018
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
105
69
-2
-75
-77
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
35
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:
420
€ million
of debt instruments subsequently measured at fair value through other comprehensive income
Net impairment losses on financial assets
External credit rating lower than BBB- (rating agency Standard & Poor's)
or Baa3 (rating agency Moody's)
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)
Group
Performance
Materials
Life Science
Healthcare
Dec. 31, 2018
of debt instruments subsequently measured at amortized cost
Loans from third parties and other financial liabilities
of debt instruments subsequently measured at fair value through other comprehensive income
Reversal of impairment losses
4
Finance lease liabilities
18
59
52
15
155
Liabilities from derivatives
54
4
19
1
73
Trade accounts receivable before impairment losses
21
1
2
14,120
243
of debt instruments subsequently measured at amortized cost
of trade accounts receivable
Impairment losses
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.
of trade accounts receivable
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
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
6,179
657
6,046
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.
427
2
2
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
272
-44
-29
-14
-1
-73
-34
-23
loss allowances
thereof: credit impaired
Loss allowances
thereof: credit impaired
4
45
61
402
2,408
Total
More than 360
days past due
93.3%
-2
14.1%
1.3%
0.9%
Overdue by
360 days
Overdue by
180 days
90 days
Not yet due
Overdue by
6.0%
-3
-12
51
Overdue by
thereof: credit impaired
Loss allowances
thereof: credit impaired
loss allowances
Trade accounts receivable before
Expected loss rate
Not yet due
€ million
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
Dec. 31, 2018
36
90 days
0.5%
30
16
453
1
2
3,004
64
Overdue by
180 days
66
399
2,415
Total
More than 360
days past due
53.1%
Overdue by
360 days
34.8%
3.3%
0.8%
60
474
2,195
1,352
1,397.39
126.74
36.68
8.48
1.12
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
1The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
instruments since January 1, 2018
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.
The Merck Group's net exposure to interest rate changes comprised
the following:
-9
6
-100 basis points
+100 basis points
-100 basis points
+100 basis points
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.
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-
-2,957
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
INTEREST RATE RISKS
Change in value of outstanding hedging
Hedge ratio¹
1:1
125
85
101
122
129
125
169
88
85
125
1,055
85
178
1,180
KRW
JPY
TWD
CNY
CHF
USD
Maturity date
thereof: positive market value (asset)
thereof: negative market value (liability)
Fair value of the hedging instrument
53
47
24
44
January 2019-
January 2021
January 2019-
December 2020
1:1
December 2020
1:1
1:1
1:1
1:1
January 2019-
January 2019-
December 2019
January 2019-
December 2020
December 2020
January 2019-
-26
-10
-8
-5
-3
-49
3
2
-10
-8
-5
-2
-49
-3
Other financial liabilities
16
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.
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
508
5.528
241
2
2
4
472
472
20
58
78
45
16
15
> 5 years
90
€ million
Bonds and commercial paper
1,352
Liabilities to related parties
2,195
Trade accounts payable
850
4
803
18
1,653
Repayment
1,839
143
Interest
Repayment
5,234
590
1,171
210
8,213
Interest
Repayment
Interest
amount
Carrying
Bank loans
Dec. 31, 2017
4
1
5
Cash flows
Cash flows
1-5 years
Cash flows
<1 year
Finance lease liabilities
Refund liabilities
Derivatives with a hedging relationship
Derivatives without a hedging relationship
Contingent considerations
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
>5 years
Carrying
amount
Interest Repayment
Interest
50
17
67
13
508
522
1,335
1,335
1,766
1,766
1,899
SHARE PRICE RISKS
85
2
369
17
620
458
984
208
7,286
Repayment
Interest
Repayment
4,430
250
12,244
Derivatives without a hedging relationship
Interest rates obervable
on the market
(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
ble in the market
(Level 3)
(excluding leasing receivables)
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:
(39) Information on fair value
measurement
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
274
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.
Trade accounts receivable
assessment was undertaken as of the balance sheet date and the
initially assumed risk profile was maintained.
Total
2,170
Contingent considerations
Equity instruments
through profit or loss
Subsequent measurement at fair value
12
12
12
4
8
Other debt instruments
21
21
21
2,170
21
274
140
118
17
274
274
Equity instruments
other comprehensive income
322
26
296
2,909
2,909
Trade accounts receivable
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.
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
Notes to the Consolidated Financial Statements
USD
CNY
TWD
JPY
KRW
Net exposure
Exchange rate -10%
618
-274
741
153
132
163
(€ depreciation)
Exchange rate +10%
(€ appreciation)
Consolidated income statement
Equity
CHF
Consolidated Financial Statements
up to 24 months
over 2 years
⚫ 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
37
-367
99
-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
The corresponding impairment in the previous year developed as
follows:
273
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
2,923
51
1
7
32
50
392
Dec. 31, 2017
2,391
Trade accounts receivable
Impaired
Other debt instruments
-62
Derivatives without a hedging relationship
64
Dec. 31,
20171
Fair value,
items
Non-financial
Carrying
amount
according
to IAS 172
Fair value
At cost
cost
Amortized
Carrying
amount
Subsequent measurement according to
IAS 39
Assets
Dec. 31, 2017
Cash and cash equivalents
€ million
275
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
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)).
10,108
5
2,845
7,258
12,244
6,714
4
2
2
5,530
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:
Total
Current financial assets
589
568
92
276
936
Other current and non-current assets
2,923
2,923
Loans and receivables
2,923
2,923
Trade accounts receivable
Derivatives with a hedging relationship
35
589
35
47
47
Available for sale
Loans and receivables
Held to maturity
9
9
9
Derivatives without a hedging relationship
Held for trading (non-derivatives)
44
47
90
35
(measured in accordance with IAS 17)²
Finance lease liabilities
472
174
30
6,098
673
5,425
Total
1
1
(measured in accordance with IAS 17)²
Finance lease receivables
4
4
76
492
45
50
27
22
259
259
4
1
76
59
50
50
259
259
30
696
Financial liabilities
Subsequent measurement at amortized cost
472
Refund liabilities
78
90
90
78
5
5
78
20
58
Derivatives with a hedging relationship
90
73
16
Derivatives without a hedging relationship
5
4
1
Contingent considerations
through profit or loss
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
Derivatives with a hedging relationship
27
-74
-15
113
113
113
4
10,707
10,707
Derivatives with a hedging relationship
Liabilities from finance leases
Trade accounts payable
Other financial liabilities
Current and non-current other liabilities
4
2,195
2,195
10,707
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
2,195
Non-financial items
10,823
Liabilities
276
276
Derivatives with a hedging relationship
45
45
45
Non-financial items
568
568
Non-current financial assets
444
12
4
Current and non-current financial liabilities
Derivatives without a hedging relationship
Other financial liabilities
429
13
13
13
Held to maturity
Loans and receivables
12
12
Available for sale
420
4
416
416
Derivatives with a hedging relationship
Derivatives without a hedging relationship
1,427
1,427
1The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
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)
Derivation from active
market
Total
Liabilities to banks and
other loan liabilities
Main input factors used to
determine fair values
Quoted prices in an
active market
Quoted prices in an active
market and volatilities
observable on the market
Volatilities observable on
the market
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 rate swaps
7,258
30
7,258
2 Measurement within the scope of IAS 17 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
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
assets
Financial
liabilities
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
measurement through profit or loss)
Other financial liabilities (subsequent Bonds
measurement at amortized cost)
Total
Fair value determined using input
Publicly-traded funds
2
Loans and receivables
46
7
12
449
135
75
115
Exchange rate -10%
Consolidated income statement
-122
18
-45
-14
-8
-12
(€ depreciation)
-184
Equity
39
-44
-38
-19
-18
Exchange rate +10%
(€ appreciation)
Consolidated income statement
122
-18
45
14
8
12
-172
1,215
KRW
JPY
-13
-16
-135
20
46
-19
-11
-14
Consolidated income statement
62
-27
74
15
13
16
Equity
110
-16
8
15
10
12
€ million
Dec. 31, 2017
Net exposure
USD
CHF
CNY
TWD
Equity
46
147
36
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
Utilizations
Additions
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
-367
-325
-2
-1
-373
-336
359
336
3,277
360
3264
-6
-4
-5
-22
-6
-6
-373
-75
31
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
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
-7
4
69
308
-31
-9
DEC. 31, 2018
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:
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".
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).
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
Other Disclosures
Notes to the Consolidated Financial Statements
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.
2,683
10,823
349
-314
765
Other current and non-current financial liabilities
Financial liabilities
3,136
147
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.
-546
497
-1,792
-38
-16
-463
-16
12,597
(43) 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. 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.
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.
Option pricing models
5 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
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
45
Acquisition cost
Net asset values of the fund
interests
1
Trade accounts receivable
Trade accounts receivable
21
that are intended for sale
due to a factoring
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
729
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
129
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).
€ million
€ million
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
277
Description of the
measurement technique
Discounting of expected
future cash flows
Fair value determined using input factors
unobservable in the market (Level 3)
Equity instruments
Financial instruments
concerned
Financial
assets
Financial
liabilities
Equity interests in unlisted
companies
10
Fair Value
agreement
Liabilities to related parties
-354
7,040
869
869
-12
-323
335
7,173
121
-323
2018
Other
Dec. 31,
Fair value
changes
Currency
translation
2018 Cash inflows Repayments consolidation
7,375
Changes
in scope of
Jan. 1,
530
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
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
133
The change in financial debt was as follows:
Bonds
thereof: current
thereof: non-current
Liabilities to related parties
Other current and non-current financial liabilities¹
Financial liabilities¹
€ million
-869
6,304
765
Cash inflows Repayments consolidation
-932
Currency
translation
-425
Fair value
changes
Dec. 31,
Other
2017
Changes
in scope of
7,375
-25
354
335
thereof: non-current
7,794
-400
-932
7,040
Jan. 1,
2017
8,731
937
Bonds
375
- 319
821
2,687
10,827
32
407
-1,821
-2,463
thereof: current
-2
119
5
902
8,896
1 Values effective January 1, 2018, have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
€ million
5
Derivatives (without hedging
relationship)
Option on equity
instruments in an
unlisted company
Contingent considerations
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
280
3
443
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
Option pricing models
Taking into account the
fair value of the companies
in which the funds are
invested
3 Discounting of probability-
weighted future milestone
payments and license fees
Observable prices derived
from equity refinancing
Expected cash flows from
recent business planning,
average cost of capital,
expected long-term growth
rate
Main input factors used to
determine fair values
Derived from observable
prices within the scope
of equity refinancing
sufficiently close to the
balance sheet date
Description of the
measurement technique
Discounting of expected
future cash flows
Total
company
Equity investements in
unlisted companies
Fair Value
Financial
assets
Financial
liabilities
6
96
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.
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
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%)
0
SIGNIFICANT MANAGEMENT JUDGMENTS
unchanged
10%
-34
5
45
-38
-10%
0
-42
-5
32
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
281
38
Financial instruments
concerned
Change in probability of regulatory approval
of the other contingent compensations would not have had a mate-
AND SOURCES OF ESTIMATION UNCERTAINTY -
CONTINGENT CONSIDERATIONS
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.
rial impact on profit before income tax.
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,
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:
€ million
Change of discount rate
5.8%
unchanged (6.3%)
6.8%
A change in the main input parameters used for the measurement
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.
Fair Value determined using input factors
unobservable on the market (Level 3)
Classified as available for sale/
classified as other liabilities
279
Notes to the Consolidated Financial Statements
278
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
DEC. 31, 2017
€ million
Fair Value
Market observable interest
rates
Fair value determined by official prices
and quoted market values (Level 1)
Financial instruments
concerned
Financial
assets
Financial
liabilities
measurement technique
Main input factors used to
determine fair values
Classified as available for sale
Shares (equity investments
in listed companies)
5
in a unlisted company
Other debt instruments
Total
Contingent considerations
259
from the sale and purchase
of businesses or shares in
492
corporations
19
unlisted funds
Bond with embedded
7
settlement option for equity
Used of standard market
valuation models
Interests in
106
16
Derived from
actuarial methods
Interest rate swaps
13
86
Liabilities to banks and
other loan liabilities
3,355 Discounting of future
cash flows
Use of recognized
67
Spot and forward rates ob-
servable on the market and
exchange rate volatilities
Interest rate curves
available on the market
Market observable
interest rates
DEC. 31, 2017
€ million
Consolidated Financial Statements
3,511
Bonds, investment funds
and currency options
54
Publicly-traded funds
Classified as other liabilities
Total
Bonds
35
active market
2
70
7,719
7,719
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
53
287
Description of the
4
140
45
259
27
487
-1
-3
3
December 31, 2018 (IFRS 9)
Net carrying amounts,
8
-9
-28
-29
-20
-4
-8
-1
Gains (+)/losses (-)
recognized in other comprehensive income
30
30
Currency translation
21
1
1
Disposals due to divestments/
payments received
-80
Transfers out of Level 3 into Level 1/Level 2
Other
-9
I
-5
282
Consolidated Financial Statements
228
46
-2
Additions as result of acquisitions/divestments
Transfers to Level 3 from previous
measurement at cost/Level 1/Level 2
258
68
Fair value changes
Gains (+)/losses (-)
recognized in profit or loss.
-6
-6
thereof: other operating result
68
22
302
50
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-
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".
€ million
Net carrying amounts, January 1,
2017 (IAS 39)
Financial assets
Financial liabilities
-1
Available-for-sale
financial assets
thereof:
Derivatives
contingent without a hedging
considerations
relationship
Other liabilities
thereof:
contingent
considerations
74
75
Total
3
24
held as of the balance sheet date
December 31, 2017 (IAS 39)
440
18
277
46
Adjustment on initial application of IFRS 9
Net carrying amounts,
7
21
102
4
Net carrying amounts,
January 1, 2018 (IFRS 9)
447
21
-18
277
Contingent
receivable considerations
Equity
instruments
137
Financial assets
Subsequent measurement at fair value
through profit or loss
Subsequent measurement
at fair value through other
comprehensive income
Financial
liabilities
Trade
accounts
Subsequent
ment at
fair value
through
profit or loss
Equity
instruments
Other debt
Contingent
instruments considerations
Derivatives
without a
hedging
relationship
measure-
-9
46
Additions due to acquisitions/divestments/
operating result
-31
-1
-29
thereof: attributable to assets/liabilities
held as of the balance sheet date
thereof: other
-37
-36
thereof: financial result
24
3
22
thereof: attributable to assets/liabilities
-1
106
-1
2
conclusion of factoring agreements
105
I
15
8
I
-7
33
of Level 1/Level 2
Fair value changes
49
Gains (+)/losses (-)
recognized in profit or loss
-7
Transfers into Level 3 out
-9
Notes to the Consolidated Financial Statements
thereof: attributable to assets/liabilities
Obligations to acquire intangible assets and from collaboration agreements
within one year
in 1-5 years
more than 5 years
266
247
€ million
1,255
1,242
1,509
2,763
3,328
Other financial obligations were recognized at nominal value.
-4
1,572
€ million
Dec. 31, 2017
The expected maturities of these obligations were as follows:
577
530
150
236
52
63
Dec. 31, 2018
3,686
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
other financial obligations from possible future sales-based license
fees and milestone payments.
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)
284
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
4,308
151
Dec. 31, 2018
Interest component of finance leases
131
308
138
577
More than
Within 1 year
4
1-5 years
Total
4
1
2
1
3
5 years
Present value of future payments from finance leases
2
Total
4
Future finance lease payments
Future operating lease payments
€ million
Dec. 31, 2017
Present value of future payments from finance leases
Interest component of finance leases
2
Future finance lease payments
More than
Within 1 year
1-5 years
5 years
2
2
Future operating lease payments
144
The maturities of liabilities from lease agreements were as follows:
2,763
Consolidated Financial Statements
-1
46
277
397
440
Net carrying amounts, December 31,
2017 (IAS 39)
Transfers out of Level 3 into Level 1/Level 2
-1
-1
Disposals due to divestments
-2
-2
-1
5
5
recognized in other comprehensive income
Dec. 31, 2017
3,328
-9
-9
thereof: financial result
3
03
Notes to the Consolidated Financial Statements
4
thereof: attributable to assets/liabilities
held as of the balance sheet date
3
3
3
Gains (+)/losses (-)
3
283
Currency translation
2018
Long-term purchase commitments
Remaining other financial obligations
Other financial obligations
Fair value at the
date of disposal
The cumulative
gain (+) or loss
(-) on disposal
included in other
Transfers of the
cumulative gain
(+) or loss (-)
within group
comprehensive equity in retained
income
earnings
40
32
32
-17
The following equity instruments measured at fair value through
other comprehensive income were disposed of in fiscal year 2018:
Dec. 31, 2018
Operating lease
Acquisition of property, plant and equipment
-17
held as of the balance sheet date
Acquisition of intangible assets and due to collaboration agreements
€ million
Equity instrument¹
M Ventures portfolio companies
Nature's Best Health Products Ltd., United Kingdom
1 Disposals due to liquidations are not included.
Cascadian Therapeutics, Inc., United States
Acquired by Seattle Genetics,
Inc., United States
Sale of Consumer Health
business to Procter & Gamble
Company, United States
The M Ventures portfolio companies that were disposed of are Prexton
Therapeutics SA, Switzerland, ObsEva SA, Switzerland, and F-Star
Gamma Limited, United Kingdom.
(40) Other financial obligations
Other financial obligations comprised the following:
€ million
Reasons for the disposal
Portfolio adjustments
and acquisitions
New partner
Focus on
biotechnology
in China's
Five-Year Plan
China's plan for the future
25
VIBRANT CHINA
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.
40
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?
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.
million patients
Which concrete products does
Merck offer for CRISPR Cas/9?
What role does the collaboration
with Tongji University play in all of
this?
per year should be
treated with
medications
from Merck by the
year 2025.
How did the partnership with
Tongji University come about?
in demand for increas-
ingly smaller but more
powerful microchips.
Semicon-
ductors as
trends such as AI are
driving an increase
Technology mega-
Semiconductors as a new driver of growth
VIBRANT CHINA
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.
26
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).
Well-founded bioethical positions
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?
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 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.
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.
from equipment and reagents to lab-
oratory devices and services. As a
partner to the life science research
community, we want to accelerate
innovation.
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.
employees on site
"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.
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.
Owing to China's large
population, the need for
digital treatment
solutions there is
enormous.
TWO SECTORS, TWO SITES IN NANTONG
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.
NO.1PRA
瑞士美度
ZARA
24
VIBRANT CHINA
New partner
New partner
Steve Vermant, Managing Director of the Life
Science business sector and Head of Research
Solutions in China
a new driver
of growth
Lil
MIDO
Radis
ness.
85
years of presence
in China
Investments in the
Nantong production
site since 2017:
€ 250
million
SWIFTER DECISION-MAKING,
A MORE PRAGMATIC APPROACH
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.
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.
The health
platform for
everyone
Merck's Healthcare business sector
has great ambitions in China -
take, for instance, its partnership
with the Internet giant Alibaba.
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.
The health platform for everyone
VIBRANT CHINA
23
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-
3,500
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.
DYNAMIC EVOLUTION, MOTIVATED TEAM
in China for inno-
VIBRANT CHINA
19
vibrant
china..
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.
T31142
20
PAPAR
VIBRANT CHINA
25005
Beijing
在中国展宏图
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.
Big plans for China
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."
RECERCE
15709
"The demand
from chip
manufacturers
Research drives us all
HEARTBEATS
17
"I am simply fascinated
by everything we
路
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."
Deputy Foreman, Performance Materials,
Darmstadt, Germany
MERCK
18
VIBRANT CHINA
2
上海银行
FRANZISKA HÖLY
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
10
A GROWTH MARKET WITH IMMENSE
POTENTIAL
Big plans for China
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.
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."
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.
At least
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.
VIBRANT CHINA
Head of Business Planning, Specialty
Accounts Business Field, Semiconductor
Solutions
will probably con- materials contribute to the development of new
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
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.
-
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."
vative materials
tinue to rise."
22
WINNIE HUI
NEW INNOVATION CENTERS
VIBRANT CHINA
Big plans for China
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
21
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.
Similar ideas were voiced by Allan Gabor: "When
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."
"By 2025 we want every
single person in China
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."
ALLAN GABOR
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."
President of Merck China and Head of Performance Materials in China
DEMAND FOR TECHNOLOGIES AND EXPERTISE
to come into contact with
our products or services
in a positive way."
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.
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.
Derivatives without a hedging
relationship
Derivatives with a hedging
relationship
Derivatives without a hedging
relationship
Loans and receivables
Other non-current financial assets
Subsequent measurement at fair
value through profit or loss
(debt instruments)
Subsequent measurement at
amortized cost
+c+d
Subsequent measurement at fair
Adjustments from the first-time application of IFRS 9
income (debt instruments)
Subsequent measurement at
amortized cost
Derivatives without a hedging
relationship
Derivatives with a hedging
relationship
Financial assets
ƏT
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Available-for-sale financial assets
291
value through other comprehensive
Derivatives with a hedging
relationship
Trade accounts receivable
Derivatives with a hedging
relationship
Carrying amount
€ million
Measurement category
Consolidated balance sheet item
Cash and cash equivalents
IAS 39
IFRS 9
Explanation
Cash and cash equivalents
Subsequent measurement at
amortized cost
Loans and receivables
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
Loans and receivables
in accordance
with IAS 39
Dec. 31, 2017
13
ment due to the
application of the
impairment model
30
30
12
12
13
RECONCILIATION OF FINANCIAL ASSETS FROM IAS 39 TO IFRS 9 AS OF JANUARY 1, 2018
297
8
420
29
-1
46
-8
123
29
-6
-23
29
29
46
46
15
15
246
247
-13 - ▬▬
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
profit effect
Jan. 1, 2018
for equity
instrustuments
Jan. 1, 2018
Available-for-sale
financial assets
Jan 1, 2018
for debt
instruments
Jan. 1, 2018
589
2,923
-15
2,908
47
35
47
35
9
9
Remeasure-
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:
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.
Consolidated Financial Statements
0.2
0.3
0.2
0.9
0.4
0.6
0.4
1.0
0.9
11.3
0.4
4.1
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
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.
• Litec-LLL GmbH, Greifswald
• 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
10.4
• Merck Healthcare KGaA, Darmstadt
2.4
3.5
4,415
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
8.5
2018
thereof:
KPMG AG
Wirtschaftsprü-
fungsgesellschaft,
thereof:
KPMG AG
Wirtschaftsprü-
fungsgesellschaft,
Merck Group
Germany
Merck Group
Germany
10.0
2017
• Merck Life Science Germany GmbH, Darmstadt
• Merck Life Science GmbH, Eppelheim
• Merck Patent GmbH, Darmstadt
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
289
CHANGES TO ACCOUNTING AND MEASUREMENT
PRINCIPLES RESULTING FROM IFRS 9 "FINANCIAL
INSTRUMENTS"
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.
Classification and measurement
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".
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
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.
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:
• 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
• Trade accounts receivable
CHANGES TO ACCOUNTING AND MEASUREMENT
PRINCIPLES APPLICABLE TO INTEREST AND
PENALTIES RELATED TO INCOME TAXES
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".
IN ARGENTINA
Merck Performance Materials Germany GmbH, Darmstadt
• Merck Real Estate GmbH, Darmstadt
•
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
• 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
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"
Notes to the Consolidated Financial Statements
-16
Derivatives without a hedging
relationship
23
444
205
1,106
28,166
Current assets
Inventories
2,632
2,632
Trade accounts receivable
2,923
2,923
Current financial assets
90
90
Other current assets
731
731
Income tax receivables
Cash and cash equivalents
Assets held for sale
490
490
589
589
Total assets
Total equity
7,455
4,512
35,621
8,317
28,166
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)
Reclassification
of interest and
penalties related
to income taxes
Dec. 31, 2017
(restated)/
January 1, 2018
(before
adjustments)
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Non-current financial assets
Other non-current assets
Deferred tax assets
13,582
8,317
4,512
444
205
1,106
13,582
7,455
35,621
565
2,257
788
8,033
354
1,489
12,919
414
43
457
2,790
2,790
2,195
2,195
Income tax liabilities
1,059
-43
1,016
Other current liabilities
2,175
2,175
Liabilities directly related to assets held for sale
Total equity and liabilities
8,635
35,621
8,635
35,621
4,399
14,066
63
14,003
12,919
565
12,358
Equity capital
Reserves
12,357
Gains/losses recognized in equity
1,082
Equity attributable to Merck KGaA shareholders
14,003
Non-controlling interests
63
14,066
Non-current liabilities
296
Provisions for pensions and other post-employment benefits
Other non-current provisions
788
Non-current financial liabilities
Other non-current liabilities
8,033
354
Deferred tax liabilities
1,489
Current liabilities
Current provisions
Current financial liabilities
Trade accounts payable
Refund liabilities
2,257
12,379
1,081
4
• collaboration agreements
⚫ costs of obtaining or fulfilling a contract
principal-agent relationships
bill-and-hold arrangements
financing components
• barter transactions
• repurchase agreements
•⚫ separate performance obligations from transportation or other
logistic services
294
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
The following table shows the consolidated income statement in the
reporting period had IAS 18 been applied on an ongoing basis:
€ million
Net sales
Cost of sales
Gross profit
Other operating income
Other income and expenses/financial result
Profit before income tax
2018
IFRS 15
(as reported)
14,836
-5,382
Reconciliation
to IAS 18
IAS 18
-6
14,830
3
consignment arrangements
-5,379
• variable consideration
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.
-6
4
-31
-1
292
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
The first-time application of IFRS 9 led to the following transition
effects:
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.
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.
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.
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.
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.
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.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
293
.
•
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.
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.
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:
• 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.
• 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.
Moreover, the new rules of IFRS 15 in the following areas were of no
relevance - or only very minor relevance - for Merck:
9,454
• revenue recognition over time for long-term service contracts and
customer-specific construction contracts
9,451
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
Expected credit loss on trade accounts receivable and other debt instruments
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
Multiple-element arrangements
Income tax effect IFRS 15
IAS 29 (after income tax)
Hyperinflation in Argentina
January 1, 2018 (restated)
€ million
12,357
1
12,358
16
32
-16
2
2
-20
17
4
-3
1
-2
1
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.
Take-or-pay contracts
EFFECTS OF CHANGED ACCOUNTING AND MEASUREMENT
POLICIES ON RESERVES AS OF DECEMBER 31, 2017, AND
JANUARY 1, 2018
627
1
628
-8,621
-8,621
1,461
-2
1,459
Income tax
-1
-369
Profit after tax from continuing operations
1,093
-368
3,396
-3
Consolidated Financial Statements
3,395
-1
Profit after tax
2,305
Notes to the Consolidated Financial Statements
2,303
Profit after tax from discontinued operation
1,090
295
2
Profit before income tax
Other operating income
Financial result
Operating result (EBIT)¹
Other operating expenses
Gross profit
as reported
Administration expenses
Marketing and selling expenses
Consolidated Income Statement
Income tax
Cost of sales
Research and development costs
Profit after tax from continuing operations
249
Profit after tax
Net sales
9,446
-5,071
-560
-4,702
14,517
Profit after tax from discontinued operation
-809
IFRS 5
adjustment
IFRS 9
adjustment
2017
10,007
-5,320
15,327
adjusted
€ million
788
Notes to the Consolidated Financial Statements
4
63
353
14,055
2,257
8,036
-17
334
1,489
-17
1
12,903
457
2,790
ADJUSTMENTS OF PREVIOUS PERIODS
-434
431
431
1,016
25
2,200
-3
25
8,657
-15
-3
7
5
35,614
298
Consolidated Financial Statements
1,761
-4,349
(52) Currency translation
31
10
thereof: attributable to Merck KGaA shareholders (net income)
thereof: attributable to non-controlling interests
2,600
4
10
Earnings per share in € (basic/diluted)
- attributable to continuing operations
- attributable to discontinued operation
Consolidated Statement of Comprehensive Income
Profit after tax
Items of other comprehensive income that may be reclassified to
profit or loss in subsequent periods:
Cost of cash flow hedge reserve
Tax effect
Other comprehensive income
2,605
Comprehensive income
0.01
-0.12
0.12
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.
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.
13,992
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.
5.98
-930
57
2,615
2,610
-899
-2,140
32
-2,108
1,227
-14
1,212
-937
56
-880
2,525
-102
2,423
-300
4
5
-294
2,224
5
-101
2,129
386
-1
43
428
2,610
4
-57
2,557
57
1
4
13,582
12,379
The marketing authorizations, patents, licenses and similar rights, (58) Property, plant and equipment
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
306
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.
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
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).
(55) Research and development costs
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.
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").
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
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.
in-licensing and out-licensing in
the Healthcare business sector
(54) Collaboration agreements,
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.
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
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.
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").
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.
USEFUL LIFE OF PROPERTY, PLANT AND EQUIPMENT
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
297
IFRS 9
IFRS 15
IAS 29
Reclassification Remeasurement
Reclassification Remeasurement
Remeasurement
1
Jan. 1, 2018
(after
adjustments)
1
(51) Consolidation methods
8,317
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:
2
444
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
4,514
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
2
28,167
5
2
2,639
-15
4
2,904
90
735
490
589
-16
-3
-2
9
7,447
-15
-3
7
5
35,614
32
-15
-32
3
-3
-15
-15
565
4
2
1,105
205
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.
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.
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
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.
(53) Recognition of net sales and
other income
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).
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
Currency translation was based on the following key exchange
rates:
€ 1 =
Chinese renminbi (CNY)
Japanese yen (JPY)
Swiss franc (CHF)
1,049
South Korean won (KRW)
U.S. dollar (USD)
Average annual rate
Closing rate
2018
7.815
130.372
1.153
1,294.331
35.544
1.181
2017
7.621
126.921
Dec. 31, 2018
7.869
126.131
Taiwan dollar (TWD)
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".
Fair value adjustments
Expected reimbursement amount
300
3,193
-125
3,318
-2
-2
-22
2
-24
-18
5
-23
-1,012
35
Consolidated Financial Statements
-1,047
-168
4,414
4,246
-168
4,414
81
-26
106
63
63
-310
-310
188
-1
4,246
189
Notes to the Consolidated Financial Statements
€ million
688
Other operating income and expenses
-1,600
32
-1,632
Research and development costs
-271
28
-299
Administration expenses
-2,373
349
-2,722
Marketing and selling expenses
Healthcare
4,850
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
-562
43
61
84
2017
as reported
IFRS 5
adjustment
adjusted
Reconciliation of EBIT¹ to EBITDA pre¹
Operating result (EBIT)¹
Depreciation/amortization/impairment losses/reversals of impairments
EBITDA¹
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of businesses
Acquisition-related adjustments
Other adjustments
EBITDA pre¹
299
Business free cash flow¹
Investments in property, plant and equipment, software as well as
advance payments for intangible assets
Changes in inventories
Changes in trade accounts receivable as well as receivables from royalties and licenses
Elimination first-time consolidation of BioControl Systems
Business free cash flow¹
¹ Not defined by International Financial Reporting Standards (IFRSS).
2,525
-102
2,423
1,758
-17
1,741
Expected tax payments based on tax rates that have been enacted or
substantively enacted by the end of the reporting period
Fair value
EBITDA pre¹
-23
Notes to the Consolidated Financial Statements
€ million
-118
4,282
5.87
0.12
2,610
4
2,615
-5
-5
1
1
-1,843
-4
-1,847
Consolidated Financial Statements
767
Consolidated Cash Flow Statement
Profit after tax
2,610
4
2,615
Other non-cash income and expenses
-3
-4
-7
Net cash flows from operating activities
2,696
2,696
1 Not defined by International Financial Reporting Standards (IFRSS).
Group
767
731
4,164
1,447
Consolidated Financial Statements
302
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".
Lower of carrying amount and fair value less costs to sell
Amortized cost
Expected tax refunds based on tax rates that have been enacted or
substantively enacted by the end of the reporting period
According to IAS 17 (see Note (59) "Leasing")
Amortized cost
Lower of cost and net realizable value
to the period when the asset is realized or the liability is settled
Undiscounted measurement based on tax rates that are expected to apply
Amortized cost
Fair value
Amortized cost
Notes to the Consolidated Financial Statements
Fair value
Fair value
Assets held for sale
Cash and cash equivalents¹
Income tax receivables
Lease receivables
Trade accounts receivable (without lease receivables)¹
Inventories
Deferred tax assets
Non-financial items
Derivative assets (operative)¹
Other receivables (financial instruments)¹
Other assets (current/non-current)
Derivative assets (financial transactions)
Debt instruments
Amortized cost or fair value, depending on the business model
(see Note (60) "Financial assets").
Amortized cost (subsequent measurement: impairment-only approach)
Amortized cost
Equity and liabilities
Other provisions (current/non-current)
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
Operating result (EBIT)¹
Settlement amount
Settlement amount
Fair value
Liabilities directy related to assets held for sale
Income tax liabilities
Refund liabilities
Trade accounts payable
Deferred tax liabilities
Amortized cost
Fair value
Amortized cost
Amortized cost
Provisions for pensions and other post-employment benefits
Amortized cost
Present value of the expenditures expected to be required to settle the
obligation
Projected unit credit method
Measurement principle
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
Liabilities to related parties
Bank loans
Bonds and commercial paper
Financial liabilities (current/non-current)
Amortized cost
Amortized cost
Balance sheet item
Measurement principle
1,949
EBITDA pre¹
1,773
-177
1,949
16
-26
42
-316
-316
27
28
17
40
Business free cash flow¹
EBITDA pre¹
Other adjustments
-111
1,337
Amortized cost (subsequent measurement: impairment-only approach)
Depreciation/amortization/impairment losses/reversals of impairments
708
-17
-177
EBITDA¹
-127
691
2,028
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of businesses
Acquisition-related adjustments
2,155
1,773
-23
Investments in property, plant and equipment, software as well as
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
Assets
Balance sheet item
The main assets and liabilities disclosed in the consolidated balance
(50) Measurement policies
301
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
¹ Not defined by International Financial Reporting Standards (IFRSS).
sheet are measured as follows:
-39
-411
1,314
35
-375
Changes in inventories
5
-34
advance payments for intangible assets
-51
2
-49
1,448
-134
Changes in trade accounts receivable as well as receivables from royalties and licenses
Business Free Cash Flow¹
EMD Finance LLC
Notes to the Consolidated Financial Statements
Wilmington
100.00
316
Consolidated Financial Statements
Registered office
Rockland
United States
United States
Company
EMD Holding Corp.
EMD Millipore Corporation
EMD Performance Materials Corp.
100.00
Country
United States
Burlington
Cell Marque Corporation
United States
United States
Burlington
United States
100.00
Rocklin
Rockville
100.00
EMD Digital Inc.
United States
Round Rock
100.00
United States
EMD Accounting Solutions & Services America, Inc.
Rockland
100.00
Cerilliant Corporation
Philadelphia
Ormet Circuits, Inc.
100.00
United States
Millipore Asia Ltd.
Wilmington
100.00
United States
Millipore UK Holdings I, LLC
100.00
Wilmington
United States
United States
United States
Millipore UK Holdings II, LLC
BioReliance Corporation
Research Organics, LLC
100.00
Equity interest
(%)
Evanston
United States
100.00
100.00
United States
EMD Serono Holding, Inc.
Rockland
100.00
Grzybowski Scientific Inventions Ltd.
United States
Billerica
100.00
United States
EMD Serono, Inc.
Rockland
100.00
EMD Serono Research & Development Institute, Inc.
United States
SAFC Biosciences Limited
Wilmington
United Kingdom
Sigma-Aldrich Holdings Ltd.
Gillingham
100.00
United Kingdom
Sigma-Genosys Limited
100.00
Gillingham
North America
Canada
EMD Chemicals Canada Inc.
Toronto
100.00
Canada
100.00
EMD Crop BioScience Canada Inc.
Gillingham
United Kingdom
Wilmington
100.00
Millipore UK Holdings LLP
Feltham
100.00
Gillingham
Sigma-Aldrich Financial Services Limited
100.00
SAFC Hitech Limited
Gillingham
100.00
Sigma-Aldrich Company Limited
Gillingham
100.00
United Kingdom
United Kingdom
100.00
Toronto
Canada
United States
Aldrich Chemical Foreign Holding LLC
St. Louis
100.00
United States
Aldrich-APL, LLC
100.00
Urbana
United States
Allergopharma USA, Inc.
Alexandria
100.00
United States
BioControl Systems, Inc.
100.00
100.00
Milwaukee
Oakville
EMD Inc.
Mississauga
100.00
Canada
Millipore (Canada) Ltd.
Toronto
100.00
100.00
Canada
United States
Natrix Separations, Inc.
Sigma-Aldrich Canada Co.
Aldrich Chemical Co. LLC
Burlington
100.00
Canada
100.00
Merck Pharmaceutical Distribution (Jiangsu) Co., Ltd.
Merck Pharmaceutical Manufacturing (Jiangsu) Co., Ltd.
Merck Serono (Beijing) Pharmaceutical Distribution Co., Ltd.
100.00
100.00
China
Merck Chemicals (Shanghai) Co., Ltd.
Shanghai
100.00
China
Beijing
Merck Display Materials (Shanghai) Co., Ltd.
100.00
China
Merck Electronic Materials (Suzhou) Ltd.
Suzhou
100.00
China
Shanghai
Merck Holding (China) Co., Ltd.
Beijing Skywing Technology Co., Ltd.
100.00
Proligo Australia Pty. Ltd.
Castle Hill
100.00
Australia
SAFC Biosciences Pty. Ltd.
Castle Hill
China
100.00
Sigma-Aldrich Oceania Pty. Ltd.
Castle Hill
100.00
Australia
Sigma-Aldrich Pty. Ltd.
Castle Hill
Australia
Australia
Shanghai
China
100.00
Hong Kong
100.00
China
China
China
Hong Kong
Nantong
Nantong
100.00
Beijing
100.00
Thereof:
Merck KGaA (%)
100.00
100.00
Merck Performance Materials Hong Kong Ltd.
Merck Pharmaceutical (HK) Ltd.
China
Merck Life Science Ltd.
Hong Kong
100.00
China
China
Merck Life Science Technologies (Nantong) Co., Ltd.
Merck Ltd.
China
Nantong
Hong Kong
100.00
China
Merck Management Consulting (Shanghai) Co., Ltd.
Shanghai
100.00
100.00
100.00
Sydney
Merck Serono Australia Pty. Ltd.
United States
Sigma Redevelopment Corporation
Feltham
100.00
United States
Sigma-Aldrich Co. LLC
100.00
St. Louis
United States
Sigma-Aldrich Corporation
St. Louis
100.00
United States
Sigma-Aldrich Foreign Holding Co.
100.00
St. Louis
St. Louis
United States
Cleveland
100.00
United States
United States
United States
United States
SAFC Biosciences, Inc.
Lenexa
100.00
Sigma Chemical Foreign Holding LLC
SAFC Carlsbad, Inc.
SAFC, Inc.
100.00
Madison
100.00
Serono Laboratories, Inc.
Rockland
100.00
Carlsbad
100.00
United States
Sigma-Aldrich Manufacturing LLC
Sigma-Genosys of Texas LLC
The Woodlands
100.00
United States
Supelco, Inc.
Bellefonte
United States
100.00
(APAC)
Australia
Merck Pty. Ltd.
Bayswater
100.00
Australia
Asia-Pacific
100.00
Milwaukee
Sigma-Aldrich, Inc.
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
San Diego
Millipore (U.K.) Ltd.
St. Louis
100.00
Merck N. V.-S. A.
Merck Chemicals N. V./S. A.
Belgium
Belgium
Belgium
100.00
Vienna
Sigma-Aldrich Handels GmbH
Austria
100.00
Vienna
100.00
Vienna
Merck Chemicals and Life Science GesmbH
Merck Gesellschaft mbH
Austria
Austria
100.00
Vienna
Allergopharma Vertriebsgesellschaft m.b.H.
Austria
countries
Other European
100.00
100.00
Steinheim
Sigma-Aldrich Verwaltungs GmbH
Germany
100.00
Steinheim
Sigma-Aldrich BVBA/SPRL
Sigma-Aldrich Produktions GmbH
Overijse
Overijse
Sigma-Aldrich Denmark ApS
Denmark
100.00
Soborg
Merck Life Science A/S
Denmark
100.00
Soborg
Merck A/S
Denmark
100.00
Prague
Sigma-Aldrich spol. s r. o.
Czech Republic
100.00
Prague
Merck spol. s r. o.
Czech Republic
100.00
Zagreb
Merck d.o.o.
Croatia
100.00
Sofia
Merck Bulgaria EAD
Bulgaria
100.00
Overijse
100.00
100.00
Germany
100.00
Steinheim
Equity interest
(%)
Registered office
Darmstadt
Merck Serono GmbH
Germany
Company
Country
313
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
100.00
100.00
Hohenbrunn
Merck Schuchardt OHG
Germany
100.00
100.00
Darmstadt
Merck Real Estate GmbH
Germany
100.00
100.00
Darmstadt
Merck Performance Materials Holding GmbH
Germany
100.00
Wiesbaden
Merck Performance Materials GmbH
Germany
100.00
Thereof:
Merck KGaA (%)
100.00
100.00
Germany
Sigma-Aldrich Logistik GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Grundstücks GmbH & Co. KG
Germany
100.00
Taufkirchen
Sigma-Aldrich Chemie Holding GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Chemie GmbH
Germany
Soborg
100.00
Sigma-Aldrich Biochemie GmbH
Germany
100.00
Gernsheim
Millipart GmbH
Germany
100.00
100.00
Darmstadt
Merck Wohnungs- und Grundstücksverwaltungsgesellschaft mbH
Germany
100.00
Gernsheim
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH
Steinheim
Darmstadt
100.00
Survac ApS
Consolidated Financial Statements
314
100.00
Arklow
100.00
Carrigtwohill
Millipore Cork Unlimited Company
Shrawdine Limited
Ireland
Ireland
100.00
Dublin
Merck Serono (Ireland) Ltd.
Ireland
100.00
Carrigtwohill
Merck Millipore Ltd.
Ireland
100.00
Carrigtwohill
Merck Finance Limited
Ireland
100.00
Budapest
Sigma-Aldrich Kft.
Hungary
100.00
Budapest
Merck Kft.
Hungary
Notes to the Consolidated Financial Statements
100.00
Ireland
Ireland
Company
100.00
Milan
Sigma-Aldrich S. r. I.
Italy
99.74
Rome
Merck Serono S. p. A.
Italy
100.00
Milan
Merck S. p.A.
Italy
100.00
Colleretto Giacosa
100.00
Rome
Istituto di Ricerche Biomediche Antoine Marxer RBM S. p. A.
Allergopharma S. p. A.
Italy
Italy
100.00
Arklow
100.00
Arklow
Thereof:
Merck KGaA (%)
Equity interest
(%)
Registered office
Silverberry Limited
Sigma-Aldrich Ireland Ltd.
Country
Maroussi, Athens
Merck A. E.
Greece
Merck Chimie S.A. S.
France
100.00
Lyon
Merck Biodevelopment S.A. S.
France
100.00
Lyon
Gonnon S. A. S.
France
100.00
Espoo
Sigma-Aldrich Finland OY
Finland
100.00
Espoo
Merck OY
Finland
100.00
Espoo
Merck Life Science OY
Finland
100.00
Tallinn
Merck Serono OÜ
Estonia
100.00
100.00
Frederiksberg
Fontenay s/Bois
100.00
France
Merck Performance Materials S. A. S.
100.00
Saint Quentin Fallavier
Sigma-Aldrich Holding S. a. r.l.
France
100.00
Saint Quentin Fallavier
Sigma-Aldrich Chimie SNC
France
100.00
Saint Quentin Fallavier
Sigma-Aldrich Chimie S. a. r. l.
France
100.00
Molsheim
Denmark
Millipore S.A.S.
100.00
Lyon
Merck Serono S. A. S.
France
100.00
United Kingdom
United Kingdom
United Kingdom
Merck Santé S. A. S.
France
99.84
Lyon
Merck S. A.
France
100.00
Trosly-Breuil
France
Merck Performance Materials Germany GmbH
Germany
100.00
Inventory prepayments are recognized under other current
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.
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.
(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.
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.
(63) Contingent consideration
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.
-
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.
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.
assets.
(62) Derivatives and hedge
accounting
(67) Provisions for pensions
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
Registered office
Equity interest
I. Fully consolidated companies
Company
Country
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.
(70) List of Shareholdings
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
and other post-employment
benefits
Contingent consideration, as well as derivatives with negative market
values, are subsequently measured at fair value. Value changes are
recognized through profit or loss.
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.
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
Operative
Subsequent measure-
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
Operative
measurement at
Asset type
Category
Subsequent
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
⚫ 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
Foreign currency
gains or losses
Other operating income
or other operating
expenses
Financial result
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
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
Financial result
expenses
or other operating
Financial result
Other operating income or other Other operating income
operating expenses
Financial result
Other operating
income or other
operating expenses
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".
Thereof:
Merck KGaA (%)
Germany
Germany
Germany
100.00
100.00
Darmstadt
Merck Healthcare Holding GmbH
Germany
100.00
100.00
Gernsheim
Merck Financial Trading GmbH
Germany
100.00
100.00
Darmstadt
Merck Financial Services GmbH
Germany
100.00
100.00
Darmstadt
Merck Export GmbH
Germany
100.00
100.00
Darmstadt
Merck Consumer Health Holding Germany GmbH
Germany
100.00
Darmstadt
Merck China Chemicals Holding GmbH
Merck Healthcare KGaA
Darmstadt
100.00
Germany
Darmstadt
Merck Patent GmbH
Germany
100.00
100.00
Darmstadt
Merck Life Science Holding GmbH
Germany
100.00
100.00
Eppelheim
Merck Life Science GmbH
Germany
100.00
Germany
Darmstadt
Germany
100.00
Darmstadt
Merck Internationale Beteiligungen GmbH
Germany
100.00
100.00
Darmstadt
Merck International GmbH
Germany
100.00
100.00
Gernsheim
Merck Holding GmbH
Merck Life Science Germany GmbH
Latvia
100.00
Merck Chemicals GmbH
100.00
Gernsheim
Emedia Export Company mbH
Germany
100.00
100.00
Darmstadt
Chemitra GmbH
Germany
100.00
Berlin
Biochrom GmbH
Germany
100.00
100.00
Darmstadt
Allergopharma Verwaltungs GmbH
Germany
100.00
Reinbek
100.00
100.00
Zossen
AB Allgemeine Pensions GmbH & Co. KG
Allergopharma GmbH & Co. KG
Germany
Germany
Parent
Company
Darmstadt
Merck KGaA
Germany
Litec-LLL GmbH
Greifswald
100.00
Germany
100.00
100.00
Darmstadt
Merck Accounting Solutions & Services Europe GmbH
Germany
100.00
Darmstadt
Merck 21. Allgemeine Beteiligungs-GmbH
Germany
100.00
Darmstadt
100.00
Darmstadt
Darmstadt
100.00
Merck 15. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH
Merck 20. Allgemeine Beteiligungs-GmbH
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
Darmstadt
Merck Serono SIA
Lyon
Oslo
315
Country
Sweden
Switzerland
Company
Sigma-Aldrich Sweden AB
Allergopharma AG
Switzerland
Ares Trading SA
Registered office
Stockholm
Therwil
Aubonne
Equity interest
(%)
Thereof:
Merck KGaA (%)
100.00
100.00
100.00
Switzerland
100.00
Coinsins
Merck Performance Materials (Suisse) SA
Switzerland
100.00
Notes to the Consolidated Financial Statements
Zug
Switzerland
51.63
51.63
Altdorf
Merck & Cie
Switzerland
Merck (Schweiz) AG
Consolidated Financial Statements
100.00
Solna
100.00
Ljubljana
Merck d.o.o.
Slovenia
100.00
Bratislava
Spain
Sigma-Aldrich, spol. s r.o.
100.00
Bratislava
Merck spol. s r.o.
Slovakia
100.00
Belgrade
Slovakia
Merck Serono SA
Merck Chemicals and Life Science S. A. U.
100.00
Merck Chemicals and Life Science AB
Sweden
100.00
Solna
Merck AB
Sweden
Madrid
100.00
Sigma-Aldrich Quimica S. L.
Spain
100.00
Madrid
Merck, S. L. U.
Spain
Madrid
Coinsins
100.00
Switzerland
100.00
Gillingham
Merck Chemicals Ltd.
United Kingdom
100.00
Gillingham
United Kingdom
Epichem Group Limited
100.00
London
BioReliance U.K. Acquisition Limited
United Kingdom
100.00
Aberdeen
United Kingdom
BioReliance Limited
Merck Holding Ltd.
100.00
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
London
Sigma-Aldrich Production GmbH
Sigma-Aldrich International GmbH
Sigma-Aldrich Chemie GmbH
United Kingdom
Switzerland
Turkey
Switzerland
Merck Ilac Ecza ve Kimya Ticaret AS
Switzerland
Buchs
Sigma-Aldrich (Switzerland) Holding AG
Switzerland
100.00
Coinsins
SeroMer Holding SA
100.00
100.00
Aldrich Chemical Co. Ltd.
100.00
BioControl Systems Limited
United Kingdom
100.00
Feltham
AZ Electronic Materials (UK) Ltd.
United Kingdom
Buchs
100.00
100.00
Istanbul
100.00
Buchs
100.00
St. Gallen
Gillingham
Feltham
Moscow
Merck d.o.o. Beograd
Merck Finance S. a. r.l.
Luxembourg
100.00
Luxembourg
Merck Chemicals Holding S. a.r.l.
Luxembourg
100.00
Luxembourg
Mats Finance S. a. r. l.
Luxembourg
100.00
Luxembourg
AZ Electronic Materials S. a. r.l.
Luxembourg
100.00
Vilnius
Merck Serono, UAB
100.00
Pietà
100.00
Pietà
BioControl Systems B. V.
Merck Capital Ltd.
Luxembourg
Merck Capital Holding Ltd.
Malta
Malta
100.00
Riga
100.00
Lithuania
Netherlands
100.00
Luxembourg
Merck Finanz S. a. r. l.
100.00
Luxembourg
Millipore International Holdings, S.a. r.l.
Luxembourg
100.00
Luxembourg
Luxembourg
Ridgefield Acquisition S. a. r.l.
100.00
Luxembourg
Sigma-Aldrich Global S. a. r. l.
Luxembourg
100.00
Luxembourg
Luxembourg
Nieuwerkerk Ad Ijssel
Millilux S. a. r.l.
100.00
Luxembourg
100.00
Luxembourg
Merck Holding S. a. r. l.
Luxembourg
100.00
Luxembourg
Luxembourg
Luxembourg
100.00
Luxembourg
Merck Re S. A.
Luxembourg
100.00
Merck Invest SCS
100.00
Netherlands
Merck B. V.
100.00
Poznan
Sigma-Aldrich Sp.z.o.o.
Poland
100.00
Warsaw
Portugal
Merck Sp.z.o.o.
100.00
Wroclaw
Merck Business Solutions Europe Sp.z.o.0.
Poland
100.00
Sigma-Aldrich Norway AS
Poland
Norway
Laquifa Laboratorios S.A.
100.00
Russia
Serbia
100.00
Moscow
Merck LLC
Russia
Algés
100.00
Merck Romania S. R. L.
Romania
100.00
Algés
Merck, S.A.
Portugal
Bucharest
Sigma-Aldrich Rus LLC
100.00
Merck Life Science AS
100.00
Amsterdam Zuidoost
Serono Tri Holdings B. V.
Merck Window Technologies B. V.
Merck Ventures B. V.
Merck Holding Netherlands B. V.
Schiphol-Rijk
Merck Chemicals B. V.
Netherlands
Netherlands
Netherlands
Netherlands
100.00
Schiphol-Rijk
Netherlands
Oslo
Amsterdam
100.00
Norway
100.00
Zwijndrecht
Sigma-Aldrich Chemie N. V.
Netherlands
100.00
100.00
Zwijndrecht
Netherlands
100.00
Schiphol-Rijk
100.00
100.00
Veldhoven
Sigma-Aldrich B. V.
Sigma-Aldrich S. a. r. l.
Luxembourg
3
New York
<0.5
< 20.00
Ann Arbor
Kraig Biocraft Laboratories, Inc.
Lumiode, Inc.
United States
United States
Fair value
(€ million)
Thereof:
Merck KGaA (%)
Equity interest
(%)
Registered office
Company
Country
321
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
118
< 20.00
A)
CLEARink Displays, Inc.
United States
Indi Molecular, Inc.
United States
< 20.00
Intrexon Corporation
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.
< 20.00
A)
< 20.00
A)
< 20.00
Fremont
Culver City
Germantown
La Jolla
A)
Progyny, Inc.
<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
Menlo Park
< 20.00
A)
United States
United States
Raze Therapeutics, Inc.
Ribometrix Inc.
United States
Cambridge
A)
Durham
< 20.00
A)
United States
Tioga Pharmaceuticals, Inc.
< 20.00
Africa (MEA)
Bird Rock Bio, Inc.
A)
London
A)
< 20.00
London
A)
< 20.00
Cologny
A)
23.28
Schlieren
A)
< 20.00
Lund
A)
< 20.00
Nijmegen
A)
Turku
< 20.00
<0.5
Turku
< 20.00
A)
< 20.00
Massy
A)
Paris
< 20.00
A)
Maastricht
< 20.00
< 20.00
United States
United States
A)
< 20.00
< 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)
< 20.00
A)
Cambridge
< 20.00
A)
Cambridge
< 20.00
Cambridge
A)
< 20.00
A)
Brompton-on-Swale
< 20.00
A)
London
Windsor
A)
Algeria
Wilaya de Tipiza
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.
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.
The financial statement risk
325
Independent Auditor's 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
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.
324
Independent Auditor's Report
Key Audit Matters in the Audit of the
Consolidated Financial Statements
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.
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.
MEASUREMENT OF DISPOSAL GAIN RECORDED FROM THE
SALE OF THE CONSUMER HEALTH BUSINESS
The financial statement risk
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.
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.
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.
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
⚫ 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.
Explanatory notes on the sale of Consumer Health business activities
can be found in note 5 of the notes to the consolidated financial
statements.
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.
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.
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 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
IMPAIRMENT TESTING OF GOODWILL
Explanatory notes on the impairment tests can be found in note 19
of the notes to the consolidated financial statements.
The financial statement risk
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.
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.
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.
Our conclusions
Our audit approach
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.
326
Independent Auditor's Report
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
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.
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.
Novapharm Production SARL
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.
Opinions
A)
< 20.00
Yavne
South Africa
Pantheon Biosciences Ltd.
Israel
A)
A)
< 20.00
Yavne
Metabomed Ltd.
Israel
< 20.00
Haifa
MediSafe Project Ltd.
Israel
A)
22.50
Israel
ARTSAVIT Ltd.
Yavne
20.00
< 20.00
<0.5
A)
Israel
Israel
Yavne
20.00
A)
Israel
Explore Bio 3 Ltd.
Yavne
Explore Bio 1 Ltd.
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.
Wiliot Ltd.
< 20.00
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
A)
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.
Darmstadt, February 14, 2019
S. man
Stefan Oschmann
UditBatry Bohm
Caesarea
Udit Batra
Macus вишива
Belén Garijo
Marcus Kuhnert
322
Responsibility Statement
Responsibility Statement
Kai Beckmann
< 20.00
Leuven-Heverlee
A)
Basel
22.06
A)
North America
United States
Prolog Healthy Living Fund, L.P.
United States
Prolog Healthy Living Fund II, L.P.
St. Louis
St. Louis
38.32
B)
50.58
B)
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.
320
Consolidated Financial Statements
V. Other equity investments
Yavne
Neviah Genomics Ltd.
(€ million)
Fair value
Thereof:
Merck KGaA (%)
Vaximm AG
Equity interest
(%)
Company
Israel
Africa (MEA)
Middle East and
Country
Notes to the Consolidated Financial Statements
Registered office
Germany
2
Muttenz
< 20.00
100.00
<0.5
100.00
<0.5
III. Non-controlled companies majority-owned
Latin America
Venezuela
Merck S. A.
Venezuela
Representaciones MEPRO S.A.
IV. Associates not included at equity due to secondary importance
Caracas
Caracas
100.00
<0.5
100.00
<0.5
CAMAG Chemie-Erzeugnisse und
Adsorptionstechnik AG
Switzerland
Switzerland
A)
25.35
Lausanne
Asceneuron SA
39.11
Switzerland
38.81
Amsterdam
Calypso Biotech B. V.
Netherlands
countries
Other European
A)
Merck Pharmaceutical and Life Sciences Ltd.
Germany
Germany
Artios Pharma Limited
Canbex Therapeutics Ltd.
F-Star Alpha Limited
United Kingdom
United Kingdom
United Kingdom
United Kingdom
F-Star Beta Limited
F-Star Delta Limited
Macrophage Pharma Limited
Peratech HoldCo Limited
Storm Therapeutics Limited
69.00
7.75
A)
Darmstadt
< 20.00
A)
Moers
< 20.00
< 20.00
2
Wiesbaden
< 20.00
< 20.00
Bönen
1
< 20.00
Sankt Augustin
United Kingdom
United Kingdom
United Kingdom
United Kingdom
A)
Martinsried
< 0.5
< 20.00
Berlin
2
< 20.00
< 20.00
Alcan Systems GmbH
ObsEva SA
Switzerland
Switzerland
Germany
Azelis Deutschland Kosmetik GmbH
InfraServ GmbH & Co. Wiesbaden KG
Germany
Inuru GmbH
Germany
IOmx Therapeutics AG
Germany
Germany
Germany
pharma mall Gesellschaft für Electronic
Commerce mbH
PharmLog Pharma Logistik GmbH
PrintCity GmbH & Co. KG
Other European
countries
f-star Biotechnologische Forschungs- und
Entwicklungsgesellschaft mbH
Austria
Belgium
ReWind Therapeutics N.V.
Galecto Biotech AB
Sweden
SynAffix B. V.
Mosa Meat B. V.
DNA Script S.A. S.
Aveni S. A. S.
Inthera Bioscience AG
Forendo Pharma OY
Netherlands
France
France
Finland
Abacus Diagnostica OY
Finland
Netherlands
Merck Maroc S.A.R.L.
<0.5
100.00
SAF-LAB LLC
Moscow
100.00
< 0.5
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
319
Country
Switzerland
United Kingdom
United Kingdom
Company
iOnctura SA
B-Line Systems Limited
Bristol Organics Ltd.
Registered office
Equity interest
(%)
Thereof:
Merck KGaA (%)
100.00
Gillingham
Fluka Chemicals Ltd.
United Kingdom
<0.5
100.00
Russia
Gillingham
100.00
Gillingham
A)
73.60
Plan-les-Ouates
Fair value
(€ million)
<0.5
<0.5
<0.5
Moscow
< 20.00
Vienna
<0.5
< 20.00
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
100.00
< 0.5
Other European
countries
Greece
Sigma-Aldrich (OM) Ltd.
Athens
100.00
< 0.5
Ireland
SAFC Arklow Ltd.
Arklow
MedChem Limited
Russia
< 0.5
100.00
Moscow
Chemical Trade Limited LLC
100.00
Russia
100.00
Amsterdam
Merck Europe B. V.
Netherlands
< 0.5
100.00
< 0.5
United Kingdom
Merck Cross Border Trustees Ltd.
Feltham
Gillingham
100.00
A)
North America
United States
United States
Fluka Chemical Corp.
TocopheRx, Inc.
Asia-Pacific
(APAC)
Australien
China
St. Louis
100.00
<0.5
Burlington
62.83
A)
Biochrom Australia Pty. Ltd.
Bayswater
Santo Domingo
Nigeria
Morocco
Africa (MEA)
Middle East and
Merck Dominicana, S.R.L.
Wessex Biochemicals Ltd.
Dominican Republic
<0.5
100.00
Guangzhou
Merck Innovation Hub (Guangdong) Co., Ltd.
<0.5
100.00
Latin America
United Kingdom
<0.5
100.00
Sigma Chemical Co. Ltd.
United Kingdom
<0.5
100.00
Feltham
Merck Pension Trustees Ltd.
Gillingham
United Kingdom
100.00
Feltham
Merck Ltd.
United Kingdom
<0.5
100.00
<0.5
Neuried
100.00
United Kingdom
United Kingdom
United Kingdom
Gillingham
Webnest Ltd.
United Kingdom
<0.5
100.00
Gillingham
<0.5
<0.5
Gillingham
<0.5
100.00
Gillingham
Ultrafine Limited
Sigma Entity One Limited
UFC Ltd.
100.00
Casablanca
Lagos
South Africa
• otherwise appears to be materially misstated.
Bonifacio Global City
100.00
Singapore
Merck Performance Materials Pte. Ltd.
Singapore
100.00
Singapore
Singapore
Merck Inc.
Merck Pte. Ltd.
Singapore
100.00
Singapore
100.00
South Korea
Cairo
100.00
Yavne
Sigma-Aldrich Pte. Ltd.
100.00
Philippines
Bonifacio Global City
Malaysia
Malaysia
New Zealand
New Zealand
Merck Sdn Bhd
Sigma-Aldrich (M) Sdn Bhd.
Merck Ltd.
Sigma-Aldrich New Zealand Co.
99.99
Petaling Jaya
100.00
100.00
Palmerston North
100.00
Christchurch
100.00
Philippines
Merck Business Solutions Asia Inc.
Kuala Lumpur
Yavne
100.00
Herzliya Pituach
Fair value
(€ million)
Germany
Germany
AB Pensionsverwaltung GmbH
Zossen
100.00
100.00
Germany
Thereof:
Merck KGaA (%)
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Equity interest
(%)
Registered office
Thereof:
Merck KGaA (%)
100.00
Yavne
90.00
Jerusalem
100.00
Rehovot
100.00
Nairobi
100.00
Halfway House
100.00
Kempton Park
100.00
Tunis
100.00
Tunis
100.00
Dubai
100.00
100.00
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
Sigma-Aldrich Japan G.K.
100.00
Company
Registered office
(%)
Merck KGaA (%)
China
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
Beijing
100.00
Country
China
Beijing
100.00
China
SAFC Hitech (Shanghai) Co., Ltd.
Shanghai
100.00
China
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
Merck Serono Co., Ltd.
Shanghai
Thereof:
317
Registered office
Equity interest
II. Companies not consolidated due to secondary importance
Company
Country
Merck Serono Middle East FZ-Ltd.
United Arab Emirates
Merck SARL
Equity interest
Merck Promotion SARL
Tunisia
Sigma-Aldrich (Pty) Ltd.
Merck (Pty) Ltd.
Merck Healthcare and Life Science Limited
Sigma-Aldrich Israel Ltd.
QLight Nanotech Ltd.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Tunisia
100.00
China
Sigma-Aldrich (Wuxi) Life Science & Technology Co., Ltd.
Jakarta
86.65
Japan
BioReliance K.K.
Tokyo
100.00
Japan
Merck Ltd.
100.00
Tokyo
(%)
Japan
Merck Performance Materials Ltd.
Tokyo
100.00
Japan
Merck Serono Co., Ltd.
Tokyo
100.00
Jakarta
P.T. Merck Chemicals and Life Sciences
P.T. Merck Tbk.
Indonesia
Wuxi
100.00
India
India
India
India
Merck Life Science Pvt. Ltd.
Merck Performance Materials Pvt. Ltd.
Merck Specialities Pvt. Ltd.
Sigma-Aldrich Chemicals Private Limited
Mumbai
100.00
Mumbai
100.00
Mumbai
100.00
Bangalore
100.00
Indonesia
Japan
Darmstadt
Tokyo
100.00
Merck C. A.
Merck, S.A.
Ecuador
Guatemala
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
Mexico
Merck S. A.
Panama
Merck Peruana S.A.
Uruguay
ARES Trading Uruguay S.A.
Buenos Aires
100.00
Buenos Aires
100.00
Rio de Janeiro
Peru
São Paulo
Colombia
Chile
Merck Vietnam Ltd.
Kaohsiung
100.00
Bangkok
45.11
Ho Chi Minh City
100.00
Latin America
Sigma-Aldrich Quimica Ltda.
Argentina
Brazil
Brazil
Merck S.A.
Sigma-Aldrich de Argentina S. r. I.
Merck S. A.
Sigma-Aldrich Brasil Ltda.
Chile
Merck S.A.
Argentina
100.00
Santiago de Chile
100.00
Country
Middle East and
Company
Africa (MEA)
Egypt
Merck Ltd.
Israel
Inter-Lab Ltd.
Notes to the Consolidated Financial Statements
Israel
Israel
Merck Serono Ltd.
Israel
PMatX Ltd.
Israel
Israel
Kenya
100.00
InterPharm Laboratories Ltd.
Consolidated Financial Statements
318
100.00
Santiago de Chile
100.00
Bogota
100.00
Quito
100.00
Guatemala City
100.00
Mexico City
100.00
Mexico City
100.00
Toluca
100.00
Panama City
100.00
Lima
100.00
Montevideo
Merck Ltd.
SAFC Hitech Taiwan Co. Ltd.
100.00
< 0.5
<0.5
< 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
Germany
Darmstadt
Darmstadt
<0.5
100.00
Thailand
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
100.00
<0.5
Darmstadt
100.00
Merck 39. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Vietnam
100.00
South Korea
Merck Performance Materials Ltd.
Pyeongtaek-shi
100.00
South Korea
Yongin City
100.00
Seoul
Taiwan
Taipei
100.00
Taiwan
Merck Performance Materials Ltd.
Taipei
100.00
Taiwan
100.00
Merck Ltd.
Merck Ltd.
Sigma-Aldrich Korea Ltd.
100.00
100.00
South Korea
Germany
Germany
Germany
Merck 40. Allgemeine Beteiligungs-GmbH
Merck 41. Allgemeine Beteiligungs-GmbH
Merck Foundation gGmbH
Darmstadt
100.00
100.00
< 0.5
<0.5
100.00
100.00
< 0.5
Darmstadt
100.00
Merck Electronic Materials Ltd.
Seoul
Darmstadt
2,632
2,764
5.0%
2,889
2,738
2,609
2,923
2,220
2,610
7,455
23.9%
9,236
7,670
7,344
10,480
6.6%
4,811
2,931
1,660
0.3%
8,809
832
4,512
9,616
3,561
-17.8%
8,896
10,823
12,597
13,713
5,637
22.5%
17,233
14,066
14,050
12,855
11,801
> 100.0%
2,170
589
939
2,879
4,231
1,557
2,990
26,010
29.9%
29.5%
7.76
5.99
3.75
2.56
2.66
3,396
38,081
2,615
1,124
1,165
- 31.4%
1,461
2,129
2,154
1,487
8,033
1,633
38,258
35,621
36,888
-13.0%
7,237
8,317
9,980
10,930
5,702
1.3%
13,764
13,582
15,015
14,492
5,694
-1.8%
27,652
28,166
30,589
30,737
15,530
3.6%
4,008
6,681
E
2,076
www.3st.de
3st kommunikation GmbH, Mainz
CONCEPT AND DESIGN
E-Mail: service@merckgroup.com
Website: www.merckgroup.com
Fax: +49 6151 72-5577
Published on March 7, 2019 by
Merck KGaA, Group Communications
Frankfurter Strasse 250,
64293 Darmstadt, Germany
Telephone: +49 6151 72-0
You can order all publications from Group Communications,
Merck KGaA, 64271 Darmstadt, service@merckgroup.com.
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.
PHOTOS
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.
Information and Service
332
331
-2.2%
51,713
52,880
50,348
49,613
Information and Service
Getty (pages 1, 10-11, 18-19, 20, 23, 26, 27, 33)
Konstantin Eckert (pages 12-17)
Mosa Meat (pages 34-35)
Rüdiger Nehmzow (pages 44, 48-49)
25.6%
Quarterly Statement Q1
May
5/14/2019
Quarterly Statement Q3
November
11/14/2019
Annual General Meeting
April
4/26/2019
Half-yearly Financial Report
August
8/8/2019
Annual Press Conference
March
3/7/2019
FINANCIAL CALENDAR
for 2019
Druckfein
PAPER
AC medienhaus GmbH
PRINTING
Leinhäuser Language Services GmbH
TRANSLATION
Unsplash, Frank V. (pages 28-29)
39,639
-16.8%
1,254
1.20
2,605
-0.9%
910
919
716
514
481
-72.9%
2,766
106
132
179
143
-20.6%
2,215
2,790
3,788
4,097
392
3,318
3,193
2,508
1.05
5.6%
2,225
2,108
1,976
1,709
1,704
1.00
46.7%
39.5%
36.7%
33.8%
45.4%
-33.9%
6,701
10,144
11,513
12,654
559
-21.4%
1.25
29.3%
Dividend per share (in €)
28.3%
Wirtschaftsprüfungsgesellschaft
[Original German version signed by:]
Braun
Wirtschaftsprüfer
[German Public Auditor]
Rackwitz
Wirtschaftsprüfer
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
Operating result (EBIT)²
Margin (% of net sales)²
EBITDA²
Property, plant and equipment
Other intangible assets
Goodwill
of which:
Non-current assets
Total equity and liabilities
Frankfurt am Main, February 15, 2019
KPMG AG
Assets and liabilities
Profit after tax
Profit before income tax
Margin (% of net sales)2
EBITDA pre²
Adjustments²
Margin (% of net sales)²
Earnings per share (in €)
The German Public Auditor responsible for the engagement is Bodo
Rackwitz.
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).
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.
328
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.
We exercise professional judgment and maintain professional skep-
ticism throughout the audit. We also:
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.
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.
Auditor's Responsibilities for the Audit
of the Consolidated Financial State-
ments and of the Combined Man-
agement Report
Independent Auditor's 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.
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.
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.
Responsibilities of Management and
the Supervisory Board for the Consoli-
dated Financial Statements and the
Combined Management Report
327
Independent Auditor's Report
29.9%
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.
Current assets
• 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.
• 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
German Public Auditor Responsible for
the Engagement
Further Information pursuant to
Article 10 of the EU Audit Regulation
Other Legal and Regulatory Requirements
329
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 dis-
closure about the matter.
• Evaluate the appropriateness of accounting policies used by man-
agement and the reasonableness of estimates made by manage-
ment and related disclosures.
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.
• 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.
• 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.
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.
• 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
• 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.
concern.
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.
of which:
[German Public Auditor]
Trade accounts receivable
-15.3%
3,528
4,164
4,415
3,354
3,123
27.5%
11.6%
16.5%
14.3%
15.5%
-28.7%
1,727
2,423
16.7%
2,481
26.1%
28.7%
29.8%
-10.5%
3,800
4,246
4,490
3,630
29.4%
3,388
-272
-82
-75
-276
-265
23.8%
Inventories
1,843
> 100.0%
2.2%
Employees (number as of December 31)
Research and development costs
Equity ratio (in %)²
Other key data
Net financial debt²
Business free cash flow²
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.
Investments in property, plant and equipment³
Liquidity
Non-current
Financial liabilities
Equity
Cash and cash equivalents
1,762
Investments in intangible assets³
2 Not defined by International Financial Reporting Standards (IFRSS).
Current
4 Proposal on the appropriation of profits for 2018.
14,517
3 According to the consolidated cash flow statement.
15,024
11,363
in %
2018
12,845
14,836
2016
2015
2014
change
Business Development 2014-2018
2017¹
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.
Investment Director of M Ventures
and Bioling Board Member
EDWARD KLIPHUIS
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.
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.
31
The needle-free sensor
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.
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.
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.
"Bioling is on the verge
of improving and
simplifying the lives
of millions of people
living with diabetes with
just a small patch."
BEYOND TOMORROW
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.
Liquid biopsy
Sometimes, a needle
prick can also
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.
"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.
physiology
BEYOND TOMORROW
32
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.
221 Mg/dl 8 Mg/dl
BEYOND TOMORROW
Lactat
A platform for the fight against cancer
Semiconductors as a new driver of growth
VIBRANT CHINA
27
CONTINUOUS TECHNOLOGICAL ADVANCES
HELP SHAPE THE INDUSTRY
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.
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.
-
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."
High-tech materials
from Merck are essential
for the manufacture
of powerful microchips.
The Chinese government
intends to invest as much
as US$ 150 billion
into its domestic industry - a
significant part of which should
flow into the chip industry -
offering opportunities for Merck.
Ketone
28
BEYOND TOMORROW
29
Beyond
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?
If you want to actively shape the future, you
need to ask the right questions.
30
BEYOND TOMORROW
The needle-free sensor
The
needle-
free
sensor
8
Glukose
3
A platform for the
fight against cancer
make everything easier.
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.
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
35
IF
If, in the near future, we do
not ensure that a greater share
of the world's meat is produced
without large-scale livestock
farming...
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 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
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.
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."
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".
...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.
without the
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.
side effects
DATA ACROSS THE GLOBE
IS PACKAGED DIFFERENTLY
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
STEFAN OSCHMANN
Chairman of the Merck Executive Board
-
wide in a structured form and
could be the source of a great knowl-
edge and developmental boost in
modern medicine.
SYNTROPY IS EXPECTED TO TAKE
RESEARCH TO A NEW LEVEL
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
to tailoring Syntropy
to meet the precise
needs of cancer
researchers and
clinical doctors."
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.
33
Real Meat
BEYOND TOMORROW
34
Real meat without the side effects
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
"Syntropy aims to
help researchers
collaborate securely
Syntropy will drive the creation of
new knowledge and accelerate scien-
tific discovery.
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.
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,
EXTERNAL AND IN-HOUSE
DATA WILL BE AGGREGATED
111
-
-
Sector-Specific Environment
Review of Forecast against Actual
-
Business Developments
Performance Materials
Merck Group
Healthcare
Life Science
Corporate and Other
137
Report on Risks and Opportunities
104
150
Course of Business and Economic Position
Macroeconomic and
61
Report on Economic Position
Report on Expected Developments
The Executive Board
50 Merck Shares
Fundamental Information
about the Group
55
Merck
Strategy
68
Internal Management System
72
Corporate Responsibility
81
Research and Development
91
People at Merck
99
101
154 Report in accordance with Section 315a
(1) of the German Commercial Code
(HGB)
206
Additional Information on Merck KGaA
in accordance with the German
193
Report of the Supervisory Board
Consolidated Statement of Changes
in Net Equity
195 Objectives of the Supervisory Board
with respect to Its Composition and
Profile of Skills and Expertise
48
Notes to the Consolidated Financial
Statements
322
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
204
156
Statement on Corporate Governance
Consolidated Cash Flow Statement
Commercial Code (HGB)
Corporate
TABLE OF CONTENTS ANNUAL REPORT
Consolidated
Financial Statements
197-321
Consolidated Income Statement
Governance
200
201
Consolidated Statement of
163-196
Comprehensive Income
165
Capital Structure and Corporate Bodies
of Merck KGaA
201
Consolidated Balance Sheet
203
166
55
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?
43
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
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.
Letter from Stefan Oschmann
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.
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.
.
•
• 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).
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.
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.
To Our Shareholders
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.
• 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.
•
SHAREHOLDERS
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.
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.
At Merck, we are also working on technologies of the future beyond our three
business sectors.
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.
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.
Dear shareholders, dear
of March,
dear friends
43
Letter from Stefan Oschmann
2019
Pandemic Protector - Protection against newly
emerging pathogens and identification of an
active substance for the treatment or prevention
of disease (category: health)
2020
Multi-drug resistance breaker - Solving
the problem of antibacterial resistance to
multiple antibacterials (category: health)
2021
Food generator - Technology to help feed the
world's growing population (category: nutrition)
2022
CO2-to-fuel converter - Generating fuel through
photocatalytic conversion of atmospheric CO2
(category: energy)
38
TABLE OF CONTENTS ANNUAL REPORT
Table of Contents
Annual Report
To Our
Shareholders
Combined
Management
Report*
53-162
41-52
Merck plans to support
courageous projects
over the next years in
the following areas:
Letter from Stefan Oschmann
Future Insight Prize
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.
To Our Shareholders
Merck Shares
50
The Executive Board
48
Letter from Stefan Oschmann
43
TO OUR
SHAREHOLDERS
41-52
GROWTH HAS ITS PRICE
New heroes wanted
BEYOND TOMORROW
37
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.
AN OPPORTUNITY FOR VISIONARY IDEAS
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.
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
http://futureinsightprize.merckgroup.com
TO OUR
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.
Feb.
REPORT*
53-162
COMBINED MANAGEMENT
REPORT*
55
Fundamental Information
about the Group
55
Merck
61
COMBINED MANAGEMENT
Strategy
Internal Management System
72
Corporate Responsibility
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.
99
Report on Economic Position
101
Macroeconomic and Sector-Specific Environment
104
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.
68
17%
GARP (Growth At
Reasonable Price)
32%
Growth
1%
Other
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 %
10.3%
Germany
3%
Hedge
19%
Index
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.
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.
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
Research and Development
81
- Healthcare
- Merck Group
Course of Business and Economic Position
Fundamental Information about the Group
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).
Merck
Fundamental Information
about the Group
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
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.
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 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.
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
55
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.
11,599
11,629
To Our Shareholders
The Executive Board
49
50
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.
CEO Healthcare
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%).
Merck Shares
51
MERCK SHARES
Share price development from January 1, 2018 to December 31, 2018
in %
15
10
5
0
-5
To Our Shareholders
Member of the Executive Board
Belén Garijo
Kai Beckmann
Member of the Executive Board
CEO Performance Materials
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
- 10
111
-15
-20
Year-end share price
Daily average number of Merck shares traded³
Market capitalization (at year-end)
€
1.25
1.25
€
99.82
114.40
€
74.80
87.90
€
89.98
89.75
number
583,653
473,740
€ million
39,121
39,021
Market value of authorized shares5 (at year-end)
€ million
Share price low
thin
Share price high
2017
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
Jan.
Mar.
Apr.
May
June
Dividend²
July
Sept.
Oct.
Nov.
Dec.
Source: Bloomberg (closing rates).
52
MERCK SHARES
Key share price data¹
To Our Shareholders
Merck Shares
2018
Aug.
Review of Forecast against Actual Business Developments
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.
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.
Fundamental Information about the Group
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.
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.
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.
64
Combined Management Report
Fundamental Information about the Group _ Strategy
Technology
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.
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.
This could enable faster and more accurate (remote) health moni-
toring and treatment.
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.
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.
Business strategies
HEALTHCARE
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.
Fundamental Information about the Group _ Strategy
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.
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.
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.
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".
Performance
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.
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.
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.
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.
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.
Combined Management Report
Fundamental Information about the Group _ Strategy
63
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.
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.
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.
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
Combined Management Report
Fundamental Information about the Group Strategy
Fundamental Information about the Group
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.
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.
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.
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.
Combined Management Report
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).
• Focus on the attractive electronics market to achieve long-term
organic growth perspective of 2-3% per year (CAGR)
• Allocate our resources more efficiently to maintain an above-
industry EBITDA pre margin of around 30%
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
Strategic finance and dividend policy
We are pursuing a conservative financial policy characterized by the
following aspects:
Combined Management Report
FINANCIAL FLEXIBILITY AND A CONSERVATIVE FUNDING
STRATEGY
Our priorities are:
Combined Management Report
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.
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.
65
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.
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.
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.
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
success.
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.
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.
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.
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.
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.
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.
To sustain our leadership for the future, Life Science has estab-
lished a strategy based on three key pillars:
1. Ensure operational excellence by focusing on creating value,
building a strong organization and implementing consistent
processes
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
3. Establish new growth pillars through our four strategic initia-
tives: Gene Editing & Novel Modalities, BioReliance® End-to-End
Solutions, BioContinuum® Platform and BrightLab™.
LIFE SCIENCE
62
66
THE ROADMAP
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.
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 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.
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.
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 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.
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 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
Combined Management Report
Fundamental Information about the Group
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.
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.
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.
Life Science
Merck
57
Merck
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.
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.
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.
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.
CONSUMER HEALTH
ALLERGOPHARMA
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.
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.
58
Combined Management Report
Fundamental Information about the Group
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.
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.
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.
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.
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 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.
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.
Strategy
Combined Management Report
Fundamental Information about the Group _ Strategy
61
General principles
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.
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.
Group Strategy
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.
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.
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
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.
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.
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.
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.
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.
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.
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
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.
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
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.
Fundamental Information about the Group
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.
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.
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.
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.
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.
-
Merck
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.
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.
PAYBACK PERIOD
71
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.
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.
Capital market-related parameters
INTERNAL RATE OF RETURN (IRR)
MERCK VALUE ADDED (MEVA)
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
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 Not defined by International Financial Reporting Standards (IFRSS).
-21.4%
-685
3,193
2
-2
NET INCOME, EARNINGS PER SHARE (EPS) AND
EARNINGS PER SHARE PRE (EPS PRE)¹
> 100.0%
-123
-22
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.
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,
3,374
RECONCILIATION OF NET INCOME TO NET INCOME PRE¹, 2
1,175
1,198
-145
> 100.0%
> 100.0%
-2,246
796
-428
368
> 100.0%
in %
29.5%
€ million
769
12
10
-57
-2,303
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.
22
2018
Change
Earnings per share pre² (in €)
Net income pre²
Non-controlling interests to be adjusted
Income taxes on the basis of the underlying tax rate²
Adjustments²
Amortization of acquired intangible assets
Income tax
Profit after tax from discontinued operation
Non-controlling interests
Net income
€ million
2017
2,605
2,508
EBITDA pre²
Elimination first-time consolidation of BioControl Systems
4,246
3,800
-28.1%
-23
81
58
Other adjustments
-97.2%
-61
63
2
Acquisition-related adjustments
> 100.0%
-446
335
25
Gains (-)/losses (+) on the divestment of businesses
-24.4%
-46
188
142
Integration expenses/IT expenses
-24.6%
-15
61
46
-23
-15.3%
-310
Business free cash flow²
-10.5%
² Not defined by International Financial Reporting Standards (IFRSS).
Changes in trade accounts receivable as well as receivables
from royalties and licenses
> 100.0%
-197
-18
-214
Changes in inventories
-7.9%
80
-1,012
-932
Investments in property, plant and equipment as well as software and
advance payments for intangible assets
in %
-10.5%
€ million
-446
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.
4,246
EBITDA pre²
2017
2018
€ million
Change
Business free cash flow¹,2
MERCK GROUP
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
70
3,800
-1.9%
Customers
64
Fundamental Information about the Group _ Corporate Responsibility
Combined Management Report
Additionally, we are working towards demonstrating the efficacy
of our product IR3535Ⓡ for malaria prevention in Africa. The insect
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.
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 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.
Strengthen the availability of healthcare solutions
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.
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.
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
Strategic sphere of activity:
Global Health
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.
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.
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.
Fundamental Information about the Group Corporate Responsibility
Combined Management Report
74
Competitors
NGOS
Healthcare
systems
Community
Scientists
Employee
represen-
tatives
Patients
Merck
makers
Federations
& policy
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.
-636
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.
For the semiconductor industry, we have developed a series of
environmentally sustainable specialty chemicals and materials
including PFOS-free antireflective and photoresist coatings.
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).
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.
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.
Performance Materials: increasing the sustainability
of manufacturing processes and end products
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.
-
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.
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.
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.
Life Science: reducing environmental impacts throughout the
product life cycle
Suppliers
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.
Fundamental Information about the Group Corporate Responsibility
Combined Management Report
76
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.
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.
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.
Promoting accessibility and improving supply chains
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.
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.
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
Raising awareness
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.
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).
Strategic sphere of activity:
Sustainable Solutions
Share-
holders
Merck
family
Media
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
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).
DIVIDEND RATIO
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
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.
5.92
-13.8%
-355
2,574
2,219
0.4%
-3
-3
-9.0%
73
-814
-741
> 100.0%
264
5.10
327
72
Fundamental Information about the Group Corporate Responsibility
Employees
Regulatory
agencies
Sales &
business
partners
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
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.
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.
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.
73
Fundamental Information about the Group _ Corporate Responsibility
Combined Management Report
Sustainable
Solutions
Operate
Combined Management Report
to
Minds
Broad
CR
Strategy
Global
Health
Responsibility
-
-
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
License
> 100.0%
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.
-1
4,164
EBITDA pre margin
M&A
NPV, IRR,
Licensing
Projects
eNPV, IRR,
EBITDA pre margin,
EPS, ROCE, MEVA
EBITDA pre margin,
POS, ROCE
Capex
Net sales growth,
NPV, IRR,
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
Payback period,
eNPV¹ = expected Net present value
ROCE, MEVA
Net income, EPS,
Dividend ratio,
Credit rating
58
Combined Management Report
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
MEVA
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.
68
Combined Management Report
Fundamental Information about the Group _ Internal Management System
Internal Management System
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
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.
POS¹ = Probability of success
Fundamental Information about the Group Strategy
1 Not defined by International Financial Reporting Standards (IFRSS).
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
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.
2018
1,727
€ million
2,423
-696
in %
-28.7%
1,743
1,742
1
3,528
M&A = Mergers & Acquisitions
2017
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
58
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
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
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.
MERCK GROUP
Net sales¹
€ million
Fundamental Information about the Group — Internal Management System
2018
14,517
Net sales
2.2%
319
Combined Management Report
€ million
2017
Change
14,836
in %
4,788
4,748
4,759
Natural gas
4,320
4,536
4,514
4,522
396
130
115
Biomass and self-generated renewable energy
119
122
119
122
4,835
Indirect energy consumption
Liquid fossil fuels³
115
In terajoules
8,035
0.1
0.0
Electricity
Steam, heat, cold
0.3
0.3
0.1
0.0
0.0
Direct energy consumption
0.0
0.0
Total energy consumption
2015
2016
2017
2018
7,708
7,621
7,898
0.0
2,873
0.4
3,150
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
Indirect CO2eq emissions
Biogenic CO2 emissions
2006³
2015
2016
0.3
0.0
2,833
0.0
0.0
3,276
Electricity
2,527
2,491
2,624
2,740
Steam, heat, cold
346
342
526
536
Total energy sold
1.1
1.1
0.4
0.0
Electricity
1.1
1.1
Steam, heat, cold
0.3
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.
149
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).
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.
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.
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
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.
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.
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.
Safety of our chemical products
Fundamental Information about the Group Corporate Responsibility
Combined Management Report
Fundamental Information about the Group
_ Corporate Responsibility
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.
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.
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.
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
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.
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
Combined Management Report
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.
Total energy sold
Focus areas: Energy efficiency, greenhouse gas emissions,
water, waste and recycling
ENERGY CONSUMPTION 1, 2
Biomass and self-generated renewable energy
33
34
33
34
Indirect energy consumption
798
787
875
910
Electricity
702
692
729
761
Steam, heat, cold
96
95
146
32
32
36
110
In gigawatt hours
2015
2016
2017
2018
Total energy consumption
2,141
2,117
2,194
2017
2,232
1,343
1,330
1,319
1,322
1,200
1,260
1,254
1,256
Liquid fossil fuels³
Direct energy consumption
2018
82
722
Relapsing multiple sclerosis
Multiple sclerosis
Registration¹
Phase II
Non-small cell lung cancer
Phase II
Hepatocellular cancer
Phase II
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Status
Hematological malignancies
Indication
Immuno-Oncology
86
Combined Management Report
Fundamental Information about the Group _ Research and Development
BIOPHARMA PIPELINE
as of December 31, 2018
Therapeutic area
Compound
Neurology
Cladribine tablets (lymphocyte-targeting agent)
Evobrutinib (BTK inhibitor)
Oncology
Tepotinib (MET kinase inhibitor)
Tepotinib (MET kinase inhibitor)
M2698 (p70S6K and Akt inhibitor)
M3814 (DNA-PK inhibitor)
M6620 (VX-970, ATR inhibitor)
M4344 (VX-803, ATR inhibitor)
M3541 (ATM inhibitor)
M8891 (MetAP2 inhibitor)
M7583 (BTK inhibitor)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Phase I
Non-small cell lung cancer, 1st line
Phase III
M7824 (anti-PD-L1/TGF-ẞ trap)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
M9241 (NHS-IL12, cancer immunotherapy)
M7824 (anti-PD-L1/TGF-ẞ trap)
Urothelial cancer
Phase II³
Colorectal cancer, 1st line
Phase II4
Non-small cell lung cancer, 1st line
Phase II
Solid tumors
Phase I
Hematological malignancies
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Abituzumab (pan-av integrin inhibiting mAb)
Avelumab (anti-PD-L1 mAb)
Phase II³
Non-small cell lung cancer
Gastric cancer, 1st line maintenance
Phase III
Avelumab (anti-PD-L1 mAb)
Ovarian cancer, 1st line
Phase III²
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Urothelial cancer, 1st line maintenance
Renal cell cancer, 1st line
Phase III
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.
Phase III
Locally advanced head and neck cancer
Phase III
Avelumab (anti-PD-L1 mAb)
Merkel cell carcinoma, 1st line
Phase II
Avelumab (anti-PD-L1 mAb)
Solid tumors
Phase II³
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
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
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.
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.
Combined Management Report
Fundamental Information about the Group _ Research and Development
81
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 devel-
opment activities - either on our own or in cooperation with third
parties - is one of our top priorities.
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.
Healthcare
BIOPHARMA
Oncology and Immuno-Oncology
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.
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.
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)
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.
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.
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.
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
cancers.
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.
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.
Responsibility for society
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.
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408
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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.
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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.
3 Baseline for our emission targets is 2006.
4 eq = equivalent.
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.
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.
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
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Combined Management Report
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.
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.
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.
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 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 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.
Combined Management Report
Fundamental Information about the Group _ Research and Development
84
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.
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.
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).
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.
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.
Combined Management Report
Fundamental Information about the Group _ Research and Development
85
Fertility
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.
-
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
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.
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.
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.
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 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
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.
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.
Fundamental Information about the Group _ Research and Development
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.
Combined Management Report
Fundamental Information about the Group _ Research and Development
83
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.
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.
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.
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.
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.
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.
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
Natural gas