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
%
S&P/Moody's / Scope
Report on Risks and Opportunities
Combined Management Report
142
In the Healthcare business sector, in 2018 Merck signed an agree-
ment for a strategic collaboration with Chinese online company Alibaba
Health, which is active in the healthcare sector. The collaboration seeks
Digital technologies are becoming increasingly important for our mar-
kets and our world of work. Therefore, in 2015, we launched strategic
digital initiatives geared to improving the efficiency of our internal
processes and to evaluating the opportunities of digitalization with
regard to our products and customers. In addition to collaborations
with external partners to expand e-health solutions for patients, such
as our MSdialog platform, the Accelerator program, which is being
driven by our Innovation Center, is one component of our innovation
strategy.
Opportunities offered by digitalization and activities
to boost innovative strength
In the Healthcare business sector, both our biopharmaceutical products
and classic pharmaceutical business are exposed to increased compe-
tition from rival products (in the form of biosimilars and generics).
In the Life Science and Performance Materials business sectors, risks
are posed by not only cyclical business fluctuations but also changes
in the technologies used or customer sourcing strategies, particularly
with respect to liquid crystals. We use close customer relationships
and in-house further developments as well as market proximity,
including precise market analyses, as mitigating measures. Overall,
owing to its possible occurrence with a critical negative impact, the
market risk is classified as a medium risk.
Risks due to increased competition and
customer technology changes
With the acquisition of Sigma-Aldrich in 2015, we gained access to the
leading life science e-commerce platform. Our customers are already
benefiting from a portfolio of more than 300,000 products, including
highly respected brands distributed via this e-commerce platform.
We are further expanding this platform in order to continuously
increase the number of products available on it. Making ordering pro-
cesses faster and more convenient for our customers and offering
support through individualized product recommendations could lead
to higher sales volumes and enable us to win new customers. Conse-
quently, this distribution channel could lead to an above-average
development of sales in the medium term.
Opportunities from leveraging the e-commerce
and distribution platform
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.
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.
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.
Opportunities from new active ingredients for cosmetics
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.
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.
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.
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.
Opportunities provided by the CRISPR technology
143
Report on Risks and Opportunities
Combined Management Report
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.
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.
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.
RISKS AND OPPORTUNITIES OF RESEARCH
AND DEVELOPMENT
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.
The new center is one of three worldwide supporting Merck's
biotech partners in developing their processes from early clinical
stages to commercialization by providing end-to-end solutions.
tion and high quality. However, the drug development process is long
and complex, and requires biotech companies to make significant
financial investments.
The manufacture of biopharmaceuticals, or biomanufacturing, is
a growing industry that is increasingly focused on optimized produc-
In June 2018, Merck opened North America's first BioRelianceⓇ End-
to-End Biodevelopment Center for drug manufacturers in Burlington,
Massachusetts. The center provides practical experience and offers
expert advice for each stage of biotechnological development and
manufacture.
Opportunities offered by customer proximity
The CRISPR technologies open up promising new avenues for med-
ical research and the treatment of some of the most difficult diseases
to treat, such as cancer as well as hereditary and rare diseases.
The CRISPR technology is used in genome editing. In 2018, Merck
was awarded several patents for this. Fundamental CRISPR patents
exist in Australia, China, Europe, Israel, Canada, Singapore and
South Korea.
In 2018, we expanded our competencies with a PMatX incubator
for electronics of the next generation in Israel in the Performance
Materials area.
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
Risk of more restrictive regulatory requirements regarding
drug pricing and reimbursement
As a global company, we face political and regulatory changes in a
large number of countries and markets.
OPPORTUNITIES
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 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.
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.
140
Combined Management Report
Report on Risks and Opportunities
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
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.
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.
MARKET RISKS AND OPPORTUNITIES
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.
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.
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.
A/A2
A-/A3
Rete/Reel
BBB/Baa2
• S&P
• Moody's
Scope
2004 2005 2006 2007
2008
2009
2010
2011 2012
2013 2014
2015
2016 2017
LIQUIDITY RISKS
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.
COUNTERPARTY RISKS
Counterparty risks arise from the potential default by a partner in
connection with financial investments, loans and financing commit-
ments on the one hand and receivables in operating business on the
other.
As for counterparty risks from financial transactions, we review
all positions relating to trading partners and their credit ratings on a
daily basis. We manage financial risks of default by diversifying our
financial positions and through the related active management of our
trading partners. Significant financial transactions involving credit
risk are entered into with banks and industrial companies that have
a good credit rating. Moreover, our large banking syndicate the
multi-currency revolving credit facility of € 2 billion was syndicated
by 19 banks - reduces possible losses in the event of default.
-
The solvency and operational development of trading partners is
regularly reviewed as part of the management of operational coun-
terparty risks. Sovereign risks are also analyzed. The volume of
receivables of each customer is capped in line with their credit rat-
ings. Risk-mitigating measures, such as credit insurance, are utilized
as appropriate. Nevertheless, defaults by isolated trading partners,
even those with outstanding credit ratings, cannot be entirely ruled
out, although rated as unlikely (further information can be found in
"Credit risks" in Note (38) "Management of financial risks" in the
Notes to the Consolidated Financial Statements).
Counterparty risk is classified as a medium risk overall owing to
the unlikely probability of occurrence with a potential critical negative
effect.
FINANCIAL MARKET OPPORTUNITIES AND RISKS
As a result of our international business activities and global corporate
structure, we are exposed to risks and opportunities from fluctuations
in exchange rates. These result from financial transactions, operating
receivables and liabilities, as well as forecast future cash flows from
sales and costs in foreign currency. We use derivatives to manage
and reduce the aforementioned risks and opportunities (further infor-
2018
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.
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.
RISKS AND OPPORTUNITIES FROM PENSION
OBLIGATIONS
We have commitments in connection with pension obligations. The
present value of defined benefit obligations can be significantly
increased or reduced by changes in the relevant valuation 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.
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Report on Risks and Opportunities
ASSESSMENTS BY INDEPENDENT RATING AGENCIES
The capital market uses the assessments published by rating agencies
to help lenders assess the risks of a financial instrument used by
Merck. We are currently rated by Standard & Poor's (S&P), Moody's
and Scope. Standard & Poor's has issued a long-term credit rating of
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.
OPPORTUNITIES
Legal risks
Nevertheless, we are still exposed to litigation risks or legal pro-
ceedings. In particular, these include risks in the areas of product
liability, competition and antitrust law, pharmaceutical law, patent
law, trademark law, data protection law, tax law and environmental
protection. As a research-based company, we have a valuable port-
folio of industrial property rights, patents and brands that could
become the target of attacks and infringements. The outcome of
future proceedings or those currently pending is difficult to foresee.
in high-growth markets
Opportunities due to an expanding local presence
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.
Risks of dependency on suppliers
Report on Risks and Opportunities
Combined Management Report
144
Although the occurrence of these risks is considered unlikely, an
individual event could have a critical negative effect on the net assets,
financial position and results of operations, and they are therefore
classified as a medium risk.
Further risks include operational failures due to fire or force majeure,
for example natural disasters such as floods or earthquakes, which
could lead to a substantial interruption or restriction of business
activities. Insofar as it is possible and economically viable, the Group
limits its damage risks with insurance coverage, the nature and
extent of which is constantly adapted to current requirements. 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.
Risks of production availability
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.
Risk of a temporary ban on products/production facilities or
of non-registration of products due to non-compliance with
quality standards
RISKS AND OPPORTUNITIES RELATED TO THE QUALITY
AND AVAILABILITY OF PRODUCTS
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 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.
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.
For instance, we are currently involved in litigation with Merck &
Co. Inc. (outside the United States and Canada: Merck Sharp &
Dohme Corp. (MSD)), against whom we have filed lawsuits in various
countries. This company has also sued us in the United States for
trademark infringement, among other things.
Due to long statutes of limitations or in some cases the absence
thereof, it is not possible to rule out that we will face third-party
claims arising from the same issue despite the conclusion of legal
proceedings. Court or official rulings or settlements can lead to
expenses with a significant impact on our business and earnings.
Despite extensive precautionary measures, non-compliance with
laws and regulations leading to related consequences can never be
completely excluded.
Tax risks are reviewed regularly and systematically by Group Tax.
Corresponding standards and guidelines are used in order to identify
tax risks at an early stage as well as to review, evaluate and corre-
spondingly minimize them. Risk reduction measures are coordinated
by Group Tax together with the subsidiaries abroad.
In our opinion, the lawsuits described below constitute the most
significant legal risks. This should not be seen as an exhaustive list
of all legal disputes currently ongoing.
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Report on Risks and Opportunities
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.
Combined Management Report
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 AND OPPORTUNITIES FROM THE USE
OF SOCIAL MEDIA
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.
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.
Overall, the liquidity risk is unlikely and rated as low.
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Combined Management Report
51-80%
> 80%
20-50%
< 20%
Probability of occurrence
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
Within the scope of audits, Group Internal Auditing regularly
reviews the performance of risk management processes within the
units and, at the same time, the communication of relevant risks from
the operating businesses to Group Risk Management.
For reporting risks with a potential negative impact on our EBIT,
a 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.
Report on Risks and Opportunities
Combined Management Report
Report on Risks and Opportunities
137
Report on Risks and Opportunities
Risks and opportunities are inherent to entrepreneurial activity. We
have put systems and processes in place to identify risks at an early
stage and to counteract them by taking appropriate action. Within
the company, opportunity management is an integral component of
internal decision-making processes such as short- and medium-term
planning and intra-year business plans.
DEGREE OF IMPACT
Risk and opportunity management
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.
RISK MANAGEMENT PROCESS
The objective of our risk management activities is to recognize, assess
and manage risks early on and to implement appropriate measures
to minimize them. The responsibilities, objectives and processes of
risk management are described in our internal risk management
guidelines. The business heads, managing directors of Merck 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.
Likewise, risk-mitigating measures are reported and assessed.
The effectiveness of these measures and the planned implementation
time frame are monitored by Group Risk Management.
The residual risk after the implementation of these measures is
presented in the internal risk report as net risk.
Group Controlling & Risk Management forms the organizational
framework for risk management and reports directly to the Group
Chief Financial Officer. Group Risk Management uses the information
reported to determine the current risk portfolio for the Merck Group,
presenting this in a report to the Executive Board, the Supervisory
Board and the Finance Committee with detailed explanations twice
per year. This also encompasses a probability-weighted aggregation
of risks at 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.
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.
Degree of impact
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.
€ 20-50 million
Medium
Medium
Medium
High
High
Medium
High
Low
Low
Low
Low
Probability of occurrence <20%
20-50%
51-80%
> 80%
> € 50 million
Medium
Medium
Medium
Medium
Low
Explanation
€5 <20 million
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
The combination of the two factors results in the risk matrix below,
which shows the individual risks and their significance to the Group.
RISK MATRIX
€ 20-50 million
€ 5-20 million
> € 50 million
Impact
Explanation
Unlikely
Possible
Likely
Very likely
< € 5 million
< € 5 million
Environmental and safety risks
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.
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
Report on Risks and Opportunities
149
Risks of the divestment, acquisition
and integration of companies and
businesses
In our view, business-related opportunities offer the greatest
potential. An important element here is the continuous expansion of
our businesses in Asia, Latin America, Africa and the Middle East. With
the successful focusing and continued intensification of our research
and development activities, we want to be able to continue to offer
our customers innovative products and help shape markets. Moreover,
we also consolidate our expertise in numerous alliances with industrial
partners as well as various universities and international organizations.
We are making targeted investments in future-oriented companies
and start-ups via our Merck Ventures Investment Fund and our Accel-
erator programs. The topic of innovation is at the forefront of all our
activities. Externally, this is becoming particularly apparent through
our new Innovation Center at Group headquarters in Darmstadt,
which is to develop into a nucleus of creativity at Merck. The activities
listed hold significant opportunities for us in the medium to long term,
beyond the underlying forecast period.
The 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.
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.
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Combined Management Report
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.
Overall view of the risk and
opportunity situation and
management assessment
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.
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.
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.
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Combined Management Report
Nevertheless, potentially critical negative impacts of the litigation
on the financial position cannot be ruled out.
In the Performance Materials business sector, Merck is involved
in a legal dispute with JNC Corporation, Japan, (JNC). JNC claims
that by manufacturing and marketing certain liquid crystals mixtures,
Merck has infringed JNC patents. 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.
Report on Expected Developments
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.
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.
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.
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.
Information technology risks
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Report on Expected Developments
- Moderate increase
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.
- Foreign exchange effect primarily resulting from several emerging market
currencies
Higher EBITDA pre and positive effects in working capital offset higher
investments in property, plant and equipment as well as digitalization initiatives
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.
EBITDA PRE
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
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.
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.
Combined Management Report
-
Report on Expected Developments
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
€ million
Actual results
2018
Forecast for 2019
Key assumptions
Net sales
BUSINESS FREE CASH FLOW
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.
-First-time application of IFRS 16 with a positive contribution of around
€ 130 million
- Growth driven by Healthcare and Life Science, which more than offsets the
decline of Performance Materials
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%
- Negative foreign exchange
effect of between -3% and
-4%
EBITDA pre
Business free
cash flow
3,800
2,508
Key assumptions
- Growth driven by Life Science and Healthcare, which more than offsets the
decline of Performance Materials
-
Foreign exchange effect primarily resulting from several emerging market
currencies
Pronounced organic percent-
age growth in the low teens
range
151
NET SALES
6,246
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
- Decline in EBITDA pre
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.
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).
Corporate and Other
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.
- Neutral foreign exchange effect due to the development of the exchange rate
of the euro against the U.S. dollar
-
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
- Drop in liquid crystal prices cannot be offset by growth in other businesses
and active cost management
low double-digit percentage
decline
EBITDA pre
Business free
cash flow
786
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
- Foreign exchange effect
roughly neutral
Actual results
2018
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.
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
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
Additional Information on
Merck KGaA in accordance with the
German Commercial Code (HGB)
The management report of Merck KGaA has been combined with the
Group management report. The annual financial statements and the
combined management report of the 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, 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.
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
Combined Management Report
Statement on Corporate Governance
Effects of material company agree-
ments on the net assets, financial
position and results of operations
SPIN-OFF OF OPERATING BUSINESS ACTIVITIES OF THE
BUSINESS SECTORS AND TEMPORARY LEASEBACK OF THE
SPUN-OFF BUSINESS ACTIVITIES
As part of the strategic development of Merck KGaA, the existing
operating activities of the Healthcare, Life Science and Performance
Materials business sectors within Merck KGaA together with the 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.
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.
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
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.
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.
156
The company is not authorized to acquire its own shares.
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
Report in accordance with Section 315a (1) of the German Commercial Code (HGB)
155
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.
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.
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.
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.
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.
€ million
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.
153
- Earnings contributions from the strategic alliance with GlaxoSmithKline plc of
approximately € 100 million and owing to license payments for ErbituxⓇ that
were lower than expected
- Negative foreign exchange effect due to trend of exchange rates on several
growth markets
- Rise in EBITDA pre
- Positive net working capital effects (including positive effects from the sale of the
Consumer Health business)
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.
-
EBITDA PRE
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.
1 Bintrafusp alfa is the proposed International Nonproprietary Name (INN) for bifunctional immunotherapy M7824.
Bintrafusp alfa is currently in clinical trials and not approved for any indication worldwide.
152
Combined Management Report
Report on Expected Developments
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.
In 2019, we expect business free cash flow of the Healthcare business
sector to show an increase in the low twenties percentage range.
-
- Expected substantial earnings contributions from our new products, especially
MavencladⓇ, more than offset negative mix effects associated with the projected
decline of RebifⓇ sales
FORECAST FOR THE PERFORMANCE MATERIALS BUSINESS SECTOR
EBITDA pre
1,556
Moderate organic growth
- Moderately negative foreign
exchange effect
- Moderate increase in research and development expenses due to the develop-
ment of our pipeline, but down in relation to sales
- Pronounced organic growth
rate in the low-to-mid-twen-
ties percentage range
-Strongly negative foreign
exchange effect
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
-
-
Negative foreign exchange effect due to trend of exchange rates on several
growth markets
Business free
cash flow
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).
measures.
Actual results
-
Negative foreign exchange effect, particularly on account of the development
of emerging market currencies
Improved EBITDA pre
- Increase in investments in property, plant and equipment in strategic projects
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.
- In addition, positive contribution to organic income growth from the switch to
IFRS 16
EBITDA PRE
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
Combined Management Report
FORECAST FOR THE LIFE SCIENCE BUSINESS SECTOR
Report on Expected Developments
In 2019, the Life Science business sector is expected to show a sharp
increase in organic EBITDA pre totaling nearly double-digit growth
Organic income growth on account of the expected sales growth and slight
margin expansion
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.
- 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
€ million
6,185
EBITDA pre
Business free
cash flow
1,840
1,393
Forecast for 2019
Net sales
- Organic growth slightly above
medium-term market growth
of 4% p.a.
- Process Solutions is expected to remain the main driver of growth, followed by
Applied Solutions
Key assumptions
Moderately below 2018 levels
2018
- Organic growth ranging from
strong to a double-digit per-
centage rate
- Slightly negative foreign
exchange effect
- Moderately negative foreign
exchange effect
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.
195
Report of the Supervisory Board
193
166
Capital Structure and Corporate Bodies of Merck KGaA
165
CORPORATE GOVERNANCE
163-196
CORPORATE GOVERNANCE
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.
Statement on Corporate Governance
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
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.
Forecast 2019
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
RESULTS OF OPERATIONS
Combined Management Report
157
in accordance with the sector-specific ERP introduction at an individual
time to the OpCo in question in a targeted manner. On the basis of
the operating lease contract, Merck KGaA will temporarily continue
to operate the spun-off business as a leaseholder in its own name
and for its own account. Once the relevant ERP systems have been
introduced for the respective OpCo, the business lease with this OpCo
will be terminated and the business previously leased out will pass
to the OpCo.
The aforementioned spin-off and business leasing contracts form
part of an overall entrepreneurial concept. They were submitted to
the General Meeting of Merck KGaA for approval on April 27, 2018
(2018 Annual General Meeting) as a coherent restructuring measure
and approved by it. The gradual implementation of the measures is
due to be completed in 2020. In 2018, the Healthcare OpCo changed
its legal form to that of a German corporation with general partners
("Kommanditgesellschaft auf Aktien") and has since been trading
under the name of Merck Healthcare KGaA, Darmstadt.
The table below shows the balance sheet of Merck KGaA after the
operating spin-off, holding company spin-off and temporary lease-
back as of 0:00 hours on January 1, 2018. The impact in fiscal 2018
of the spin-offs was mainly lower depreciation, amortization and
write-downs of fixed assets and lower pension expenses. On the
other hand, business lease expenses and the passing-on of costs for
personnel-related provisions led to an increase in other operating
expenses.
€ million
Objectives of the Supervisory Board with respect to Its
Composition and Profile of Skills and Expertise
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.
Corporate Governance
Board of Partners of
E. Merck KG
165
MERCK KGAA
For a clearer understanding, the following gives a general expla-
nation of the application of German company law at Merck KGaA
with additional references to the General Meeting and shareholder
rights.
Merck KGaA 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.
AktG), including in particular the adoption of the annual financial
statements (section 286 (1) AktG).
The German Corporate Governance Code is geared toward the condi-
tions found in a German stock corporation ("Aktiengesellschaft" or
"AG") and does not take into consideration the special characteristics
of a corporation with general partners ("Kommanditgesellschaft auf
Aktien" or "KGaA") such as Merck KGaA. Given the structural differ-
ences between an AG and a KGaA, several recommendations of the
German Corporate Governance Code are to be applied to a KGaA
only in a modified form. Major differences between the two legal
forms exist in terms of liability and management. While, in the case
of an AG, only the AG is liable as a legal entity, the general partners
of a KGaA also have unlimited personal liability for the company's
obligations (section 278 (1) of the German Stock Corporation Act -
"AktG"). At Merck KGaA, this pertains to both E. Merck KG - which
pursuant to Article 8 (5) of the Articles of Association is excluded
from management and representation - as well as to the managing
general partners, who together make up the Executive Board of
Merck KGaA. The members of the Executive Board of Merck KGaA
are therefore subject to unlimited personal liability. Unlike an AG,
their executive authority is not conferred by the Supervisory Board,
but rather by their status as general partners. Consequently, in addition
to other responsibilities typical of the supervisory board of an AG
(see description of the procedures of the Supervisory Board on pages
186 et seq.), the supervisory board of a KGaA does not have the
authority to appoint the management board, draw up management
board contracts or specify compensation of the management board.
This legal form also involves special features with regard to the
General Meeting. For example, in a KGaA, many of the resolutions
made require the consent of the general partners (section 285 (2)
Joint report of the Executive Board and
the Supervisory Board according to
section 3.10 of the German Corporate
Governance Code including the
Declaration of Conformity
The Statement on Corporate Governance contains the Declaration
of Conformity, relevant information on practices within the com-
pany, a description of the procedures of the corporate bodies, as
well as targets for the percentage of positions held by women as
well as the diversity policy.
Statement on Corporate Governance
Statement on Corporate Governance
Corporate Governance
166
MONITORING
Further information can be found under "Merck KGaA" on page 166.
Capital Structure and Corporate Bodies of Merck KGaA
MONITORING
Supervisory Board
General Meeting
397,196,314.35 €
E. Merck KG holds
the equity interest
The general partner
168,014,927.60 €
Shareholders hold
the share capital
General partners with no equity interest
Executive Board of Merck KGaA
565,211,241.95 €
Total capital of Merck KGaA
Corporate Bodies of Merck KGaA
Capital Structure and
ASSETS
A. Fixed assets
Intangible assets
Tangible assets
Net retained profit: shareholders
B. Current assets
28.5
20,015.3
168.0
397.2
3,813.7
701.6
168.0
397.2
3,813.7
701.6
60.3
60.3
187.1
187.1
5,327.9
5,327.9
B. Provisions
Provisions for pensions and other post-employment benefits
200.4
110.7
Other provisions
1,112.1
946.1
1,312.5
1,056.8
C. Liabilities
Financial liabilities
Trade accounts payable
Other liabilities
1,500.0
1,500.0
1,462.6
Financial assets
1,762.6
1.4
Inventories
Trade accounts receivable
Other receivables and other assets
Cash and cash equivalents
C. Prepaid expenses
Total ASSETS
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.
EQUITY AND LIABILITIES
A. Net equity
Subscribed capital
General partner's equity
Capital reserves
Retained earnings
Profit carried forward E. Merck KG
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
28.5
19,939.5
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.
292.1
11,820.7
5.3%
315
181
134
73.7%
1,293
892
401
45.0%
3
1
2
142.9%
34
28
6
21.1%
37
688
725
32.5%
18,670
239
18,148
490
522
in %
2.9%
-251
-51.2%
899
21,040
1,173
-23.4%
17,532
16,486
1,046
6.3%
2,336
1,763
573
-274
19,940
1,100
5.5%
1,312
-193
288
200
87
832
1,112
-280
1,119
in %
43.2%
-25.2%
14,575
13,281
1,295
9.8%
1,500
446
1,500
292
0.0%
-14.7%
€ million
1
5,329
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
5,328
Other provisions
Financial liabilities
Trade accounts payable
Other liabilities
Deferred income
Change
Dec. 31, 2018
Dec. 31, 2017
€ million
Liabilities
12,629
Dec. 31, 2017
Change
-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%
Investment income/Write-downs of financial assets
1,234
847
387
−1,305
Personnel expenses
18.0%
-271
Change
€ million
Sales
Other income
2018
2017
€ million
4,785
45.7%
4,807
in %
-0.5%
172
212
-40
- 18.9%
Cost of materials
-1,776
-1,505
-22
Financial result
-262
-201
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.
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".
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.
The Financial result deteriorated due to lower fair values of plan
assets.
ASSETS
-116.3%
-5.3%
€ million
Intangible assets
Tangible assets
Financial assets
Current assets
Inventories
Trade accounts receivable
Other receivables and other assets
Cash and cash equivalents
Prepaid expenses
Fixed assets
Dec. 31, 2018
-9
162
-61
30.3%
Profit before profit transfers and taxes
584
917
-334
292.1
11,489.1
13,281.3
-36.4%
171
Profit transfers
-553
99
-17.9%
Taxes
32
-193
225
Profit after profit transfers and taxes
-454
11,489
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.
52.7%
9.9%
307
4,807
4,785
308
in %
-0.5%
-23
4,500
4,477
€ million
2017
2018
Change
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
1
0.3%
-22
-0.5%
162
Combined Management Report
Net sales of the Life Science business sector were slightly above the
previous year's figure. The Research Solutions (-3.0%) and Applied
Solutions (-5.0%) business units showed a slight decline in sales,
which was offset by the increase in net sales in the Process Solutions
159
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
Combined Management Report
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.
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.
17.9
-0.5%
in %
-4.4%
-193
170
-22
467
4,807
637
4,785
€ million
2017
4,341
2018
4,148
Change
36.5%
20,015.3
158
Combined Management Report
1,399
-13
-0.9%
309
4,785
228
82
35.8%
4,807
1,386
-22
The share of sales with other Group companies (Group sales)
amounted to 93.6% in 2018 (2017: 93.6%).
€ million
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.
Outside Germany
Germany
Total
154
1,141
€ million
-0.5%
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.
0.4%
777
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
Other sales
3
Total
2018
2017
€ million
2,310
2,404
-94
in %
-3.9%
780
Change
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%).
Other sales mainly included intragroup cross-charging for IT services,
rent and other administrative services.
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).
196
48.0%
Life Science
46
35
11
31.4%
Performance Materials
260
220
40
18.2%
Other R&D spending that cannot be allocated to individual business sectors
Total
13
22
-9
-40.9%
408
604
Healthcare
in %
18
17
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%).
21,040
19,940
-1
1,100
The net assets and financial position of Merck KGaA changed only
slightly in comparison with the previous year. With a 5.5% increase
in total assets, the equity ratio amounted to 25.3% (2017: 26.7%).
The operating spin-off led to a decline in intangible and tangible
assets, while financial assets increased; see section "Effects of material
company agreements on the net assets, financial position and results
of operations".
The increase in current assets (€ + 573 million) was mainly attri-
butable to higher receivables from affiliates for profit transfers and
other group cross-charging.
923
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".
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
€ million
The rise in other liabilities resulted primarily from the clearing
account with the Merck Financial Services GmbH, Darmstadt.
685
-6.1%
5.5%
34.7%
3,536
3,213
3,072
2,674
2,515
671
648
590
574
79
128
10,983
10,473
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.
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
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.
238
3,756
2017
Risks and opportunities
Total
Combined Management Report
Additional Information on Merck KGaA in accordance with the German Commercial Code (HGB)
161
2018
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
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
Other
a dividend of € 1.25 per share.
Logistics
Research
Sales and marketing
Forecast for Merck KGaA
Average number of employees during the year
Production
Administration
•
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;
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.
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:
Adjustment criteria for lowering profit sharing could include the
following:
• Violations of internal rules and guidelines (for example, the Merck
Code of Conduct), legislation or other binding external requirements
in the area of responsibility;
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.
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).
Extraordinary performance in the execution of especially important
projects or the achievement of other exceptionally important
objectives in the area of responsibility;
•
3
Three-year average of the profit after tax
X
X
individual
of the E. Merck Group
Payout 2018
(€)
Profit after tax
Profit after tax
Profit after tax
factor for
+
+
FY 2016
FY 2017
FY 2018
Adjustment
performance
0.7-1.3
a) the performance of the Merck share price compared with the
performance of the DAX® with a weighting of 50%,
•
Statement on Corporate Governance
FY 2017
FY 2018
FY 2019
FY 2020
Grant in €
Reference
Merck share
price at the
Corporate Governance
beginning
number of
MSUS for
the grant
Performance cycle
Performance
Individual
rate in %
of the Merck
share price
vs. the DAX®
Potential
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;
172
b) EBITDA pre margin, as a proportion of a defined target value
with a weighting of 25%, and
Failure to implement particularly important projects or to reach
other exceptionally important targets in the area of responsibility;
• Clear failure to achieve targets for relevant key performance indi-
cators in the area of responsibility.
Merck Long-Term Incentive Plan
MERCK LONG-TERM INCENTIVE PLAN (LTIP)
Key performance indicators
• Share price performance relative to the DAX® (50% weighting)
Cycle
Limit
c) the organic sales growth of the Merck Group as a proportion
of a defined target value with a weighting of 25%.
Reference price (share price
for conversion into numbers
or for payment)
• Organic sales growth (25% weighting)
Three years
Absolute capped amount totaling 250% of the individual grant
Average closing price of Merck shares in XetraⓇ trading during the last 60 trading days prior
to the beginning or the end of the performance cycle
The Long-Term Incentive Plan is based on a three-year 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:
At the beginning of the performance cycle, for each Executive Board
member the Personnel Committee sets an individual grant in euros.
This grant is then divided by the definitive reference share price at
the beginning of the performance cycle, resulting in the number of
MSUS they could be eligible to receive. The final number of MSUS
that are actually allocated to the Executive Board members after the
performance cycle has expired depends on the development of three
weighted key performance indicators over the three-year perfor-
mance cycle:
• EBITDA pre margin (25% weighting)
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.
• Distribution of responsibilities among Executive Board members
Granting of loans and salary advances
Individual absolute capped amount
(The compensation report is part of the notes to the audited consol-
idated financial statements).
COMPENSATION PHILOSOPHY
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.
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.
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.
The following principles are followed or taken into account when
it comes to the specific structure of the compensation, the setting of
individual compensation, the selection of the key performance indi-
cators and the structure of payout and allocation terms:
REGULATORY REQUIREMENTS AND PRINCIPLES OF
Compensation report
GOOD CORPORATE GOVERNANCE
LONG-TERM GROUP STRATEGY
The execution of the long-term Group strategy is promoted through
the selection of appropriate, ambitious key performance indicators
for performance-related compensation. Against this background, our
performance-related compensation components (profit sharing and
Merck Long-Term Incentive Plan) orient towards the key performance
indicators of the Group.
LONG-TERM INTERESTS OF OUR SHAREHOLDERS
The long-term interests of our shareholders are taken into account
through a significantly high amount of variable, performance-related
compensation as a proportion of total compensation as well as the
compensation system's strong focus on the share price. The per-
formance of the Executive Board members should be properly
recognized, with the failure to meet targets leading to a noticeable
reduction in performance-related compensation.
In our company, unlike publicly listed German stock corporations, it
is not the Supervisory Board, but the Board of Partners of E. Merck KG
that decides on the amount and composition of compensation
received by our Executive Board members. The Board of Partners
has assigned this task to its Personnel Committee. The Personnel
Committee is thus primarily responsible for the followings topics as
they relate to our Executive Board and the compensation thereof:
• Structure and examination of the performance-independent and
performance-related compensation elements
•
•
Contract terms of members of the Executive Board
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.
Assumption of honorary offices, board positions or other sideline
activities
Statement on Corporate Governance
168
EBITDA
pre margin
Corporate Governance
Statement on Corporate Governance
167
THE GENERAL MEETING OF MERCK KGAA
The twenty-third General Meeting of Merck KGaA was held on April 27,
2018 in Frankfurt am Main, Germany. At 59.25%, the proportion of
share capital represented at the meeting was slightly lower than in the
previous year. In 2017, the proportion of share capital represented
was 64.03%.
In particular, the Annual General Meeting passes resolutions con-
cerning the approval of the annual financial statements, the appro-
priation of net retained profit, the approval of the actions of the
Executive Board members and the Supervisory Board members, as
well as the election of the auditor. Changes to the Articles of Asso-
ciation likewise require the adoption of a resolution by the General
Meeting. The shareholders of Merck KGaA exercise their rights at the
General Meeting. They may exercise their voting rights personally,
through an authorized representative or through a proxy appointed by
the company. The proxy is in attendance throughout the duration of
the General Meeting. All the documents and information concerning
upcoming General Meetings (including a summary explanation of
shareholder rights) are also posted on our website. Moreover, the
General Meeting is webcast live on the Internet from its commence-
ment until the end of the speech by the Chairman of the Executive
Board. The introductory speeches by the Chairman of the Executive
Board and the Chairman of the Supervisory Board are recorded in
order to make them available to interested members of the public
at any time after the meeting. In this way, we are satisfying the high
transparency requirements of the Merck Group.
Corporate Governance
"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.
Darmstadt, February 26, 2019
DECLARATION OF CONFORMITY
In accordance with section 161 AktG, applying the provisions of the
German Corporate Governance Code correspondingly, the Executive
Board and the Supervisory Board issued the following Declaration of
Conformity with the recommendations of the Government Commission
of the German Corporate Governance Code:
For the Executive Board
For the Supervisory Board
s. Stefan Oschmann
s. Wolfgang Büchele
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."
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
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.
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:
ADDITIONAL BENEFITS
Fixed compensation
The fixed compensation received by the members of the Executive
Board comprises fixed and non-performance related amounts that
are paid in the form of 12 equivalent monthly installments.
Additional benefits
In addition, the members of the Executive Board receive non-
performance related additional benefits. These consist mainly of
contributions to insurance policies, personal security expenses and
a company car, which they may use privately.
PERFORMANCE-RELATED COMPENSATION
Performance-related compensation comprises profit sharing as well
as the Merck Long-Term Incentive Plan. Both performance-related
compensation components are based on multi-year steering param-
eters. The regulatory requirements of the German Stock Corporation
Act and the German Corporate Governance Code are taken into
account, and particular recognition is given for sustainable corporate
development.
170
PERFORMANCE-INDEPENDENT COMPENSATION AND
Corporate Governance
Profit sharing
PROFIT SHARING
Key perfor-
mance indicator
Period
Limit
Three-year average of the profit after tax of the
E. Merck Group
Three years
Statement on Corporate Governance
OVERVIEW OF THE STRUCTURE AND THE COMPONENTS
OF THE COMPENSATION SYSTEM
¹Excluding additional benefits and company pension.
Performance-
independent
Corporate Governance
Statement on Corporate Governance
169
COMPENSATION ELEMENTS AND COMPENSATION STRUCTURE1
Performance-
related
compensation
Merck Long-Term Incentive Plan
Fixed compensation
• Performance Share Plan based on virtual shares (Merck Share Units)
Key performance indicators: share price performance relative to the DAX®
(50%), EBITDA pre margin (25%), organic sales growth (25%)
• Absolute capped amount totaling 250% of the individual grant
Profit sharing
•
Key performance indicator: Three-year average of the profit after tax of the
E. Merck Group
• Consideration of individual performance via the performance factor in a range
from 0.7 to 1.3
• Individual absolute capped amount
•
Organic
sales
growth
2,860
x
1,240
1,401
168
1,569
1,369
166
9,802
10,955
6,958
1,535
16,760
7,025
17,980
1The percentage entitlement increases until retirement by two percentage points per year of service up to 70%.
Corporate Governance
Statement on Corporate Governance
175
BENEFITS IN THE EVENT OF TERMINATION OF DUTIES AS
AN EXECUTIVE BOARD MEMBER
In the event of the early termination of the employment relationship,
without notice for good cause, the employment contracts of the
Executive Board members stipulate a cap on severance pay in
accordance with the recommendations of the German Corporate
Governance Code. Pursuant to this, payments in connection with the
termination of an Executive Board member's duties shall not exceed
twice the annual total compensation or constitute compensation for
more than the remaining term of the employment contract (sever-
ance cap). If an Executive Board member's duties prematurely end
due to the termination of the employment contract either by the com-
pany or the Executive Board member before the performance cycle
of an open tranche in the Merck Long-Term Incentive Plan expires,
the obligations resulting from the plan are no longer applicable.
PAYMENTS TO FORMER EXECUTIVE BOARD MEMBERS AND
THEIR SURVIVING DEPENDENTS
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).
MISCELLANEOUS
The total compensation of the Executive Board of Merck KGaA
includes both the compensation received from E. Merck KG as well
as possibly also from subsidiaries consolidated in the Group financial
statements. Should members of the Executive Board be held liable
for financial losses while executing their duties, under certain circum-
stances this liability risk is covered by a D&O insurance policy from
Merck KGaA. The D&O insurance policy has a deductible in accor-
dance with the legal requirements and the recommendations of the
German Corporate Governance Code.
PERFORMANCE-RELATED COMPENSATION IN 2018
The compensation system for our Executive Board is geared to suit-
ably rewarding the performance of Executive Board members in
terms of sustainable corporate development and the creation of
shareholder value, whereas the failure to meet targets leads to a
noticeable decrease in performance-related compensation. In response
to the suggestions from our shareholders and to further increase the
transparency of the Executive Board compensation system, the follow-
ing tables present the average individual profit-sharing rates and the
performance corridors for the key performance indicators used in the
Merck Long-Term Incentive Plan.
LOANS AND ADVANCES
Total
65
490
Walter Galinat (left on: September 30, 2018)
421
2,512
2,958
1,600
1,599
1,610
11,284
12,987
¹For 2017, in addition to the current service cost of € 396 thousand for Kai Beckmann occurred a past service revenue of € 2,424 thousand (total service revenue: € 2,028 thousand).
2 For 2017, in addition to the current service cost of € 398 thousand for Belén Garijo occurred a past service cost of € 2,184 thousand (total service cost: € 2,582 thousand).
3 For 2017, in addition to the current service cost of € 426 thousand for Marcus Kuhnert occurred a past service cost of € 1,178 thousand (total service cost: € 1,604 thousand).
Defined-benefit obligations
The members of the Executive Board did not receive any advances
or loans in fiscal 2018.
€ thousand
IFRS
Pensionable Percentage
compensation entitlement
Service cost of pension
obligations earned in the
current year
2017
Present value of the
defined-benefit pension
obligation as of Dec. 31
2018
2017
2018
Stefan Oschmann¹
750
64
Member of the Executive Board
426
176
Statement on Corporate Governance
factor for
individual perfor-
mance 2018
1.49
1
1.13
1
0.97
1
0.89
1
1.57
1.3
0.89
1
The amount of profit-sharing for Belén Garijo was increased by a
factor of 1.3. The following positive criterion was used to justify the
increase in profit participation:
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.
• Success with the multi-year repositioning of the R&D area and
significant productivity increases in pharmaceutical research.
.
•
Many important gains in the pharmaceutical pipeline (BavencioⓇ,
Evobrutinib, TGF-ẞ trap).
Approval and market introduction of Cladribin/MavencladⓇ in the
European Union.
Today the Merck pipeline is seen by external experts as having very
high value, and this also significantly eases the task of winning
top-level talent for Merck.
Performance
Average profit-
sharing rate in
per mille in 2018
Marcus Kuhnert
Belén Garijo
Profit sharing
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.
Key performance indicator
(€ million)
Profit after tax of the E. Merck Group
2015
1,066
2016
1,559
2017
2018
2,549
Corporate Governance
3,324
1,724
Three-year average profit after tax of the E. Merck Group
(2016-2018)
2,477
The amount of the individual per mille profit-sharing rates is stag-
gered at intervals. This staggering incentivizes the achievement of
an average profit after tax of more than € 1 billion more strongly
than amounts below € 1 billion. However, insofar as the average
profit after tax is more than € 1.5 billion, the amount greater than
€ 1.5 billion is not taken into account when determining the profit-
sharing payment. The average profit-sharing rates in per mille for
the members of the Executive Board in 2018 were as follows:
Member of the Executive Board
Stefan Oschmann
Udit Batra
Kai Beckmann
Walter Galinat (left on: September 30, 2018)
Three-year average profit after tax of the E. Merck Group
(2015-2017)
400
4,637
4,162
Kai Beckmann
Walter Galinat (left on: September 30, 2018)
Belén Garijo
Marcus Kuhnert
Maximum limit
Fixed
compensation
Maximum profit
sharing limit
Merck Long-Term
Incentive Plan
Maximum
limit overall
compensation
1,300
4,810
5,638
9,800
1,000
3,640
4,263
8,000
1,000
Udit Batra
Stefan Oschmann
Member of the Executive Board
€ thousand
Weighting: 50%
Weighting: 25%
Weighting: 25%
Reference
Merck share
price at
the end
0%-200%
Amount paid
out in € (0%-
250% of the
grant in €)
The Merck Long-Term Incentive Plan thus links two key performance
indicators derived from the strategy with an external, relative key
performance indicator. On the one hand, this creates an incentive to
achieve strategic objectives. On the other hand, the strong share
price orientation takes into account the company's long-term devel-
opment prospects and the expectations of our shareholders. To pre-
vent distortions as a result of exceptional factors as well as to directly
reflect the performance of the Executive Board members, the EBITDA
pre margin is used.
Depending on the performance of the key performance indicators,
after the three-year performance cycle between 0% and 150% of
the provisionally promised MSUs are finally allocated. The value of
these MSUS is paid out to the Executive Board in the year after the
three-year performance cycle has ended. For this, the final allocated
number of MSUS is multiplied by the definitive reference share price
at the end of the performance cycle. The maximum increase in the
share price is limited to 200% of the reference price at the beginning
of the performance cycle, thus limiting participation in external
effects that contribute to share price increases. Apart from setting a
limit on the final number of allocated MSUS and on the applicable
share price increase, the overall Merck Long-Term Incentive Plan
payment is limited to 250% of the individual grant. If targets are
clearly missed, it is also possible that absolutely no payment is made
from the Merck Long-Term Incentive Plan (0%).
Clawback provision
3,120
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.
To further increase the transparency of the Executive Board com-
pensation system, the performance corridor for the key performance
indicators used in the Merck Long-Term Incentive Plan will be subse-
quently disclosed. However, the company will continue to refrain from
publishing this performance corridor in advance as this could permit
market-related and competitively relevant conclusions to be drawn
about strategic objectives.
Corporate Governance
Statement on Corporate Governance
173
Share Ownership Guideline
A Share Ownership Guideline was introduced in 2017. This obligates
the Executive Board members, for the duration of their employment
relationship, to permanently hold Merck shares in an amount equal
to 100% of their annual gross fixed compensation. Owing to his
position as Chairman of the Executive Board, Stefan Oschmann is
obligated to hold a higher amount, or at least 200% of his annual
gross fixed compensation, in Merck shares. The duty to provide
evidence of the complete number of shares must be met no later
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.
OVERALL COMPENSATION LIMIT
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.
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.
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.
3,575
8,000
800
IFRS
Service cost of pension
Contribution
level
obligations earned in the
current year
Present value of the
defined-contribution pension
obligation as of Dec. 31
2017
2018
2017
2018
400
Total
379
633
990
400
396
395
3,977
4,402
400
398
394
400
Number
of MSUS
actually
achieved
0%-150%
Marcus Kuhnert³
Kai Beckmann¹
2,860
3,300
8,000
1,100
3,900
4,675
8,000
3,300
8,000
PENSION ENTITLEMENTS
Belén Garijo²
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.
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.
1 For accounting purposes, this corresponds to a defined-benefit obligation within the meaning of IAS 19.8.
174
Corporate Governance
Statement on Corporate Governance
The contribution amounts or pensionable compensation and the per-
centage obligation as well as the pension provisions and service costs
are listed in the following tables:
Defined-contribution obligation
€ thousand
Member of the Executive Board
Udit Batra
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.
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.
900
Total
Additional benefits
2018 (min.) 2018 (max.)
2018
2017
2018 (min.) 2018 (max.)
2018
1,000
1,000
Fixed compensation
2017
Benefits granted (€ thousand)
Member of the Executive Board
(left on: September 30, 2018)
Walter Galinat
Member of the Executive Board
Kai Beckmann
9,341
1,438
5,316
5,814
13,303
2,855
7,981
36
8,711
81
1,000
2,400
2,400
Profit sharing
626
626
626
832
1,081
1,081
1,081
1,036
Total
26
26
26
32
81
600
600
600
800
1,000
81
3,120
400
400
3,640
2,800
2,800
4,810
3,700
3,700
Profit sharing
1,038
1,038
1,038
1,012
1,486
1,486
1,486
1,464
Total
38
38
38
12
186
Multi-year variable compensation
400
LTI 2017 (2017 to 2019)
1,623
379
1,369
1,369
1,369
1,401
Total compensation
Service cost
8,941
1,038
4,916
5,435
11,934
1,486
6,612
7,310
Total
4,263
1,078
5,638
1,426
LTI 2018 (2018 to 2020)
2,146
2,200
2,200
2,860
Multi-year variable compensation
2,860
2,200
2,200
3,900
3,900
3,000
Profit sharing
926
926
926
821
1,166
1,166
1,166
1,149
Total
26
26
26
21
LTI 2017 (2017 to 2019)
66
1,779
LTI 2018 (2018 to 2020)
1,604
394
10,135
394
1,560
394
6,643
8,510
Total compensation²,3
2,582
Service cost
7,086
926
3,961
4,277
9,741
1,166
6,249
5,928
Total
3,300
835
4,675
1,183
1,256
900
900
900
6,786
626
3,661
4,288
7,776
1,081
4,385
395
4,780
2,769
Total compensation¹
-2,028
Service cost
4,797
3,300
835
3,575
904
LTI 2018 (2018 to 2020)
1,256
1,361
LTI 2017 (2017 to 2019)
Multi-year variable compensation
395
1,476
395
8,171
168
166
800
1,100
2018 (min.) 2018 (max.)
2018
2017
2018 2018 (min.) 2018 (max.)
1,100
1,100
66
66
49
Additional benefits
1,100
186
Fixed compensation
Benefits granted (€ thousand)
Member of the Executive Board
Marcus Kuhnert
Member of the Executive Board
6,952
792
3,827
4,456
166
166
2017
186
164
Additional benefits
14,391
1,320
2,200
26
600
2018
Walter Galinat
-388
4,797
1,361
14,954
1,430
2,400
36
1,000
2017
Kai Beckmann
2,387
4,385
904
15,590
835
1,430
3,661
(left on: September 30, 2018)
1,100
2017
Belén Garijo
2,969
6,249
1,183
20,386
1,870
3,900
66
1,100
2018
91
4,288
1,256
13,804
1,320
2,200
32
800
2017
2,051
2,400
81
1,000
164
1,300
2017
Stefan Oschmann
3,536
6,612
1,426
24,584
2,255
3,700
186
1,300
2018
Member of the Executive Board
(€ thousand)
(€ thousand)
Time value²
(€ thousand)
MSUS
Number of
Grant value
(€ thousand) (€ thousand)
(€ thousand) (€ thousand)
3,700
2,255
23,581
2,146
2018
-335
5,435
1,623
17,830
1,705
2,800
12
1,000
2017
49
Udit Batra
4,916
1,078
18,588
1,705
2,800
38
1,000
2018
-375
7,310
2,791
421
3,000
19,555
based com-
for share-
in the period
Expense
(+)/income
(-) recorded
Performance-independent
components
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.
TOTAL COMPENSATION
Statement on Corporate Governance
Corporate Governance
178
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.
116.7%
29%
31%
28%
25%
(internal key performance indicator)
EBITDA pre margin
19.5%
-16.1%
50%
Performance-related components
0%
Total
Profit sharing
2018 (min.) 2018 (max.)
1,000
1,000
2018
1,000
1,000
2017
2018 (min.) 2018 (max.)
1,300
1,300
1,300
1,300
Fixed compensation
2018
2017
Benefits granted (€ thousand)
Member of the Executive Board
Udit Batra
Chairman of the Executive Board
Merck Long-Term Incentive Plan
(with a long-term incentive effect)
incentive
effect)
benefits
Fixed com- Additional
pensation
long-term
(without a
pensation³
-20%
(external key performance indicator)
Share price performance relative to the DAX®
4,277
1,256
13,804
1,320
2,200
21
800
2017
Marcus Kuhnert
2,203
3,961
835
14,391
1,320
2,200
26
900
2018
-376
5,928
1,779
-385
Total
2018
2017
5,900
6,000
Key performance indicator¹
ment Merck LTIP
tranche 2015
Stefan Oschmann
BENEFITS GRANTED FOR THE FISCAL YEAR
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.
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
179
Statement on Corporate Governance
Corporate Governance
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.
1,870
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.
-1,768
32,035
15,937
29,784
6,261
9,421
107,930
103,528
9,900
9,900
17,200
16,300
314
423
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.
421
Belén Garijo
5,881
183
Statement on Corporate Governance
Corporate Governance
Since 1995, KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin,
has been the audit firm for the statutory audit of the annual financial
statements and consolidated financial statements of Merck KGaA.
The auditor responsible for auditing the consolidated financial state-
ments changes regularly in accordance with the statutory require-
ments. Bodo Rackwitz is currently leading the audit engagement and
has been the auditor in charge of the engagement since fiscal 2015.
The Supervisory Board had KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin, provide a statement regarding the scope of the business,
financial, personal, and other relationships between KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin, its bodies and head auditors,
and Merck KGaA, its Group companies and the members of their
bodies (independence declaration). The statement also covers the
scope of the services provided by KPMG AG Wirtschaftsprüfungs-
gesellschaft, Berlin, in the previous fiscal year as well as the services
(other than auditing services) that are contracted for the upcoming
year (especially consultancy services) for Merck KGaA and its sub-
sidiaries. Having examined the declaration, the Supervisory Board
has found no grounds to doubt the independence of KPMG AG
Wirtschaftsprüfungsgesellschaft, Berlin. Neither party identified any
conflicts of interest.
ACCOUNTING AND AUDITS OF FINANCIAL STATEMENTS
Merck KGaA prepares its consolidated financial statements and com-
bined management report in accordance with International Financial
Reporting Standards (IFRSS), as applicable in the EU, as well as the
supplementary rules applicable under section 315e (1) of the German
Commercial Code (HGB) and as stipulated by our Articles of Associ-
ation. The consolidated financial statements and the combined man-
agement report are prepared by the Executive Board and examined
by an auditor, taking into account the generally accepted standards
for the audit of financial statements promulgated by the Institute of
Public Auditors in Germany (Institut der Wirtschaftsprüfer – IDW).
The Supervisory Board commissioned KPMG AG Wirtschaftsprü-
fungsgesellschaft, Berlin, to audit the consolidated financial statements
and the combined management report for 2018. Moreover, the Super-
visory Board agreed with KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin, that the auditor shall inform the Supervisory Board without
delay of any grounds for disqualification or bias occurring during the
audit if these cannot be immediately rectified. Additionally, the auditor
shall immediately report to the Supervisory Board any findings and
issues which emerge during the audit that have a direct bearing upon
the tasks of the Supervisory Board. The auditor shall inform the
Supervisory Board or note in the audit report any circumstances
determined during the audit that would render inaccurate the Decla-
ration of Conformity made by the Executive Board and the Supervisory
Board. It has also been agreed with the auditor that in order to assess
whether the Executive Board has fulfilled its obligations in accordance
with section 91 (2) AktG, the audit will also cover the company's
early warning risk identification system. Moreover, the auditor is
required to examine and evaluate the accounting-relevant internal
control system insofar as this is necessary and appropriate for
assessing the accuracy of financial reporting.
421
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.
DEALING WITH INSIDER 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.
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.
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.
REPORTING
Information on corporate
governance practices
Statement on Corporate Governance
Corporate Governance
182
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.
COMPANY BY MEMBERS OF THE EXECUTIVE BOARD AND
OF THE SUPERVISORY BOARD
OWNERSHIP, PURCHASE OR SALE OF SHARES IN THE
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).
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).
FURTHER REPORTS
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).
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.
-
Within the framework of their work, all Executive Board and Super-
visory Board members of Merck KGaA are exclusively committed to
the interests of the company and neither pursue personal interests
nor grant unjustified advantages to third parties.
AVOIDANCE OF CONFLICTS OF INTEREST
The Executive Board, the Supervisory Board and the Finance Com-
mittee are regularly informed about the current risk portfolio of the
Group and the individual companies. More detailed information can be
found in the Report on Risks and Opportunities on pages 137 et seq.
RISK AND OPPORTUNITY MANAGEMENT
The Executive Board informs the supervisory bodies at least once
a year about the key compliance issues.
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.
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.
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.
Statement on Corporate Governance
Corporate Governance
184
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
The role of the Group Compliance Officer is reflected in the sub-
sidiaries, which ensure via country representatives that compliance
measures are implemented in the countries. Since 2013, Compliance
tasks in the countries and on a regional basis have largely been
performed by full-time compliance officers. As a result, a higher level
of compliance expertise is based locally and the increasing tasks in
all business sectors are taken into account. At the same time, the
management structure was streamlined and the reporting lines for
the countries were consolidated regionally. Since the end of 2016,
the compliance officers in the countries have been reporting to the
dedicated compliance officers for the respective business sectors
(Healthcare, Life Science and Performance Materials). A separate
responsibility was also created for Group functions. Regular regional
compliance meetings are held to promote the exchange of information
within the Compliance organization.
A further focal area of the Compliance program is ensuring legally
and ethically correct dealings with medical professionals and 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.
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.
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.
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
wholesalers.
The Code of Conduct explains the company principles for dealings
with business associates, shareholders, colleagues and employees,
and within the scope of our responsibility for society. Thus, it supports
all employees in acting ethically - not only in their dealings with one
another, but also outside the company. The Code of Conduct is thus
the main set of rules of our compliance program. In the newly 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
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.
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
50,000.00 50,000.00
50,000.00 49,250.00
50,000.00 50,000.00
Edeltraud Glänzer
Gabriele Eismann
Mechthild Auge
Crocifissa Attardo
(Vice Chairman)
Michael Fletterich
Wolfgang Büchele
(Chairman)
in €
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:
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
COMPENSATION FOR THE SUPERVISORY BOARD
MEMBERS OF MERCK KGAA
181
Statement on Corporate Governance
Corporate Governance
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).
265
2,077
499
2,769
265
499
Michaela Freifrau von Glenck
Siegfried Karjetta
Albrecht Merck
Dietmar Oeter
3,000.00
2,250.00
3,000.00
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
97,000.00 97,000.00
3,000.00 3,000.00
94,000.00 94,000.00
2017
2018
2017
2018
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.
2017
Compensation for
meeting attendance
2018
Fixed compensation
Total
Veit Ulshöfer
Tobias Thelen
Theo Siegert
Gregor Schulz
Helga Rübsamen-Schaeff
Alexander Putz
Total compensation
In its report to the General Meeting, the Supervisory Board dis-
closes any conflicts of interest involving its members and how they
were dealt with. Consultancy agreements as well as other service
and work contracts of a Supervisory Board member with Merck
require the approval of the Supervisory Board. In fiscal 2018, there
were neither conflicts of interest nor consultancy agreements or other
service or work contracts with Merck KGaA involving Supervisory
Board members.
ADHERENCE TO ENVIRONMENTAL AND
SAFETY STANDARDS
At Merck, closed-loop thinking guides the way in which we address
environmental protection issues. To this end, we integrate precaution-
ary measures into our process, procedural and product development
planning. Our Environment, Health and Safety Policy, with its prin-
ciples and strategies, implements the guidelines formulated by the
national and international associations of the chemical industry in
the Responsible Care guidelines. The Responsible Care Global Charter,
developed by the International Council of Chemical Associations
(ICCA) in 2014, puts even more emphasis than before on overall
responsibility for products, supply chains and the community. Merck
signed this expanded version of Responsible Care Global Charter for
the entire Group in the same year. It is currently being implemented
by Merck at an international level. We report our ecological, economic
and social performance transparently in accordance with the interna-
tionally recognized principles of the Global Reporting Initiative (GRI),
taking into account the requirements of the German Sustainability
Code and the principles of the UN Global Compact. One of our major
climate protection objectives is to achieve a 20% reduction in our
greenhouse gas emissions by 2020, measured against the 2006
baseline.
1 Internal board position.
Sachsenheim, Merck Global Head of Research and Bioinformatics
Veit Ulshöfer
Altmann Analytik GmbH & Co. KG, Munich
Munich, Managing Partner of
Tobias Thelen²
Düsseldorf, Managing Partner of de Haen Carstanjen & Söhne KG,
Düsseldorf
Theo Siegert
Umkirch, Pediatrician
Gregor Schulz
Cures GmbH, Wuppertal
Langenburg, Chairperson of the Advisory Board of AiCuris Antiinfective
Michelstadt, Full-time member of the Merck Joint Works Council
Helga Rübsamen-Schaeff
Alexander Putz
Seeheim-Jugenheim, Vice President Corporate Quality Assurance
Dietmar Oeter
Schriesheim, Commercial Director of the Castel Peter Winery,
Bad Dürkheim
Albrecht Merck
Darmstadt, Physician
Siegfried Karjetta²
Zurich, Retired teacher
2 Members appointed according to Article 6 (5) of the Articles of Association.
Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
no board positions
(b) E. Merck KG, Darmstadt¹
- DKSH Holding Ltd., Zurich, Switzerland
(b) E. Merck KG, Darmstadt¹
(a) - Henkel AG & Co. KGaA, Düsseldorf
(b) - E. Merck KG, Darmstadt¹
- Supervisory Board of Bonn University Hospital
(b) - E. Merck KG, Darmstadt¹
(a) 4SC AG, Martinsried
no board positions
no board positions
Michaela Freifrau von Glenck
(b) - E. Merck KG, Darmstadt¹
no board positions
- Evonik Industries AG, Essen (Vice Chairperson)
(a) B. Braun Melsungen AG, Melsungen
no board positions
no board positions
b) - Merck BKK (rotating chairperson)
no board positions
- Kemira Oyj, Helsinki, Finland
(b) E. Merck KG, Darmstadt¹
(a) - Gelita AG, Eberbach (Vice Chairman)
(b) - E. Merck KG, Darmstadt¹
2,077
(IG BCE), Hanover
Edeltraud Glänzer
Marcus Kuhnert
Frankfurt am Main, CEO Healthcare
Belén Garijo
Eppertshausen, Member of the Executive Board until September 30, 2018
Walter Galinat
Darmstadt, CEO Performance Materials
Kai Beckmann
Wellesley (Massachusetts, United States), CEO Life Science
Udit Batra
Munich, Chairman
Stefan Oschmann
Member
(b) comparable German and foreign supervisory bodies of corporations
(a) statutory supervisory boards and
Memberships of
MEMBERS OF THE EXECUTIVE BOARD OF MERCK KGAA
Information on memberships of statutory supervisory boards and
comparable German and foreign supervisory bodies (section 285
No. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).
Procedures of the Executive Board,
Supervisory Board, Board of Partners
and its Committees
185
Statement on Corporate Governance
Corporate Governance
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.
Königstein, Chief Financial Officer
no board positions
(b) EMD Millipore Corporation, Billerica, Massachusetts, United States
(President)
(a) - Bundesdruckerei GmbH, Berlin
Seeheim-Jugenheim, Senior Product Manager
Gabriele Eismann
Wehrheim, Full-time member of the Merck Joint Works Council
Mechthild Auge
Darmstadt, Full-time member of the Merck Joint Works Council
Crocifissa Attardo
Gernsheim, Chairman of the Merck Joint Works Council
Michael Fletterich
Munich, Chairman of Exyte AG, Stuttgart
Wolfgang Büchele
Hanover, Vice Chairperson of IG Bergbau, Chemie, Energie
Member
Corporate Governance
SUPERVISORY BOARD
186
The Executive Board passes its resolutions in meetings that are
normally held once a month.
The Executive Board informs the Board of Partners and the
Supervisory Board at least quarterly of the progress of business and
the situation of the company. In addition, the Executive Board informs
the aforementioned boards at least annually of the company's annual
plans and strategic considerations.
The Executive Board provides the Supervisory Board with regular,
up-to-date and comprehensive reports about all company-relevant
issues concerning strategy, planning, business developments, the risk
situation, risk management and compliance. The rules of procedure
of the Executive Board and of the Supervisory Board as well as a
Supervisory Board resolution regulate further details on the informa-
tion and reporting duties of the Executive Board vis-à-vis the Super-
visory Board.
The general partners with no equity interest (Executive Board) manage
the business activities in accordance with the laws, the Articles of
Association and the rules of procedure. They are appointed by
E. Merck KG in accordance with the consent of a simple majority of
the other general partners. The members of the Executive Board are
jointly responsible for the entire management of the company. Certain
tasks are assigned to individual Executive Board members based on
a responsibility distribution plan. Each Executive Board member
promptly informs the other members of any important actions or
operations in his respective business area. The Executive Board is
responsible for preparing the annual financial statements of
Merck KGaA and of the Merck Group as well as for approving the
quarterly and half-year financial statements of the Merck Group. In
addition, the Executive Board ensures that all legal provisions, official
regulations and the company's internal policies are abided by, and
works to achieve compliance with them by all the companies of the
Merck Group. A Group-wide guideline defines in detail which trans-
actions require prior Executive Board approval.
no board positions
(b) - Banco Bilbao Vizcaya Argentaria S.A., Bilbao, Spain
- L'Oréal S.A., Clichy, France
no board positions
Statement on Corporate Governance
2,769
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.
Service cost
7,154
8,642
379
1,369
1,401
4,080
5,513
4,164
4,214
5,785
7,241
599
326
599
Total compensation¹
Service cost
Total
LTI 2015 (2015 to 2017)
2,077
402
2,077
4,593
LTI 2014 (2014 to 2016)
400
4,564
395
800
1,100
1,100
600
800
2018
2017
2018
2017
2018
2017
(left on: September 30, 2018)
Fixed compensation
Allocation (€ thousand)
Member of the Executive Board
Marcus Kuhnert
Member of the Executive Board
Member of the Executive Board
Belén Garijo
Walter Galinat
4,475
-2,028
3,485
900
Multi-year variable compensation
2,400
2018
2017
2018
2017
2018
Member of the Executive Board
Kai Beckmann
Member of the Executive Board
Chairman of the Executive Board
2017
Fixed compensation
Allocation (€ thousand)
Udit Batra
Stefan Oschmann
ALLOCATION FOR THE FISCAL YEAR
Statement on Corporate Governance
Corporate Governance
180
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).
7,507
1,347
4,382
1,300
2,400
1,300
1,000
2,800
2,800
3,700
3,700
Profit sharing
1,081
1,036
1,038
1,012
1,486
1,464
Total
81
36
Total compensation
12
186
164
Additional benefits
1,000
1,000
1,000
Additional benefits
38
26
3,340
168
3,725
3,887
5,665
5,343
2,931
3,172
599
599
105
866
1,194
140
Total compensation², 3
Service cost
Total
LTI 2015 (2015 to 2017)
LTI 2014 (2014 to 2016)
Multi-year variable compensation
2,200
166
3,097
2,582
394
1,604
32
Total
LTI 2015 (2015 to 2017)
2017
Member of the Executive Board
(left on: August 31, 2016).
LTI 2014 (2014 to 2016)
Multi-year variable compensation
Profit sharing
Total
Additional benefits
2,200
Allocation (€ thousand)
Fixed compensation
2017
2018
(left on: April 29, 2016)
Member of the Executive Board
Bernd Reckmann
4,146
5,491
6,059
7,925
421
2018
3,900
Karl-Ludwig Kley
2,200
Actually achieved
value Merck LTIP
tranche 2014
50%
0%
-20%
Upper target
corridor limit
Target
Lower target
corridor limit
(external key performance indicator)
Share price development relative to the DAX®
Key performance indicator¹
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.
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
177
Statement on Corporate Governance
Corporate Governance
Total
26
21
66
3,000
49
Target achieve-
ment Merck LTIP
tranche 2014
36.3%
Merck Long-Term Incentive Plan
EBITDA pre margin
2,200
Profit sharing
136.3%
926
821
1,166
1,149
626
value Merck LTIP
tranche 2015
Upper target
corridor limit
Target
832
Target achieve-
Actually achieved
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.
(internal key performance indicator)
126.7%
25%
29.6%
31%
Lower target
corridor limit
28%
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
Get to know our Merck team from
Healthcare, Billerica, United States
Hearts
beats
SHINJI OKITSU
Group Leader Immunology,
ANA LUISA
11
HEARTBEATS
Semiconductors as a new driver of growth 26-27
HEARTBEATS
Research drives us all 12-17
2. Vibrant China
around the world at
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
https://www.merckgroup.com/en/
Research drives us all
MARC FEIGLIN
16
the passion.
HEARTBEATS
Yavne, Israel
Head of Alliance Management & Partnership,
MARC FEIGLIN
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."
dreamed of helping
"Even as a child, I
15
HEARTBEATS
UVEX
Billerica, United States
Group Leader Immunology, Healthcare,
SHINJI OKITSU
"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."
Research drives us all
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
HEARTBEATS
annualreport/2018/magazine/heartbeats
13
it makes my heart
beat faster."
SUNNY CHOI
Talent and Development Manager,
Seoul, Korea
14
HEARTBEATS
"It's my job to give
people the courage
to explore new
things that did not
exist before. If they
succeed at that,
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
Research drives us all
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.
September 11
راق
Table of Contents
HIGHLIGHTS OF 2018
9
TABLE OF CONTENTS MAGAZINE
November 28
Fourth place in the Access to Medicine Index
This result means that we have maintained our
ranking since the index was last published in
2016. We are proud of our efforts to improve
access to medicine and thus the health of
underserved populations.
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.
Collaborate against cancer with Syntropy
We want to advance cancer research. To that
end, we intend to form a joint venture under the
name Syntropy with software company Palantir
Technologies. Syntropy will enable research cen-
ters to have access to a collaborative technol-
ogy platform to drive forward cancer research,
speed up scientific progress and improve peo-
ple's lives.
November 19
HIGHLIGHTS OF 2018
80
7
November 20
Darmstadt, Chairman of the Executive Board and
Cures GmbH, Wuppertal
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
Michael Kleinemeier
Köln, Head of Infrastructure Development at DB Netz AG, Frankfurt am
Main
Katharina Kraft
Mannheim, Senior Management Consultant at BASF SE, Ludwigshafen
Helene von Roeder
Frankfurt am Main, Member of the Executive Board of Vonovia SE, Bochum
Daniel Thelen
Simon Thelen
Köln, Senior Physician at the Clinic for Trauma and Hand Surgery,
University Hospital Düsseldorf
Memberships of
Frank Stangenberg-Haverkamp
Heidelberg, Member of the Executive Board of SAP SE, Walldorf
Vienna, Austria, Vice Chairman of the Executive Board and
General Partner of E. Merck KG, Chairman
(a) - Merck KGaA, Darmstadt
On January 27, 2019, a new election of the Board of Partners was
held. The Board of Partners now consists of the following members:
(b) - Fortas GmbH, Rösrath (Chairman)
- 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
Member
- 4SC AG, Martinsried
(a) - Merck KGaA, Darmstadt
(a) - Merck KGaA, Darmstadt
- Henkel AG & Co. KGaA, Düsseldorf
(b) DKSH Holding Ltd., Zurich, Switzerland
(a) Merck KGaA, Darmstadt
Corporate Governance
Statement on Corporate Governance
189
· Supervisory Board of Bonn University Hospital
Johannes Baillou
•
(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
(a) statutory supervisory boards and
Vienna, Austria, Vice Chairman of the Executive Board and
General Partner of E. Merck KG, Chairman
no board positions
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
(b) comparable German and foreign supervisory bodies of corporations
Statement on Corporate Governance
(b) - Fortas GmbH, Rösrath (Chairman)
•
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
• Goodwill impairment tests
• Impairment testing of interests in associates
•
• 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.
Recognisition and measurement of income tax liabilities and
deferred tax liabilities
The auditors issued an unqualified audit opinion on the annual
financial statements of Merck KGaA in accordance with German
Auditing Standards. The audit opinion for the annual financial state-
ments contained the following key audit matters, i.e. those matters
that, in the professional judgment of the auditor, were of most sig-
nificance in the audit of the annual financial statements:
The annual financial statements of Merck KGaA, the consolidated
financial statements of the Merck Group and the combined manage-
ment report for Merck KGaA and the Merck Group, including the
accounts, were audited by KPMG AG Wirtschaftsprüfungsgesellschaft,
Berlin.
ANNUAL FINANCIAL STATEMENTS
Moreover, the members of the Supervisory Board have a back-
ground in one or more of the following fields of specialization: chem-
istry, biochemistry, nutrition, human medicine, business administration
and economics, education and physics, among others.
More than one-half of our Supervisory Board members are uni-
versity graduates and hold doctorates.
1 Merck also has employees at sites that are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the financial
section of this report.
2Each country with at least one active employee is considered one country.
Corporate Governance
Report of the Supervisory Board
Report of the Supervisory Board
193
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.
COOPERATION WITH THE EXECUTIVE BOARD
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.
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.
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.
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).
COMMITTEES
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.
no board positions
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.
Apart from the Nomination Committee, the Supervisory Board of
Merck KGaA currently has no further committees on account of the
special features that apply to the Supervisory Board of a corporation
with general partners (KGaA) under German company law and
because a corresponding need for this has not emerged to date. The
members of the Nomination Committee convened on November 9,
2018, in order to recommend suitable candidates to the Supervisory
Board for the Supervisory Board elections in 2019. At its meeting, the
committee discussed potential candidates. The discussion took into
account the statutory requirements as well as the candidate's fit into
the full Supervisory Board, the objectives of the Supervisory Board
regarding its composition, its profile of skills and expertise and the
diversity policy. No report is given on the work of further committees.
PERSONNEL MATTERS
With the exception of Michael Fletterich, who was excused and absent
from the meeting on November 9, 2018, all the Supervisory Board
members attended all the Supervisory Board meetings.
Darmstadt, February 26, 2019
The Supervisory Board of Merck KGaA
Wolfgang Büchele
Chairman
Corporate Governance
Objectives of the Supervisory Board with respect to Its Composition and Profile of Skills and Expertise 195
Objectives of the Supervisory Board
with respect to Its Composition and
Profile of Skills and Expertise
INITIAL SITUATION
According to section 5.4.1 of the German Corporate Governance
Code, the Supervisory Board shall specify concrete objectives regard-
ing its composition as well as prepare a profile of skills and expertise
for the entire board. Within the scope of the company-specific situa-
tion, the composition of the Supervisory Board shall appropriately
reflect the international activities of the enterprise, potential conflicts
of interest, the number of independent Supervisory Board members,
an age limit to be specified for the members of the Supervisory
Board, a regular limit to be specified for the length of Supervisory
Board membership and diversity.
GENERAL NOTES ON THE COMPOSITION OF THE
SUPERVISORY BOARD
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
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.
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.
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:
The key prerequisites for high-performance leadership teams are
both the diversity of the individual competency profiles and a balance
Corporate Governance
Statement on Corporate Governance
191
STIPULATIONS PURSUANT TO SECTION 111 (5) AKTG
(TARGET FOR THE PERCENTAGE OF POSITIONS ON THE
SUPERVISORY BOARD HELD BY WOMEN)
Pursuant to section 111 (5) AktG, the Supervisory Board of companies
(see also pages 186 et seq. for the description of Supervisory Board
procedures).
that are listed or subject to co-determination stipulates binding targets Diversity policy pursuant to section
for the percentage of positions on the Supervisory Board and on the
Management Board held by women. However, for Merck KGaA, stip-
ulations pursuant to section 111 (5) AktG need not be set for the
following reasons:
The statutory target of 30% pursuant to section 96 (2) AktG is
already applied to the Supervisory Board of Merck KGaA. This elim-
inates the obligation to stipulate a further target for the percentage
of positions held by women on the Supervisory Board (see section
111 (5) sentence 5 AktG).
The obligation to stipulate a target for the percentage of positions
held by women on the Management Board pursuant to section 111
(5) AktG is not applicable to the legal form of a corporation with
general partners (Kommanditgesellschaft auf Aktien), as a corpo-
ration with general partners neither has a management board com-
parable to that of a stock corporation nor does the Supervisory
Board have personnel authority over the Executive Board. Instead,
the Executive Board consists of personally liable general partners
289f (2) No. 6 of the German
Commercial Code (HGB)
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:
Management
experience
Gender
Internationality,
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").
GENDER
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.
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.
AGE
Statement on Corporate Governance
1The relevant group represents approximately 6% of the entire workforce; see the section entitled "Diversity and Management" (on page 94).
Corporate Governance
In addition to the aspects presented in the following, reference is
made to the objectives of the Supervisory Board with respect to its
composition and the profile of skills and expertise of the Supervisory
Board (see the information on the "Objectives of the Supervisory
Board with respect to its composition and profile of skills and expertise"
on pages 195 et seq.). The statements made there are part of the
diversity policy for the Supervisory Board presented here.
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.).
Educational
background
Industry
knowledge
Age
global mindset
192
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.
Second management level of Merck KGaA below the Executive
Board: 26% of positions held by women
• First management level of Merck KGaA below the Executive Board:
21% of positions held by women
(b) AVW Versicherungsmakler GmbH, Hamburg
- Vonovia Finance B.V., Amsterdam, Netherlands
No board positions
-
EDUCATIONAL BACKGROUND
Supervisory Board of Bonn University Hospital
- 4SC AG, Martinsried
No board positions
Merck KGaA, Darmstadt
(b) - Kemira Oyj, Helsinki, Finland
- Gelita AG, Eberbach (Vice Chairman)
(a) Merck KGaA, Darmstadt
- Travel Asset Group Ltd., London, United Kingdom (Chairman)
Oras Invest Ltd, Helsinki, Finland
-
(a)
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.
No board positions
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.
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:
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)
percentage of management positions
held by women pursuant to section 76
(4) and section 111 (5) of the German
Stock Corporation Act (AktG)
Stipulations to promote the
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.
The Research and Development Committee has four members. During
fiscal 2018 and up until January 27, 2019, these were: Helga
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.
RESEARCH AND DEVELOPMENT COMMITTEE
FINANCE COMMITTEE
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.
Corporate Governance
190
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.
PERSONNEL 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.
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.
(a) innogy SE, Essen
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.
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.
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.
INTERNATIONALITY AND GLOBAL MINDSET
MANAGEMENT EXPERIENCE
Depreciation/amortization/impairment losses/reversals of impairments
Profit after tax¹
€ million
Consolidated Cash Flow Statement
203
Consolidated Cash Flow Statement
Consolidated Financial Statements
35,621
Changes in inventories
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".
Changes in trade accounts receivable
Changes in other assets and liabilities
Changes in provisions
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
Changes in trade accounts payable/refund liabilities
Payments from the disposal of other financial assets
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
Other non-cash income and expenses¹
Neutralization of gains/losses on disposal of assets
Liabilities directly related to assets held for sale
Payments for acquisitions less acquired cash and cash equivalents
Other current liabilities
1,016
1,176
→ 28
Other non-current liabilities
8,033
6,681
→ 35
Non-current financial liabilities
2,257
788
2,336
780
→ 26
52
Other non-current provisions
Provisions for pensions and other post-employment benefits
Non-current liabilities
14,066
63
14,003
1,081
12,358
565
565
15,006
1,629
17,200
33
17,233
→ 25
354
Deferred tax liabilities
→ 14
→ 14
472
→ 30
2,195
1,766
29
2,790
2,215
→ 35
457
600
→ 26
Income tax liabilities¹
Refund liabilities²
Trade accounts payable²
Current financial liabilities
Current provisions¹
Current liabilities
12,919
1,489
1,288
11,138
Payments from new borrowings of other current and non-current financial liabilities
Repayment of other current and non-current financial liabilities
Note
thereof: from discontinued operation
4
-593
-466
375
349
-319
-314
-323
-932
32
Comprehensive income
147
→ 41
-1,821
-2,825
-496
5
-1,870
182
1,586
- 320
-13
-155
-162
-42
-106
-392
67
4
-910
-919
31
-75
44
-219
Changes in cash and cash equivalents due to currency translation
-17
185
11
3,129
156
→ 31
2,191
Non-controlling interests
-1,147
3,042
55
-5
-30
Dividend payments
11
-346
-2,733
-1,256
-288
103
199
234
104
-7
-221
-184
-172
1,758
1,812
2,615
3,396
2017
2018
Changes in cash and cash equivalents
-109
Net cash flows from financing activities
→ 18
2,696
Cash and cash equivalents as of January 1
589
939
Cash and cash equivalents as of December 31 (consolidated balance sheet)
→ 33
2,170
589
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
204
2,219
24
Consolidated Financial Statements
Consolidated Statement of Changes in Net Equity
For details see Note (36) "Equity".
€ million
January 1, 2017 (as reported)
Adjustment due to mandatory
retrospective adoption of IFRS 9¹
January 1, 2017 (restated)
Profit after tax²
Other comprehensive income²
103
Consolidated Statement of Changes in Net Equity
Equity attributable to Merck KGaA shareholders
thereof: from continuing operations
Reserves¹
→ 37
7
-1
8
1
142
-13
29
-1
29
142
-41
2
141
-34
-7
→ 25
2,615
3,396
2017
-71
88
52
12
619
-51
-7
-2,011
626
Other comprehensive income¹
Changes recognized in equity
Reclassification to profit or loss
Changes taken directly to equity
2018
4
10
5
-5
-47
→ 37
69
-7
-31
12
-32
5.87
5.25
0.12
Fair value adjustments
Reclassification to profit or loss
Tax effect
Changes recognized in equity
Available-for-sale financial assets³
Fair value adjustments
Reclassification to profit or loss
Tax effect
Changes recognized in equity
Debt instruments²
Cash flow hedge reserve
Reclassification to profit or loss
Reclassification to assets
Tax effect
Changes recognized in equity
Cost of cash flow hedge reserve¹
Fair value adjustments
Reclassification to profit or loss
Tax effect
Changes recognized in equity
Fair value adjustments
-2,062
to profit or loss in subsequent periods
Changes recognized in equity
thereof: from continuing operations
thereof: from discontinued operation
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
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 Not defined by International Financial Reporting Standard (IFRSS).
Consolidated Financial Statements
Statement of Comprehensive Income
201
Consolidated Statement of Comprehensive Income
Items of other comprehensive income that may be reclassified
€ million
Items of other comprehensive income that will not be reclassified
to profit or loss in subsequent periods
Net defined benefit liability
Changes in remeasurement
Tax effect
Changes recognized in equity
Equity instruments²
Fair value adjustments
Tax effect
Profit after tax¹
581
-1,989
568
2,764
23
->
28,166
27,652
1,106
1,091
→ 14
205
2,632
138
444
610
→ 34
4,512
4,811
→ 21
8,317
7,237
- 20
→ 22
13,582
→ 24
2,923
Equity capital
→ 36
Total equity
35,621
7,455
9,236
36,888
→ 5
589
2,170
2,931
→ 33
460
→ 14
731
886
22
-
90
24
34
490
Gains/losses recognized in equity¹
13,764
Dec. 31, 2017
67
2,330
thereof: from discontinued operation
700
1,634
Profit transfer to/from E. Merck KG
767
3,964
Comprehensive income
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".
6
→ 36
thereof: attributable to non-controlling interests
761
3,943
767
3,964
thereof: attributable to Merck KGaA shareholders
Comprehensive income
-1,847
22
→ 19
202
Consolidated Balance Sheet
Dec. 31, 2018
Note
Total assets
Assets held for sale
Cash and cash equivalents
Income tax receivables
Other current assets
Current financial assets
Trade accounts receivable
Consolidated Financial Statements
Inventories
Deferred tax assets
Other non-current assets
Non-current financial assets
Property, plant and equipment
Other intangible assets
Goodwill
Non-current assets
€ million
Consolidated Balance Sheet
Current assets
including changes in reserves
Consolidated Statement of Changes in Net Equity
Changes in scope of consolidation/Other
13,989
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
FINANCIAL STATEMENTS
61
14,050
3
24
761
-2,057
-4
69
7
-1,847
-4
-1,843
-2,057
197-321
69
2,615
10
2,605
14,050
61
13,989
3,229
3
-191
7
CONSOLIDATED
FINANCIAL STATEMENTS
Consolidated Income Statement 200
(20) Other intangible assets 234
(21) Property, plant and equipment 237
(22) Other assets 239
(23) Inventories 240
(24) Trade accounts receivable 240
(25) Provisions for pensions and other
post-employment benefits 241
(26) Other provisions 247
(27) Contingent liabilities 252
(28) Other liabilities 253
(29) Trade accounts payable 254
(30) Refund liabilities 254
(19) Goodwill 231
(31) Net cash flows from investing activities 254
(32) Financial result/net gains or losses from financial
instruments 255
(33) Cash and cash equivalents 257
(34) Financial assets 257
(35) Financial liabilities/capital management 258
(36) Equity 260
(37) Derivative financial instruments 264
(38) Management of financial risks 267
(39) Information on fair value measurement 274
(40) Other financial obligations 283
(41) Net cash flows from financing activities 285
Other Disclosures 286-288
(42) Related-party disclosures 286
(43) Executive Board and Supervisory Board compensation 286
(44) Auditor's fees 287
Capital Structure, Investments and
Financing Activities 255-285
6
(6) Collaborations of material significance 213
Group structure 210-215
Result from Operating Activities
and Income Taxes 216-230
Consolidated Statement of
Comprehensive Income 201
Consolidated Balance Sheet 202
Consolidated Cash Flow Statement 203
(7) Segment reporting 216
(8) Net sales 221
(9) Cost of sales 223
(10) Marketing and selling expenses 223
(11) Research and development costs 223
(12) Other operating income 224
(13) Other operating expenses 225
(14) Income tax 226
(4) Changes in the scope of consolidation 210
(5) Acquisitions and divestments 210
(15) Cost of materials 229
(17) Earnings per share 230
(18) Net cash flows from operating activities 230
Consolidated Statement of Changes
in Net Equity 204
Operating Assets, Liabilities and
Contingent Liabilities 231-254
General disclosures 206-209
(1) Company information 206
(2) Reporting principles 206
(3) Management judgments and
sources of estimation uncertainty 208
(16) Personnel expenses/headcount 229
(45) Corporate governance 287
767
4
-175
-515
-515
-55
55
-3
-93
-96
-1
-128
-33
1,790
17,200
33
17,233
206
Consolidated Financial Statements
Notes to the
Consolidated Financial Statements
-13
-162
3,964
22
-121
Note
-1
1,171
13,992
63
14,055
3,374
22
General Disclosures
3,396
-32
619
569
-1
568
-7
-32
619
3,943
-7
(1) Company information
The accompanying consolidated financial statements as of Decem-
ber 31, 2018, have been prepared with MERCK Kommanditgesellschaft
auf Aktien (Merck KGaA), Frankfurter Strasse 250, 64293 Darmstadt
as parent company. Merck KGaA is registered under HRB 6164 with
the Commercial Register of Darmstadt. In accordance with the pro-
visions of the German financial reporting disclosure law (Publizitäts-
gesetz), consolidated financial statements are also prepared for
E. Merck Kommanditgesellschaft (E. Merck KG), the ultimate parent
company and general partner of Merck KGaA with an equity interest
of 70.274% as of December 31, 2018 (December 31, 2017: 70.274%).
These consolidated financial statements include Merck KGaA and its
subsidiaries. The authoritative German versions of these financial
statements are filed with the German Federal Gazette (Bundesan-
zeiger) and can be accessed at www.bundesanzeiger.de.
(2) Reporting principles
14,066
63
14,003
1,171
-1
-121
-31
31
14,066
-15
63
1,171
-1
-121
31
1
1
-593
-593
-159
14,003
-155
-15
4
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.
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".
Regulations applicable as of fiscal 2018 and other presentation
and measurement changes
The following regulations take effect as of fiscal 2018:
• IFRS 9 "Financial Instruments"
• IFRS 15 "Revenue from Contracts with Customers"
• IFRIC 22 "Foreign Currency Transactions and Advance Consideration"
Amendment to IAS 40 "Investment Property"
•
• Amendment to IFRS 2 "Share-based payment"
1
Amendment to IFRS 4 "Insurance Contracts"
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.
The other new regulations applicable for the first time in fiscal
2018 did not have a material impact on the consolidated financial
statements.
Regulations applicable as of fiscal 2019
The following standards will take effect as of fiscal 2019:
• IFRS 16 "Leases"
• IFRIC 23 "Uncertainty over Income Tax Treatments"
Amendment to IAS 28 "Investments in Associates and Joint Ventures"
• Amendment to IFRS 9 "Financial Instruments"
We did not opt for early application of any of these standards. With
the exception of IFRS 16, none of these rules is expected to have a
significant effect on the consolidated financial statements.
IFRS 16 "Leases" replaces IAS 17 "Leases" and the corresponding
interpretations. Merck applies the modified retrospective method to
implement IFRS 16. The cumulative transition effects will be recog-
nized as at the date of first-time application (January 1, 2019).
Previous-year figures will not be restated.
-1
4
• 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"
(46) Companies opting for exemption under section
264 (3) HGB or section 264b HGB 287
(47) Information on preparation and approval 287
(48) Subsequent events 288
59
-46
Changes in scope of consolidation/Other
-55
Transactions with no change of control
-515
including changes in reserves
-162
29
-41
3,374
29
-41
Profit transfer to/from E. Merck KG
Dividend payments
Comprehensive income
Other comprehensive income
Profit after tax
3,374
-16
December 31, 2018
397
168
Earnings per share (in €)
basic
thereof: from continuing operations
thereof: from discontinued operation
diluted
→ 17
7.76
5.99
2.51
5.87
.6
5.25
7.76
5.99
2.51
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".
7
-1,340
12,525
3,814
0.12
-1,358
9,930
3,814
2,605
-1,501
8,046
3,814
168
397
-3
-1,501
for equity
instruments
142
of defined
benefit plans
3,814
Remeasurement Fair value reserve
Capital reserves
(share premium)
Merck KGaA
partner's equity Subscribed capital
Merck KGaA
Merck KGaA
168
397
General
Retained earnings
Equity capital
December 31, 2017²
Retained earnings/
net retained profit
8,049
10
2,605
-155
168
397
4
January 1, 2018 (restated)
Adjustment on application of IAS 29¹
-
-1,358
9,903
23
Adjustment on initial application of IFRS 91
Adjustment on initial application of IFRS 15¹
142
3,814
397
January 1, 2018
-1,358
9,903
3,814
168
397
1
-593
168
22
→ 36
thereof: attributable to non-controlling interests
Net sales
Cost of sales
Gross profit
Note
2018
2017
→8
14,836
14,517
€ million
→ 9
-5,071
9,454
9,446
Marketing and selling expenses
→ 10
-4,384
-4,349
Administration expenses
-993
-5,382
-899
Consolidated Income Statement¹
Consolidated Financial Statements
Accounting and Measurement
Policies 288-311
(49) Effects from new accounting standards and other presentation
and measurement changes 288
(50) Measurement policies 301
(51) Consolidation methods 302
(52) Currency translation 302
(53) Recognition of net sales and other income 303
(54) Collaboration agreements, in-licensing and out-licensing in
the Healthcare business sector 304
(55) Research and development costs 305
(56) Goodwill 305
(57) Other intangible assets 305
(58) Property, plant and equipment 306
(59) Leasing 306
(60) Financial assets 306
Consolidated Income Statement
(61) Financial liabilities 308
(63) Contingent consideration 309
(64) Other non-financial assets and liabilities 309
(65) Deferred taxes 309
(66) Inventories 310
(67) Provisions for pensions and other post-employment
benefits 310
(68) Other provisions and contingent liabilities 310
(69) Share-based compensation programs 311
List of Shareholdings 312-321
(70) List of shareholdings 312
200
(62) Derivatives and hedge accounting 308
Transactions with no change of control
Research and development costs
-2,225
-345
1,461
2,129
Income tax
→ 14
-368
428
Profit after tax from continuing operations
1,093
-343
2,557
→ 5
2,303
57
Profit after tax
3,396
2,615
thereof: attributable to Merck KGaA shareholders (net income)
3,374
2,605
Profit after tax from discontinued operation
→ 11
→ 32
77
-2,108
Impairment losses and reversals of impairment losses on financial assets (net)2
→ 38
27
Other operating income
→ 12
627
1,212
Other operating expenses
51
→ 13
-880
Operating result (EBIT)³
1,727
2,423
Finance income
Finance costs
Profit before income tax
-
32
-780
Exchange differences on translating foreign operations
Notes to the Consolidated Financial Statements
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
medium
IAS 2
Trade accounts receivable
2,931
→ 24, 38
yes
Determination of impairment amount
medium
IFRS 9
Other financial assets
Identification of impairments (or reversal of impairments)
→34, 39
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
yes
→ 25
no
2,764
-20
yes
In-licensing of intangible assets
medium
IAS 38
Identification of impairments (or reversal of impairments)
medium
IAS 36
Determination of amortization
medium
→ 23
IAS 38
4,811
→ 21
no
Identification of impairments (or reversal of impairments)
medium
IAS 36
Determination of depreciation
medium
IAS 16
Inventories
Property, plant and equipment
yes
Determination of present value of defined-benefit obligations
medium
high
-1,176
IAS 12
Recognition and measurement of deferred taxes from temporary differences
Recognition of deferred tax assets from loss carryforwards
medium
medium
IAS 12
33
IAS 12
Assets held for sale
→ 5
Recognition and measurement of income tax liabilities
no
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
Additions
Date on which assets and liabilities are classified as "held for sale"
no
→ 14
Income tax
-4,719
IAS 19
Other provisions and contingent liabilities
-1,381
→ 26,27
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
7,237
Retirements
Other intangible assets
high
30.4%
29.8%
28.6%
24.9%
1,786
1,840
1,773
1,556
1,580
206
85
7,568
-256
1,755
2,028
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.
63
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:
8,184
20,422
3 Not defined by International Financial Reporting Standard (IFRSS).
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.
1,025
Business free cash flow³
1,402
1,393
1,314
1,516
1,621
1,629
20,860
1,159
19
310
327
313
359
379
59
-1,254
-1,333
-2,985
-2,893
55
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:
• 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"
(3) Management judgments and
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
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:
Discretion-
Goodwill
ary scope/
estimation
uncertainty
Carrying
amount Dec.
31, 2018
(€ million)
See Note for
details
Sensitivity
analysis
IFRSS
13,764
→ 19
yes
Determination of recoverable amount
Items
Published accounting standards not yet endorsed by the
European Union
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.
From today's perspective, the new rules are not expected to have
any material effects on the consolidated financial statements.
Consolidated Income Statement
Consolidated Cash Flow Statement
€ million
Non-current assets
Land, land rights and buildings, including buildings
on third-party land
Plant and machinery
Other facilities, operating and office equipment
January 1, 2019
€ ~ 385 million
€ ~15 million
€ ~ 70 million
Based on the leasing portfolio held at first-time application (January 1, 2019) and the latest contractual
status, we expect for fiscal 2019 depreciation of about € 120 million, and corresponding interest expenses
of about € 10 million. To date, expenses from operating lease agreements were recognized over the
lease term, on a straight-line basis, in operating expenses. These changes in accounting principles will
translate into improved KPIs. Based on the current contractual status, the operating result (EBIT) will
improve by about € 10 million, and the EBITDA pre by about € 130 million. However, the first-time
application of IFRS 16 will have no material impact on the business free cash flow (BFCF).
The repayment components of about € 115 million included in the lease payments represent repayments
of financial liabilities and are therefore recognized as cash flows from financing activities. To date, such
repayment components were recognized within payments from operating lease agreements in cash
flows from operating activities.
208
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
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;
•
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
IAS 36
Establishment
Acquisitions
Materiality
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.
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),
214
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
a kinase inhibitor indicated for the treatment of patients with metastatic
non-small cell lung cancer (NSCLC) whose tumors are anaplastic
lymphoma kinase (ALK)-positive or whose tumors are metastatic
ROS1-positive. During co-promotion of XalkoriⓇ, Merck receives from
Pfizer a profit share, which is reported in net sales. In 2018, this
profit share income amounted to € 58 million (2017: € 72 million). At
initial recognition, the right was measured at fair value by an inde-
pendent external expert using the multi-period excess earnings
method. The right was capitalized when it was granted and is being
amortized over the term of the agreement. The residual book value
of this intangible asset as of December 31, 2018, was € 68 million
(December 31, 2017: € 93 million). An impairment loss of € 33 million
was recognized for rights to XalkoriⓇ in 2017.
On the date the collaboration agreement was entered into, both the
upfront payment received and the value of the right to co-promote
XalkoriⓇ were recognized in the balance sheet as deferred income
under other liabilities. Both amounts are being recognized as income
on a pro rata basis over the expected period during which Merck is to
meet certain obligations and will be presented under other operating
income (2018: € 191 million/2017: € 191 million). In fiscal 2018,
Merck generated sales of € 69 million with Bavencio® (2017:
€ 21 million) and recorded research and development expenses of
€ 313 million (2017: € 264 million). In addition, Merck recognized
income in a mid double-digit million euro amount in return for waiving
rights to Pfizer's anti-PD-1 antibody, which had previously been
included in the collaboration agreement; this income was reported
under other operating income (2017: income of € 124 million for mile-
stone payments for regulatory approvals received).
SIGNIFICANT MANAGEMENT JUDGMENTS AND
SOURCES OF ESTIMATION UNCERTAINTY -
COLLABORATION AGREEMENTS
In the past, Merck occasionally recognized income for upfront and
milestone payments as well as license fees received under collabora-
tion agreements.
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).
In this context, Merck had to assess the extent to which the
requirements of IFRS 15 had to be applied directly or indirectly.
For the immuno-oncology collaboration agreement entered into
with Pfizer Inc., United States, in November 2014, the various promises
to transfer goods or services could not be separated, meaning that
the promises had to be accounted for in their entirety as a single
performance obligation - as is customary for collaboration agreements
in the pharmaceutical industry.
Furthermore, for identified performance obligations, Merck had to
determine whether income had to be recognized over time or at a point
in time. If income is recognized over time, management judgments
are required as to the appropriate revenue recognition method and
the period over which income is to be recognized.
In the case of the collaboration agreement with Pfizer, income
had to be recognized over time, i.e. the upfront payment received
had to be allocated over the period in which the main development
activities were conducted. If the consideration received in this context
and deferred as a liability had been recognized in the income statement
over a shorter period reduced by six months, in fiscal 2018 this would
have increased other operating income, and profit before income tax
would therefore have increased by € 64 million (2017: € 38 million).
Recognition over a period extended by six months would have low-
ered other operating income and profit before income tax by
€ 38 million (2017: € 27 million).
AGREEMENT WITH BRISTOL-MYERS SQUIBB COMPANY,
UNITED STATES, FOR THE CO-COMMERCIALIZATION OF
GLUCOPHAGE® IN CHINA
In December 2012, Merck established an agreement with Bristol-Myers
Squibb Company, United States, (BMS) for the co-commercialization
of the antidiabetic agent GlucophageⓇ (active ingredient: metformin
hydrochloride) for the treatment of type 2 diabetes in China. Based
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).
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
215
AGREEMENT WITH INTREXON CORPORATION,
UNITED STATES, ON THE JOINT DEVELOPMENT AND
COMMERCIALIZATION OF CAR-T CANCER THERAPIES
In March 2015, Merck and Intrexon Corporation, United States,
(Intrexon) entered into a strategic collaboration and license agree-
ment to develop and commercialize chimeric antigen receptor T-cell
(CAR-T) cancer therapies. The agreement provided Merck exclusive
access to Intrexon's proprietary and complementary suite of tech-
nologies to engineer T-cells with optimized and inducible gene
expression. Based on this agreement, Intrexon was responsible for
all platform and product developments until the investigational new
drug application was submitted for regulatory approval. In 2015,
Merck made an upfront cash payment of US$ 115 million to Intrexon,
which was recognized as part of intangible assets not yet available
for use (carrying amount as of December 31, 2017: € 104 million).
Effective December 28, 2018, Merck transferred the above-men-
tioned exclusive rights back to Intrexon on the basis of a contractual
agreement. At the time the contract was signed, Merck was entitled
to receive Intrexon common stock worth US$ 150 million in return
for the assignment of rights. Due to the intention to hold the shares
for the long term, the shares were classified as equity instruments
subsequently measured at fair value through other comprehensive
income. Furthermore, the agreement contained another investment
by Merck, amounting to US$ 25 million, in Intrexon's subsidiary Pre-
cigen, Inc., United States, (Precigen) which is involved in the devel-
opment of T-cell cancer therapies. In return, Merck received a con-
vertible note in an amount of US$ 25 million, with the option, under
certain conditions, to acquire shares in either Intrexon or Precigen.
The convertible note was classified as a debt instrument measured
at fair value through profit or loss.
If so, Merck had to determine whether Merck's contractually
promised goods or services contained in the collaboration agreement
could be separated or not.
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.
ACQUISITIONS IN THE PREVIOUS YEAR
On August 31, 2017, Merck completed the divestment of the Biosim-
ilars business to subsidiaries of Fresenius SE & Co. KGaA. In addition
to the divestment of the business activities, the contract parties
entered into supply and services agreements, which include drug
development support and manufacturing services. As compensation
for the sale of the business activities, Merck received an upfront
payment of € 156 million. According to the agreed terms of the trans-
action, Merck was entitled to future milestone payments of up to
€ 497 million, which were partly covered by services to be performed,
as well as tiered royalties on product sales. The disposal gain
amounted to € 319 million and was recorded under other operating
income. Further information regarding the fair values determined in
2017 by an external expert for the contingent consideration compo-
nents and the sensitivity analysis can be found in Note (39) "Infor-
mation on fair value measurement".
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
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.
Notes to the Consolidated Financial Statements
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
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
material significance
DIVESTMENT OF BIOSIMILARS BUSINESS
IN PREVIOUS YEAR
213
DEVELOPMENT AGREEMENT WITH AVILLION LLP,
UNITED KINGDOM, TO DEVELOP MERCK'S ANTI-IL-17-A/F
NANOBODY®
On March 30, 2017, Merck announced an agreement with a subsidiary
of Avillion LLP, United Kingdom, (Avillion) to develop the anti-IL-17-A/F
NanobodyⓇ M1095. Merck acquired full, exclusive rights to anti-IL-17-
A/F NanobodyⓇ through a global development and commercialization
license from Ablynx nv, Belgium, in 2013. This Nanobody® is an
investigational therapy which has completed Phase I development.
As part of the cooperation, Avillion will be responsible for developing
this anti-IL-17-A/F NanobodyⓇ from Phase II through Phase III in
plaque psoriasis. Avillion will also finance the clinical program through
to regulatory submission. The drug candidate is currently in a
Phase IIb trial that started on schedule in August 2018. During the
development phase, Merck recognizes a financial liability for poten-
tial repayment obligations to Avillion and records a corresponding
expense as research and development costs. Research and develop-
ment costs in the low single-digit million euro range were incurred
in fiscal 2018.
Life Science
2018
2017
2018
2017
6,246
6,190
6,185
5,882
51
Healthcare
57
1,337
1,036
834
747
726
696
743
13
53
23
731
Net cash flows from operating activities
Investments in intangible assets 4
Investments in property, plant and equipment4
IMMUNO-ONCOLOGY COLLABORATION WITH F-STAR
DELTA LTD., UNITED KINGDOM
On June 4, 2017, Merck announced a strategic collaboration with
F-star Delta Ltd, United Kingdom, (F-star) for the development and
commercialization of bispecific immuno-oncology antibodies. Merck
has the option, upon delivery of pre-defined data packages by F-star,
to fully acquire the company that owns five bispecific development
programs, including F-star's lead asset FS118. In return, Merck made
upfront payments to F-star and its shareholders totaling € 60 million,
which were capitalized in 2017. Until the option can be exercised,
Merck finances F-star's research and development activities and
reports the corresponding expenses under research and development
costs. In addition, since the collaboration began, Merck has made
performance-related milestone payments of € 14 million, which have
been capitalized. If the option is exercised and defined milestones
are reached, Merck will incur further payment obligations.
DEVELOPMENT AGREEMENT WITH THE SFJ
PHARMACEUTICALS GROUP, UNITED STATES,
TO DEVELOP ABITUZUMAB
On May 2, 2018, Merck announced that it had signed an agreement
with the SFJ Pharmaceuticals Group, United States, (SFJ) to develop
abituzumab. Abituzumab is an investigational monoclonal antibody
with potential for treating solid tumors such as colorectal cancer
(mCRC). In a Phase II study of a patient population with KRAS
wild-type mCRC, a subgroup of patients was identified as potentially
benefiting from treatment with abituzumab in combination with
ErbituxⓇ and chemotherapy. SFJ will be responsible for Phase II
and III development of abituzumab. During the development stages,
Merck recognizes a financial liability for potential repayment obli-
gations to SFJ and records a corresponding expense as research and
development costs. No significant clinical development expenses
were incurred in the 2018 reporting period.
216
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Result from Operating Activities and Income Taxes
(7) Segment reporting
INFORMATION BY BUSINESS SECTOR¹
€ million
Net sales²
Intersegment sales
Operating result (EBIT)³
Depreciation and amortization
Impairment losses
Reversals of impairment losses
EBITDA³
Adjustments³
EBITDA pre (Segment result)³
EBITDA pre margin (in % of net sales)³
Assets by business sector
Liabilities by business sector
54
7
46
827
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
Net sales
-680
2,614
2,682
101
-8
-43
-370
2,303
57
2,281
53
-709
€ million
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:
211
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
-16
-13
301
59
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.
1,492
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
22
4 According to the consolidated cash flow statement.
4
The following table provides the reconciliation from the disposal
proceeds to the preliminary net gain from the disposal of discon-
tinued operation before tax:
Other current assets
Total assets
Non-current liabilities
Provisions for pensions and other post-employment benefits
Other non-current liabilities and provisions
Current liabilities
Trade accounts payable
Other current liabilities and provisions
Total liabilities
Net assets divested (including non-controlling interests)
thereof: non-controlling interests
Net assets divested
Receivables
Carrying
251
84
48
8
391
241
43
115
38
436
amounts on the
disposal date
Inventories
Cash and cash equivalents
Current assets
€ million
Disposal proceeds
less: net assets divested
Subtotal
Transaction costs related to the disposal
Realized currency translation effects on equity
Disposal gain before tax
2018
3,364
-606
2,758
-103
-41
2,614
212
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Net assets divested comprised the following items:
€ million
Non-current assets
Goodwill
Property, plant and equipment
Deferred tax assets
Other non-current assets
Neither net gains nor losses on fair value measurement less costs
to sell were recognized for fiscal 2018 or the previous year.
3
INFORMATION BY COUNTRY AND REGION¹
€ million
14,868
14,694
Property, plant and equipment
3,031
2,895
1,503
1,385
Research and development costs
-1,938
-1,840
-920
-681
647
-902
623
2,839
-1,050
927
-166
Number of employees
25,791
25,979
13,513
13,302
2,234
2,151
10,978
10,520
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Excluding intersegment sales.
Europe
1,024
-186
2,124
-87
575
1,002
4,406
4,559
Net sales by customer location²
2017
2018
945
2018
North America
thereof: Switzerland
thereof: Germany
2018
2017
2018
614
2017
211
2017
3,818
6,537
223
Goodwill and other intangible assets
3,835
3,871
390
360
1,416
1,407
4,828
5,012
Net sales by company location²
3,810
5,562
996
3,704
544
544
14,836
14,517
950
959
4,718
4,532
1,659
1,416
879
357
364
14,836
1,583
3,672
1,869
2017
4,965
thereof: China
Latin America
Middle East and Africa
Merck Group
2018
14,517
2018
2017
4,761
2018
2018
2017
2018
2017
2018
2017
3,627
3,623
2017
14,857
127
570
-30
-26
-17
-17
-14
-12
-2,225
-2,108
-73
10,486
3,550
3,324
3,337
4,027
1,121
1,060
51,713
52,880
11,294
14,675
-69
4,512
665
32
39
2
2
21,001
21,899
1,020
-185
10,800
-165
10,339
923
531
266
214
Asia-Pacific
114
43
45
4,811
585
thereof: United States
910
2,508
232
60
41
1,743
1,742
21
26
4
240
58
-87
769
947
-488
-391
3,528
4,164
17
86
2,423
1,727
-437
217
Performance Materials
Corporate and Other
Merck Group
2018
2017
2018
2017
2018
2017
2,406
2,446
14,836
14,517
-51
-57
508
689
-548
33
2,696
3,193
107
272
13
14
100
15
116
218
919
13
106
116
392
969
-1,303
-1,418
2,219
588
906
-497
-429
742
119
-21,554
-19,655
82
786
980
-381
-292
3,800
4,246
32.7%
40.1%
25.6%
29.3%
4,046
3,942
-489
-484
4,414
-14,940
3,073
-16,832
36,888
35,621
99
Consolidated Financial Statements
-292
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.
-2
-23
-272
Impairment losses
- 18
-14
-19
-3
-190
-55
Adjustments (total)¹
-63
-27
-209
-2
-26
-327
¹Not defined by International Financial Reporting Standards (IFRSS).
Reversals of impairment losses
220
-13
reversals of impairment losses¹
-3
-99
-1
-142
Gains (+)/losses (-) on the
divestment of businesses
Acquisition-related adjustments
Other adjustments
-45
-2
-3
-50
-25
-25
-2
2
-58
Adjustments before impairment losses/
-6
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
€ million
-188
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment
of businesses
310
310
Acquisition-related adjustments
-1
-3
-5
-63
Other adjustments
-13
-10
-42
-5
-11
-81
-56
-131
-21
-31
2017
Restructuring expenses
thereof:
marketing
thereof:
cost of sales¹
and selling
thereof:
administration
thereof:
research and
development
thereof: other
operating income
expenses¹
expenses¹
costs¹
and expenses¹
Total¹
-5
-12
-41
-3
-61
-46
Notes to the Consolidated Financial Statements
-39
Total
Operating result (EBIT)²
1,727
2,423
Financial result
-266
-294
Profit before income tax
1,461
-82
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).
Notes to the Consolidated Financial Statements
219
The adjustments comprised the following:
€ million
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of businesses
Acquisition-related adjustments
Consolidated Financial Statements
Other adjustments
-272
-1,741
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.
Corporate and Other included income and expenses, assets and
liabilities as well as cash flows that could not be directly allocated to
the reportable segments presented. This related mainly to central
Group functions. Moreover, the column served the reconciliation to the
Group numbers. As these are steered at Group level, the expenses
and income as well as cash flows attributable to the financial result
and income taxes were also disclosed under Corporate and Other.
Apart from sales, the success of a segment is mainly determined
by EBITDA pre (segment result) and business free cash flow. EBITDA
pre and business free cash flow are performance indicators not
defined by International Financial Reporting Standards. However,
they represent important variables used to steer the Merck Group.
To permit a better understanding of operational performance, EBITDA
pre excludes depreciation and amortization, impairment losses, and
reversals of impairment losses as well as the adjustments presented
in the following. Among other things, business free cash flow is also
used for internal target agreements.
Neither in 2018 nor in 2017 did any single customer account for
more than 10% of Group sales. Transfer prices for intragroup net
sales were determined on an arm's-length basis.
The following table presents the reconciliation of EBITDA pre of all
operating businesses to the profit before income tax of the Merck
Group:
€ million
EBITDA pre of the operating businesses²
Adjustments²
2018
4,181
4,538
Corporate and Other
EBITDA pre of the Merck Group²
- 381
3,800
4,246
Depreciation/amortization/impairment losses/reversals of impairment losses
-1,801
20171
Adjustments before impairment losses/reversals of impairment losses²
Impairment losses
Reversals of impairment losses
the Biosimilars business in the previous year, and were included in
other operating expenses.
The majority of other adjustments in the amount of € 58 million
(2017: € 81 million) was related to the activities on the occasion of the
company's 350th anniversary (2018: € 31 million/2017: € 62 million).
The adjustments were included in the consolidated income statement
under cost of sales as well as under other operating expenses and
income, and were allocable to functional costs as follows:
€ million
2018
Restructuring expenses
Integration expenses/IT expenses
thereof:
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
cost of sales
-39
thereof:
marketing
and selling
thereof:
administration
thereof:
research and
development
expenses
expenses
costs
thereof: other
operating income
and expenses
-1
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
Adjustments (total)²
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Not defined by International Financial Reporting Standard (IFRSS).
2018
20171
-46
-61
-142
-188
-25
310
-2
-63
-58
-81
-272
-82
-55
-68
87
-6
2,129
reversals of impairment losses²
428
6,246
100%
6,185
100%
2,406
100%
14,836
100%
The following tables present a breakdown of net sales by key product
lines/products:
HEALTHCARE
€ million/in %
Oncology
thereof: ErbituxⓇ
thereof: BavencioⓇ
Neurology & Immunology
thereof: Rebif®
thereof: MavencladⓇ
Fertility
thereof: Gonal-f®
2018
944
15%
816
13%
4%
69
544
1%
2,173
35%
214
9%
3,818
26%
1,501
24%
1,532
25%
1,932
80%
4,965
33%
661
11%
256
4%
32
2%
950
6%
448
7%
88
8
23%
1%
24%
222
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
LIFE SCIENCE
€ million/in %
Process Solutions
Research Solutions
Applied Solutions
Total
PERFORMANCE MATERIALS
€ million/in %
Display Solutions
Surface Solutions
Semiconductor Solutions
Other
Total
2018
2,487
40%
2,048
33%
1,650
27%
6,185
100%
100%
1,529
6,246
270
1,438
23%
90
1%
1,162
19%
708
11%
General Medicine & Endocrinology
2,341
38%
thereof: GlucophageⓇ
733
12%
thereof: ConcorⓇ®
475
8%
thereof: Euthyrox®
363
6%
thereof: SaizenⓇ
234
4%
Other
Total
4%
2018
1,432
4,559
20171
4,246
-932
-1,012
Changes in inventories
-214
-18
Changes in trade accounts receivable as well as receivables from royalties and licenses
Elimination first-time consolidation of BioControl Systems
-145
-22
-2
Business free cash flow²
2,508
3,193
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
2 Not defined by International Financial Reporting Standard (IFRSS).
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
221
(8) Net sales
The following tables present a more detailed breakdown of net sales
from contracts with customers by business sector.
€ million/in %
Net sales by nature of the products
Goods
Equipment/hardware
2018
Healthcare
2018
3,800
6,085
software as well as advance payments for intangible assets
EBITDA pre²
-50
-43
-219
-5
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
Investments in property, plant and equipment,
31%
98%
87%
Net sales by region
(customer location)
Europe
North America
Asia-Pacific (APAC)
Latin America
Middle East and Africa (MEA)
Total
58
1%
58
6,246
100%
6,185
100%
2,406
100%
14,836
100%
2,203
35%
2,136
35%
220
9%
Total
Life Science
5,413
agreements
14
Performance Materials
2,404
Group
100%
13,902
94%
4
343
6%
347
2%
84
1%
424
7%
2
510
4%
4
4
1
15
Services
License income
Notes to the Consolidated Financial Statements
Commission income
Income from co-commercialisation
Adjustments before impairment losses/
1,332
476
-25
-7
-23
-13
-6
-23
-2
-6
-36
-185
-218
-780
-880
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.
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.
Litigation expenses amounting to € 74 million (2017: € 108 million)
arose primarily from additions to provisions for legal disputes (see
Note (26) "Other provisions").
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").
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
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.
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.
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.
226
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
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:
-40
Impairment losses
-31
-31
Project expenses
Expenses for miscellaneous services
Losses on disposal of businesses and non-current assets
Acquisition expenses
Impairment losses on financial assets²
Remaining other operating expenses
Other operating expenses
2018
2017¹
-104
-156
-74
-108
-62
-3
-58
-86
-53
-54
-46
-27
-45
-64
-36
-38
-2
Expenses for the company's 350-year anniversary (including employee bonus)
Expenses for company's
350-year anniversary
Cost of sales
-1
Total
-45
-64
-58
-86
-31
-40
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
(14) Income tax
€ million
Current income taxes in the period
Income taxes for previous periods
Deferred taxes in the period
Income taxes
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
TAX RECONCILIATION
The following table presents the tax reconciliation from theoretical
income tax expense to income tax expense according to the consol-
idated income statement. The theoretical income tax expense is
determined by applying the statutory tax rate of a corporation head-
quartered in Darmstadt.
2018
-579
20171
-694
-79
-14
290
1,137
-368
-14
€ million
-3
- 5
Marketing and selling expenses
Administration expenses
Restructuring expenses
2018
on non-financial assets
(including employee bonus)
20171
2018
20171
2018
20171
-23
-6
-6
-17
-15
-33
-1
-12
- 39
-45
-19
-30
-21
Research and development costs
-33
Other operating expenses
55%
Expenses for the revaluation of contingent considerations
Restructuring 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).
(10) Marketing and selling expenses
Marketing and selling expenses comprised the following items:
€ million
Sales force
Internal sales services
Sales promotion
Logistics
Amortization of intangible assets²
Royalty and license expenses
Other marketing and selling expenses
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".
2 Excluding amortization of internally generated or separately acquired software.
2018
2017¹
-913
-918
-808
-795
-509
-504
-702
-649
-975
-1,014
(9) Cost of sales
-213
223
Consolidated Financial Statements
20%
596
25%
1
2,406
100%
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.
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
from customer-specific equipment/hardware in the Life Science busi-
ness sector.
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.
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - REVENUE RECOGNITION
•
historical experience,
•
pricing information as well as
expected product growth rates
Sales deductions
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.
The measurement of sales deductions and refund liabilities resulting
from expected rebates and discounts took
into consideration.
The measurement of sales deductions and refund liabilities resulting
from rights of return took
•
historical return rates of individual product groups,
information from distributors on inventory levels as well as
publicly available information on product sales from sector-specific
service providers (Healthcare business sector)
into consideration.
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".
Notes to the Consolidated Financial Statements
Premiums, fees and contributions
-224
-245
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.
15
10
1
91
87
138
627
100
1,212
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).
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
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).
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.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
225
(13) Other operating expenses
The breakdown of other operating expenses was as follows:
€ million
Integration expenses/IT expenses
Litigation
Exchange rate differences from operating activities (net)
Impairment losses on non-financial assets
Non-income related taxes
Profit share expenses
Other operating income
-263
Remaining other operating income
Reversal of impairment losses on financial assets²
-4,384
-4,349
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.
€ 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.
(11) Research and development costs
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.
224
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(12) Other operating income
Other operating income was as follows:
€ million
2018
2017¹
Income from upfront payments, milestone payments, rights and royalties
368
564
Gains on disposal of businesses and non-current assets
83
350
Gains from the release of provisions for litigation
21
10
Income from miscellaneous services
Income from the revaluation of contingent considerations
Reversal of impairment losses on non-financial asset
Consolidated Financial Statements
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
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
(operational)
Derivatives without a hedging relationship
through profit or loss
Subsequent measurement at fair value
295
Other receivables
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.
Current
Determination of impairment amount
€ million
239
Notes to the Consolidated Financial Statements
Other assets comprised:
(22) Other assets
(operational)
Subsequent measurement at amortized cost
Consolidated Financial Statements
45
Dec. 31, 2018
30
4
1
EQUIPMENT
4
46
46
276
29
Total
Non-current
Dec. 31, 2017
45
247
312
17
Current
Total
Non-current
Financial items
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - PROPERTY, PLANT AND
4,811
9
2,228
Net carrying amounts as of December 31, 2018
-5,740
-977
-3,150
-1,609
66
-44
-5
1,163
-23
13
Dec. 31, 2017
13
December 31, 2018
Currency translation
15
Reversals of impairment losses
Classification as held for sale or transfer to a disposal group
-16
328
1,092
1 Values effective January 1, 2018, have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
1
1
5
8
Dec. 31, 2017
Dec. 31, 2018
Net carrying amount of assets classified as finance lease
Other property, plant and equipment
Land and buildings
€ million
The carrying amounts of assets classified as finance leases were as
follows:
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
5
45
205
63
Changes in scope of consolidation/other
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
December 31, 2018
The following table provides details on contract assets representing
completed performances not yet invoiced:
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
731
Notes to the Consolidated Financial Statements
1,024
(23) Inventories
€ million
-24
1
-1
-1
52
1
1
-78
-78
This item comprises the following items:
95
35
35
Total
Contract assets
Non-current
Current
Finished goods/goods for resale
Inventories
Work in progress
Raw materials and supplies
94
138
886
Other assets
107
8
99
121
5
117
Prepaid expenses
277
Contract assets¹
38
326
8
318
Receivables from non-income related taxes
367
91
277
361
239
52
1
52
568
114
454
663
76
587
Non-financial items
184
69
115
156
62
94
Remaining other assets¹
1
1
7
7
Assets from defined benefit plans
299
24
481
2
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
52
€ 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
Reversals of impairment losses
35
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
January 1, 2018¹
-1,474
-2,978
42
59
11
-18
-2
-1
-3
-12
-517
-115
-246
-156
Transfers
Disposals
Impairment losses
Depreciation
Changes in the scope of consolidation
-5,343
-887
-696
116
140
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
237
Dec. 31, 2018
510
40
656
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
4,719
2,209
8
8
19
19
81
81
77
77
Other
Insurance contracts
421
Fair value of the plan assets
313
456
778
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
563
777
67
1,407
6
33
39
6
6
10
10
26
26
3,172
1,137
1
420
458
458
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
-40
Quoted market
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
price in an
an active market
Investment funds
94
94
105
105
Direct investments in real estate
957
957
993
993
Debt instruments
814
814
592
592
Equity instruments
77
77
147
147
Cash and cash equivalents
Total
an active market
active market
Total
No quoted
market price in
2017
-1,820
11
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.
Notes to the Consolidated Financial Statements
Germany
2018
2017
1.97% 1.90%
2.51% 2.51%
1.75% 1.75%
Switzerland
2018
2017
1.00% 0.70%
1.74% 1.80%
United Kingdom
2018 2017
2.95% 2.56%
2.00% 2.00%
2.94% 3.04%
Other countries
2018
2017
3.16% 2.99%
3.21% 3.66%
1.77% 1.94%
These were average values weighted by the present value of the
respective benefit obligation.
The defined benefit obligations were based on the following types of
benefits provided by the respective plan:
€ million
Benefit based on final salary
2,257
Annuity
Installments
Benefit not based on final salary
Annuity
Lump sum
Installments
Other
Medical plan
Present value of defined benefit obligations
Fair value of the plan assets
Germany
Switzerland
Lump sum
2,336
1
7
The value recognized in the consolidated balance sheet for pensions
and other post-employment benefits was derived as follows:
€ million
Present value of all defined benefit obligations
Fair value of the plan assets
Funded status
Effects of asset ceilings
Net defined benefit liability recognized in the balance sheet
Assets from defined benefit plans
Provisions for pensions and other post-employment benefits
The calculation of the defined benefit obligations was based on the
following actuarial parameters:
Discount rate
Future salary increases
Future pension increases
Dec. 31, 2018
Dec. 31, 2017
4,719
4,707
-2,391
2,328
-2,452
2,255
1
2,329
1
2,256
Dec 31, 2018
United Kingdom
Other countries
2,602
1
Additions
January 1, 2018
Adjustment on initial application of IFRS 15
Adjustment on initial application of IFRS 9
December 31, 2017
€ million
The following table provides details on the development of trade
accounts receivable before loss allowances during the period under
review:
In the period from January 1 to December 31, 2018, trade accounts
receivable in Italy with a nominal value of € 28 million (2017:
€ 25 million) were sold for € 28 million (2017: € 24 million). The sold
receivables did not involve any further rights of recovery against
Merck.
2,923
2,931
-367
-73
3,290
3,004
21
Dec. 31, 2017
3,290
Dec. 31, 2018
2,983
Allowances on receivables subsequently measured at fair value through other comprehensive income
Net trade accounts receivable
Allowances on receivables subsequently measured at amortized cost
Gross trade accounts receivable
Subsequently measured at fair value through other comprehensive income
Subsequently measured at amortized cost
€ million
(24) Trade accounts receivable
241
thereof: attributable to performance obligations satisfied in prior periods
Consolidated Financial Statements
Customer payments/defaults
Classification as held for sale or transfer to disposal group
450
Total
84
93
3,137
93
1
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.
(25) Provisions for pensions and other
post-employment benefits
For further information on loss allowances as well as credit and
market risks affecting trade accounts receivable, please refer to Note
(38) "Management of financial risks", section "Credit risks". Please
refer to Note (49) "Effects from new accounting standards and other
presentation and measurement changes" for further details on the
first-time application effects of IFRS 9 regarding the classification
and measurement of financial assets.
3
3,004
-86
6
-16,590
1
16,395
3,277
-4
-9
counts receivable
3,290
Gross trade ac-
Change in scope of consolidation/other
December 31, 2018
Currency effects
-1,668
450
Cumulative actuarial gains (+)/losses (-) recognized in equity, December 31
Pension payments
Employer contributions
Employee contributions
Payment transactions
-40
139
-18
-40
139
-18
-115
Actuarial gains (+)/losses (-)
-115
-115
-34
124
-49
75
48
-14
14
110
13
123
81
Actuarial gains (+)/losses (-)
Changes in the effects of the asset ceilings
arising from experience adjustments
4
Currency translation differences recognized in income
-17
14
-3
Other effects recognized in income
3
3
Items recognized in income
-256
54
-202
thereof: attributable to the divested Consumer Health business
-7
2
-5
Remeasurements of defined benefit obligations
Actuarial gains (+)/losses (-)
arising from changes in demographic assumptions
Actuarial gains (+)/losses (-)
arising from changes in financial assumptions
Actuarial gains (+)/losses (-)
arising from experience adjustments
Remeasurements of plan assets
Actuarial gains (+)/losses (-)
Changes in the scope of consolidation
Reclassification to liabilities directly related to
assets held for sale
48
Present value
of the defined
benefit obligations
-4,698
Fair value of the
plan assets
2,386
Effects of the
asset ceilings
Net defined
benefit liability
-2,313
-160
-160
-86
-86
43
43
-2
-2
-8
-8
Currency translation differences recognized in income
40
-33
Other effects recognized in income
-3
-2
Items recognized in income
-217
2018
Gains (+) or losses (-) on settlement
4
Past service cost
Interest income
-5
43
Currency translation differences recognized in equity
-10
5
-5
15
-13
2
Other changes
53
-13
40
Other
December 31, 2018
-4,719
2,391
-2,329
244
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
€ million
January 1, 2017
Current service cost
Interest expense
Plan administration costs recognized in income
-2
48
42
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
-14
8
6
-46
Reclassification within retained earnings
Actuarial gains (+)/losses (-)
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
-2
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
67
5
Consolidated Financial Statements
Other
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
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.
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:
€ million
January 1, 2018
Current service cost
Interest expense
Interest income
Plan administration costs recognized in income
Past service cost
Gains (+) or losses (-) on settlement
Present value
of the defined
benefit obligations
Fair value of the
plan assets
2,452
Effects of the
asset ceilings
Net defined
benefit liability
-2,256
-161
-161
-85
-85
December 31, 2017
42
dependent upon years of service and final salary from which newly
hired employees have been excluded. On the other hand, the benefit
rules applicable to employees newly hired since January 1, 2005,
comprised a direct commitment that is not based on the final salary.
The vast majority of defined benefit obligations of German entities
were attributable to plans that encompass old-age, disability and
surviving dependent pensions. On the one hand, these obligations
were based on benefit rules comprising benefit commitments
-4,707
148
Other changes
2,391
Changes in the scope of consolidation
Payment transactions
Employee contributions
Employer contributions
Pension payments
Actuarial gains (+)/losses (-)
Changes in the effects of the asset ceilings
arising from experience adjustments
Actuarial gains (+)/losses (-)
Remeasurements of plan assets
arising from experience adjustments
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
6
thereof: attributable to the divested Consumer Health business
arising from changes in financial assumptions
-8
3
Remeasurements of defined benefit obligations
Actuarial gains (+)/losses (-)
Reclassification to liabilities directly related to assets held for sale
Currency translation differences recognized in equity
arising from changes in demographic assumptions
-294
from debt instruments with subsequent measurement at fair value through profit or loss
Expenses from fair value changes of share-based compensation programs
Interest component of the additions to pension provisions and other non-current provisions
Other interest expenses
Finance costs
-268
-294
7
5
8
-1
7
-14
-13
-1
-343
-15
-345
Financial result
-51
-266
-56
Capital loss from disposal of debt instruments with subsequent measurement at amortized cost
Expenses from fair value changes
-2
Currency differences from financing activities
in other intangible assets
(32) Financial result/net gains or losses from financial instruments
€ million
Interest income and similar income
Income from fair value changes
2018
20171
1 Previous year's figures have been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Capital Structure, Investments and Financing Activities
55
23
Interest expenses from interest rate derivatives
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
1
-
Finance income
77
167
27
51
Interest expenses and similar expenses
Capitalized borrowing costs of qualifying assets
in property, plant and equipment
5
The currency differences from financing activities mainly comprised
gains or losses from hedging intragroup transactions in foreign
currency.
through profit or loss
Consolidated Financial Statements
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
-259
-77
105
Net gains and losses
Reversals of
Interest Impairment losses impairment losses
21
255
-54
Subsequent measurement at amortized cost
Financial liabilities
Subsequent measurement at fair value
Notes to the Consolidated Financial Statements
The following table shows the development of net gains or losses,
interest income or expenses as well as dividend income from financial
instruments (excluding items recognized in other comprehensive
income) in the period under review by measurement category:
2018
€ million
Interest result
Net gains and losses
Currency
translation
Dividends
Interest
income
Interest
expenses
256
Impairment
losses
Fair value
adjustments
Disposal
gains/losses
Financial assets
Subsequent measurement at amortized cost
-47
Subsequent measurement at fair value
through other comprehensive income
Equity instruments
Debt instruments
Reversals of
impairment
losses
Notes to the Consolidated Financial Statements
Reclassification from non-current to current
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.
412
-582
-2
-583
193
-193
2
2
-2
2
332
4
2
336
As of January 1, 2018, contract liabilities amounted to € 506 million,
of which € 299 million was recognized in fiscal 2018.
254
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(29) Trade accounts payable
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.
Given the first-time application of IFRS 15 as of January 1, 2018,
some items previously recognized in trade accounts payable were
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").
(30) Refund liabilities
The following table shows the development of refund liabilities in the
period under review:
€ 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.
January 1, 2018
410
194
315
1,427
Other liabilities
2,288
52
2,341
2,175
354
¹ Due to the first-time application of IFRS 15 as of January 1, 2018, contract liabilities included in deferred income in 2017 were reported separately as of January 1, 2018; see Note (49)
"Effects from new accounting standards and other presentation and measurement changes".
As of December 31, 2018, other financial liabilities included liabilities
to related companies amounting to € 511 million (December 31,
2017: € 584 million). These were profit entitlements of E. Merck KG.
€ million
January 1, 2018
506
Additions
Cumulative catch-up adjustments to revenue
-39
Reclassification to liabilities directly related to assets held for sale
Currency translation
Change in scope of consolidation/other
December 31, 2018
2,529
The following table provides details on the development of contract
liabilities related to payments received before performance completion:
Contract liabilities
Current
Non-current
Total
311
Recognition of income/reversal
Additions
Utilizations/reversals
Cumulative catch-up adjustments to revenue
-34
-25
-24
-3
3
-28
12
12
1
1
13
-16
-3
-3
-1
-1
423
274
49
31
472
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.
Please refer to Note (8) "Net sales" for further information on
judgments and sources of estimation uncertainty.
(31) Net cash flows from investing
activities
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.
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.
-19
-3
-30
-31
thereof: attributable to performance obligations satisfied
in prior periods
Currency translation
Reclassification to liabilities directly related to assets held for sale
Change in scope of consolidation/other
December 31, 2018
Rebates/bonus payments
Rights of return
thereof:
thereof:
Total
379
United States
Total
United States
Total
244
52
32
431
1,273
951
44
23
1,317
-1,193
-902
-43
-22
-1,235
Consolidated Financial Statements
97
Contract liabilities¹
-14
600
370
58
203
111
11
27
780
248
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
LITIGATION
As of December 31, 2018, the provisions for legal disputes amounted
to € 551 million (December 31, 2017: € 526 million). The legal matters
described below represented the most significant legal risks.
Product-related and patent disputes
Rebif®: Merck is involved in a patent dispute with Biogen Inc., United
States, (Biogen) in the United States. Biogen claims that the sale of
RebifⓇ in the United States infringes on a Biogen patent. The dis-
puted patent was granted to Biogen in the United States in 2009.
Subsequently, Biogen sued Merck and other pharmaceutical compa-
nies for infringement of this patent. Merck defended itself against all
allegations and brought a countersuit claiming that the patent was
invalid and not infringed by Merck's actions. In the first instance, a
jury recognized the invalidity of the patent. This jury verdict was
overturned by a first-instance federal judge in September 2018. For
the time being, the patent is thus deemed to be legally valid and to
have been infringed. Merck filed a complaint with the CAFC (second
instance) against the first-instance ruling in October 2018. In this
context, Merck recognized provisions in a three-digit million euro
amount. Cash outflow is not expected to occur within the next
12 months.
PS-VA liquid crystals mixtures: In the Performance Materials business
sector, Merck is involved in a legal dispute with JNC Corporation,
Japan, (JNC). JNC claims that by manufacturing and marketing cer-
tain liquid crystals mixtures, Merck has infringed JNC patents. JNC
asserts its claims in court in various jurisdictions. In two JNC patent
infringement cases, a first-instance and a second-instance decision,
respectively, were taken in Merck's favor, against which JNC has
appealed or is highly likely to appeal.
Merck maintains that JNC's patent infringement assertion is invalid
owing to relevant prior art and has filed the corresponding nullity
actions, which in three cases were already successful in first-instance
proceedings. JNC has filed complaints in each case. In a correction
trial in Korea, a decision in favor of JNC was issued in the second
instance. Both Merck and the Korean Patent Office have filed com-
plaints with the Korean High Civil Court.
184
46
19
26
-1
-4
-3
-15
December 31, 2018
551
90
316
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.
137
46
211
1,381
thereof: current
thereof: non-current
182
32
112
30
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.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
PROVISIONS FOR EMPLOYEE BENEFITS/SHARE-BASED
PAYMENT
Provisions for employee benefits include obligations from long-term
variable compensation programs. More information on these compen-
sation programs can be found in Note (69) "Share-based compen-
sation programs". The following table presents the key parameters
as well as the development of the potential number of Merck Share
Units (MSUS) for the individual tranches:
Performance cycle
Term
Reference price of Merck shares in €
(60-day average Merck share price prior
to the start of the performance cycle)
250
DAX® value (60-day average of the DAX®
prior to the start of the performance cycle)
Jan. 1, 2016 -
Dec. 31, 2018
3 years
87.92
10,669.76
2017 tranche
Jan. 1, 2017 -
Dec. 31, 2019
3 years
2018 tranche
Jan. 1, 2018 -
Dec. 31, 2020
2016 tranche
-6
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 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.
Paroxetine: In connection with the divested generics business, Merck
is subject to antitrust investigations by the British Competition and
Market Authority (CMA) in the United Kingdom. In March 2013, the
authorities informed Merck of the assumption that a settlement
agreement entered into in 2002 between Generics (UK) Ltd. and
several subsidiaries of GlaxoSmithKline plc, United Kingdom, in con-
nection with the antidepressant drug paroxetine violates British and
European competition law. Merck, the then owner of Generics (UK)
Ltd., was allegedly involved in the negotiations for the settlement
agreement and is therefore liable. The investigations into Generics
(UK) Ltd. started in 2011, without this being known to Merck. On
February 11, 2016, the CMA imposed a fine in this matter. Merck has
taken legal action against this fine. Appropriate accounting measures
have been taken. As things stand at present, a decision and outflow
of resources are not expected within the next 12 months because
the Appeal Tribunal has since submitted the relevant legal questions
to the European Court of Justice (CJEU) for a preliminary ruling.
In addition to provisions for the mentioned litigation, provisions
existed as of the balance sheet date for various other pending legal
disputes.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
249
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - OTHER PROVISIONS
FOR LEGAL DISPUTES
The 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 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.
⚫ the legal situation and current legislation in comparable proceedings
in the jurisdiction in question.
were
⚫ the duration of proceedings in pending litigation,
⚫ the likelihood of possible outcomes of the proceedings,
⚫ 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 main parameters when determining the amount of provisions
3 years
to assets held for sale
Changes in scope of consolidation/other
(26) Other provisions
Other provisions developed as follows:
€ million
January 1, 2018
Additions
Utilizations
Release
Interest and
Litigation Restructuring
Personnel
Environmental
protection
Acceptance
and follow-on
penalties
related to
obligations
income taxes
Other
-196
Dec. 31, 2018
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.
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
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
247
Dec. 31, 2017
-435
-438
503
508
Total
151
-130
-133
251
256
-198
€ million
Increase (+)/decrease (-) in present value of all defined benefit obligations if
the discount rate is 50 basis points higher
the discount rate is 50 basis points lower
155
526
92
254
-66
-2
-7
-10
-90
-206
11
2
-9
2
1
5
2
6
-1
-2
Interest portion
Currency translation
14
Reclassification to liabilities directly related
-21
-40
137
26
43
166
1,245
65
30
203
-174
9
13
176
511
-22
-22
-78
-8
-3
15
95.63
10,822.06
91.73
13
1,032
1,038
21
Total
1,059
172
172
174
174
94
94
95
95
78
25
18
43
Dec. 31, 2017
Non-current
Current
Total
Non-current
SIGNIFICANT MANAGEMENT JUDGEMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - CONTINGENT LIABILITIES
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
(28) Other liabilities
33
Other liabilities comprised the following:
Other financial liabilities
thereof: payroll liabilies
thereof: interest accruals
Liabilities from derivatives with a hedging
relationship (operative)
Financial items
Dec. 31, 2018
Current
1,019
€ million
1,110
1,063
39
21
303
211
514
Other non-financial liabilities
99
99
Non-financial items
21
1,211
1,230
1,112
-203
Disposal gains/
losses
Fair value
adjustments
735
-669
-294
19
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.
Deferred income¹
5
1,102
58
1,077
23
20
Accruals for personnel expenses
687
687
150
665
332
4
336
Liabilities from non-income related taxes
171
15
186
144
665
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.
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
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.
Transferred as part of the disposal of Consumer Health
Dec. 31, 2018
16,336
39,889
23,760
774,850
829,632
The value of the provisions was € 114 million as of December 31,
2018 (December 31, 2017: € 45 million). Net expenses of € 92 mil-
lion were incurred in fiscal 2018 (2017: net income of € 13 million).
The three-year tranche issued in 2015 ended at the end of 2017; an
amount of € 23 million was paid out in 2018.
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - SHARE-BASED COMPEN-
SATION PROGRAMS
The measurement of long-term share-based compensation programs
implies extensive estimation uncertainty. The two main parameters
in the measurement of the long-term share-based compensation
programs in the form of cash-settled share-based compensation pro-
grams are long-term indicators of company performance and price
fluctuations of Merck shares in relation to the DAX®.
The amount recognized in the consolidated balance sheet as of
December 31, 2018, as non-current provisions, which comprises the
2017 and 2018 tranches from long-term variable compensation pro-
grams, amounted to € 54 million (December 31, 2017: 2016 and
2017 tranches € 22 million). The following overview shows the
amounts by which the non-current provisions would have been
impacted by changes in the DAX® (increase or decrease by 10%,
respectively) and the closing price of Merck shares, as of Decem-
ber 31, 2018 (increase or decrease by 10%, respectively). The
amounts stated would have led to a corresponding reduction or
increase in profit before income tax.
€ million
Variation of Merck share price
Variation of DAX® value
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
37,953
13,988
47,676
Forfeited
13,089.39
Potential number of MSUS
Potential number offered for the first time in 2016
763,463
Forfeited
24,392
Dec. 31, 2016
739,071
251
Potential number offered for the first time in 2017
Forfeited
31,105
24,897
Dec. 31, 2017
707,966
828,727
Potential number offered for the first time in 2018
891,345
853,624
5
+10%
+10%
-10%
⚫ the discount rate.
The measurement was carried out regularly in consultation with inde-
pendent experts.
ACCEPTANCE AND FOLLOW-ON OBLIGATIONS
Provisions for acceptance and follow-on obligations primarily took
into account costs stemming from discontinued development projects
as well as obligation surpluses from onerous contracts. Utilizations
and releases were mainly attributable to development projects dis-
continued in previous years.
INTEREST AND PENALTIES RELATED TO INCOME TAXES
Provisions for interest and penalties related to income taxes mainly
comprised interest payables associated with or resulting from tax
payables. In previous periods, such items were disclosed in income
tax liabilities in full.
For further information on these disclosure changes, please refer
to Note (49) "Effects from new accounting standards and other pres-
entation and measurement changes".
MISCELLANEOUS OTHER PROVISIONS
Miscellaneous other provisions mainly comprised provisions for war-
ranty obligations and for uncertain commitments from contributions,
fees and other duties.
⚫ the associated future costs, and
252
Notes to the Consolidated Financial Statements
(27) Contingent liabilities
€ million
Contingent liabilities from legal disputes and tax matters
Other contingent liabilities
Dec. 31, 2018
47
Dec. 31, 2017
66
1
1
Consolidated Financial Statements
⚫ the applicable remediation methods,
the actual severity of the identified contamination,
.
Increase (+)/decrease (-) of the provision
Dec. 31, 2018
14
-15
-10
8
Dec. 31, 2017
15
-2
16
Sensitivities were determined on the basis of the respective param-
eters in question, with all other measurement assumptions remain-
ing unchanged. The 2016 tranche reported under current provisions
will not be subject to any value fluctuations between December 31,
2018, and the payout date and was therefore not included in the
sensitivity analysis (December 31, 2017: 2015 tranche).
Provisions for employee benefits included an amount of € 51 million
for the promise of a one-time bonus for employees on the occasion
of the company's 350th anniversary, which was recognized in 2017
and paid out in 2018.
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.
SIGNIFICANT MANAGEMENT JUDGMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - OTHER PROVISIONS
FOR ENVIRONMENTAL PROTECTION
The calculation of the present value of the future settlement amount
of provisions for environmental protection required estimates to be
made of
⚫ the future settlement date,
-10%
643,954
Loans from third parties and other financial liabilities
20
-60
16
14
30
24
610
635
90
Derivatives without a hedging relationship (financial transactions)
Financial assets
444
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
535
50
50
Other debt instruments
278
285
Equity instruments
274
274
Debt instruments
8
4
12
Subsequent measurement at fair value through profit and loss
16
324
340
Equity instruments
Contingent considerations
259
259
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
Bonds (current)
869
335
Commercial paper
113
838
Bank loans
370
803
Liabilities to related parties
824
767
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
€
8
70
€
Dec. 31,
2017
Interest rate
€ million
€ million
Maturity
%
USD bond 2015/2018
Eurobond 2015/2019
Eurobond 2009/2019
799
70
335 March 2018
Sept. 2019
Dec. 2019
1.700%
0.750%
million
400
Currency
USD
800
4.250%
other comprehensive income
Subsequent measurement at fair value through
9
265
Fair value/carrying amount
Positive market values
Financial transactions
Operative transactions
Current
Non-current
Current
Non-current
4
1
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
257
(33) Cash and cash equivalents
Cash and cash equivalents comprised the following items:
€ million
Notes to the Consolidated Financial Statements
Cash, bank balances and checks
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.
1,100
1,100
5,286
6,859
1,466
Nominal volume
Current
1,898
Non-current
1,360
1,898
1,360
4,376
1,100
1,100
4,376
6,274
2,460
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.
December 31, 2018
Short-term cash investments (up to 3 months)
Dec. 31, 2018
780
Total
35
420
454
47
29
12
59
13
22
Subsequent measurement at amortized cost
Loans against third parties
1
9
10
1
9
Dec. 31, 2017
Non-current
Cash and cash equivalents
Current
Non-current
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
Total
-1
13
10
27
9
86
13
86
27
46
13
9
18
25
15
30
18
25
Non-current
Current
46
Non-current
9
30
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
25
86
27
62
13
Gross
Current
Financial transactions
73
73
16
45
14
14
16
20
58
1
4
-
20
58
Non-current
Current
Non-current
Current
16
Operative transactions
16
16
Negative market values
15
30
Non-current
Current
Non-current
Operative transactions
Financial transactions
Current
Positive market values
Fair value/carrying amount
20
58
73
16
46
4
14
45
5,286
presentation
Net presentation
-2
13
-1
-2
85
5
-68
-123
1
-1
December 31, 2017
Tax effect
-5
3
3
of options currency forwards
Reclassification to assets
Reclassification to profit or loss
-25
Fair value adjustment (directly recognized in equity)
-4
-64
Tax effect
Reclassification to assets
14
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
Negative market values
3
Netting
January 1, 2017 (after adjustment)
January 1, 2017
agreements
due to
master netting
Potential netting volume
of the Group applied to the following hedging instruments:
The reserves for cash flow hedges and the cost of cash flow hedging
-155
-155
113
113
Net presentation
Netting
presentation
Gross
-168
-168
80
80
due to financial
collateral
Adjustment due to mandatory retrospective adoption of IFRS 9¹
Potential net
amount
51
-139
€ million
swaps
-68
-123
Interest rate
Intrinsic value Spot component of
of options currency forwards
Forward
component of
Time value
Cash flow hedge
Cost of hedging
-96
-60
54
60
Potential net
amount
due to financial
collateral
due to
master netting
agreements
Potential netting volume
29
-29
366
1,573
366
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.
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".
4.5%/2.4%
260
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
CAPITAL MANAGEMENT
The objective of capital management is to secure financial flexibility
in order to maintain long-term business operations and to realize
strategic options. Maintaining a stable investment grade rating,
ensuring liquidity, limiting financial risks as well as optimizing the
cost of capital are the objectives of our financial policy and set impor-
tant framework conditions for capital management. The responsible
committees decide on the target capital structure of the balance
sheet, the appropriation of net retained profit and the dividend level.
In this context, net financial debt is one of the leading capital man-
agement indicators.
874
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).
550
1,000
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
2023
2024
2025
1.350
800
70
0.75%/
4.25%
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.
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:
Syndicated loan
250
250
variable
549
370
581
303
variable
2022
<1 year
2,799
620
3,931
1,653
There are no indications that the availability of credit lines already
extended was restricted.
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.
(36) Equity
EQUITY CAPITAL
250
€ million
250
400
Bilateral credit agreement with banks
Bilateral credit agreement with banks
Bilateral credit agreement with banks
Various bank credit lines
Dec. 31, 2018
Financing
commitments
from banks
Dec. 31, 2017
Financing
commitments
Utilization
from banks
Utilization
2,000
2,000
Interest
variable
Maturity of
financing
commitments
2020
700
700
variable
400
variable
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
10,144
589
Financial liabilities
less:
Cash and cash equivalents
Current financial assets
Net financial debt³
655
1,348
872
799 Sept. 2019
70 Dec. 2019
626 March 2020
1,347 March 2020
833 March 2022
0.750%
4.250%
800
€
70
70
€
2.400%
4.500%
750
USD
Non-current financial liabilities
1,350
Liabilities from derivatives (financial transactions)
Finance lease liabilities
Liabilities to related parties
19
Liabilities from derivatives (financial transactions)
16
27
Finance lease liabilities
2
1
Current financial liabilities
2,215
2,790
Eurobond 2015/2019
Eurobond 2009/2019
USD bond 2015/2020
Eurobond 2010/2020
USD bond 2015/2022
Eurobond 2015/2022
USD bond 2015/2025
Hybrid bond 2014/2074
Hybrid bond 2014/2074
Bonds (non-current)
Bank loans
Loans from third parties and other financial liabilities
90
€
1,000
500
€
6,304
7,040
250
850
51
54
73
86
2
2
6,681
8,033
8,896
10,823
2,170
24
6,701
3.375%
2.950%
€
2.625%
USD
548
548
Sept. 2022
1.375%
550
€
1,389
1,328
994
992
498
497
March 2025
Dec. 2074¹
Dec. 2074²
3.250%
1,600
USD
1,000
Operative transactions
E. MERCK KG'S SHARE OF NET PROFIT
Consolidated Financial Statements
-5
1
1
22
22
Profit transfer to E. Merck KG
including changes in reserves
-62
-454
-515
-63
-531
-593
Result of E. Merck KG before reciprocal profit
transfer adjusted for trade tax
-24
-16
-5
Profit transfer to E. Merck KG/
withdrawal by E. Merck KG
-7
-611
shareholders. The amount withdrawn by E. Merck KG would amount
to € 430 million (2017: € 515 million).
APPROPRIATION OF PROFITS AND CHANGES IN RESERVES
€ million
Profit transfer to E. Merck KG
Profit transfer from E. Merck KG
Changes in reserves
2018
2017
Merck & Cie
-62
Merck KGaA
-447
Total
-509
Merck & Cie
Merck KGaA
Total
-63
-548
-7
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
-62
- 63
Interest
Currency
No hedge accounting
Interest
Currency
Equity
DEC. 31, 2017
€ million
Cash flow hedge
Interest
Currency
No hedge accounting
Interest
Currency
Equity
Nominal volume
Current
1,573
Non-current
Cash flow hedge
-430
€ million
The following derivatives were held by Merck as of the balance sheet
date:
-515
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
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).
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.
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.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
263
NON-CONTROLLING INTERESTS
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.
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.
OTHER CHANGES IN EQUITY
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.
264
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
(37) Derivative financial instruments
DEC. 31, 2018
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).
25
26
-16
616
723
20
56
(100%)
-24
637
-16
780
(70.274%)
447
-447
548
-548
(29.726%)
7
-24
-7
Merck KGaA
Merck KGaA
Notes to the Consolidated Financial Statements
261
The allocation of net profit/loss is based on the net income of both
E. Merck KG and Merck KGaA determined in accordance with the
provisions of the German Commercial Code. These results are
adjusted for trade tax and/or corporation tax and create the basis
for the allocation of net profit/loss. The adjustment for corporation
tax is made to compensate for the difference in the tax treatment
between the general partner and the limited liability shareholders.
Corporation tax is only calculated on the income received by the
limited liability shareholders. Its equivalent is the income tax 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:
€ million
Result of E. Merck KG before reciprocal profit transfer, adjusted
for trade tax
Net income of Merck KGaA before reciprocal profit transfer
Corporation tax
Basis for appropriation of profits
Profit transfer to E. Merck KG
Ratio general partner's capital to total capital
Profit transfer from E. Merck KG
Ratio of share capital to total capital
Corporation tax
Net income
2018
2017
E. Merck KG
E. Merck KG
60
5
-20
2018
2017
Merck KGaA
162
E. Merck KG
537
Merck KGaA
171
E. Merck KG
430
60
25
39
16
187
187
-430
-515
-162
-162
61
Profit carried forward
-5
Dividend proposal
Retained earnings Merck KGaA
-56
430
162
537
171
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).
APPROPRIATION OF PROFITS
The profit distribution to be resolved upon by shareholders also
defines the amount of that portion of net profit/loss freely available
to E. Merck KG. If the shareholders resolve to carry forward or to
allocate to retained earnings a portion of Merck KGaA's net retained
profit to which they are entitled, then E. Merck KG is obligated to
allocate to the profit brought forward/retained earnings of Merck KGaA
a comparable sum determined in accordance with the ratio of share
capital to general partner's capital. This ensures that the retained
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.
262
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
€ million
Net income
Profit carried forward previous year
Withdrawal from revenue reserves
Transfer to revenue reserves
Withdrawal by E. Merck KG
Financial transactions
€ million
4
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
12,244
2
2
4
472
472
20
> 5 years
58
€ million
Bonds and commercial paper
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
Trade accounts payable
78
16
984
208
7,286
Repayment
Interest
Repayment
Interest
Interest Repayment
Carrying
amount
>5 years
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
458
45
620
369
15
90
4
1
5
50
17
67
13
508
522
1,335
1,335
1,766
1,766
1,899
85
4,430
250
2
17
2,195
2,195
Liabilities to related parties
Group
Performance
Materials
Life Science
Healthcare
€ million
Dec. 31, 2018
open positions of all trading partners in the corresponding countries
and takes risk-mitigating measures if necessary. If there is objective
evidence that particular trade accounts receivable are fully or partially
impaired, additional loss allowances are recognized to provide for
expected credit defaults. The customer groups with comparable
default risks to be taken into account are determined at Merck in
accordance with the business sectors and location of the respective
customers. Current macroeconomic expectations are also considered
by taking into account country-specific ratings. For risk management
purposes, Merck groups the existing trade accounts receivable based
partly on the business sectors, as the customers' risk profiles within
the respective business sector are regarded as comparable, and
partly on credit ratings in the respective countries in which Merck
operates and from which the receivables originate. The table below
contains an overview of the credit risk by business sector and country
rating as of December 31, 2018:
The credit risk of customers is monitored using established credit
management processes that take the individual customer risks into
account. This is done in particular by analyzing the aging structure of
trade accounts receivable. Merck continuously reviews and monitors
The credit risk from trade accounts receivable is largely impacted by
the specific circumstances of individual customers. Merck also takes
into account additional factors such as the general default risk in the
respective industry and country in which the customer operates.
Credit risks from trade accounts receivable
The above-described impairments for trade accounts receivable
applied entirely to receivables resulting from contracts with customers.
Reversals of impairment losses on debt instruments subsequently
measured at amortized cost mainly related to an other receivable
from a final payment in connection with the generics business divested
in 2007.
271
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
27
35
69
105
-2
External credit rating at least AA- (rating agency Standard & Poor's)
or Aa3 (rating agency Moody's)
-75
856
437
Dec. 31, 2018
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
Trade accounts receivable before
1,010
1,535
465
2
36
427
Trade accounts receivable before impairment losses
External credit rating lower than BBB- (rating agency Standard & Poor's)
or Baa3 (rating agency Moody's)
420
21
146
252
External credit rating at least BBB- (rating agency Standard & Poor's)
or Baa3 (rating agency Moody's)
2,120
827
-77
2018
of debt instruments subsequently measured at fair value through other comprehensive income
Net impairment losses on financial assets
Finance lease liabilities
18
59
52
15
155
Liabilities from derivatives
54
4
19
1
73
Loans from third parties and other financial liabilities
21
453
474
Other financial liabilities
1,352
1,352
4
1
2
14,120
of debt instruments subsequently measured at amortized cost
of trade accounts receivable
of debt instruments subsequently measured at fair value through other comprehensive income
Reversal of impairment losses
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.
Loans from third parties and other financial liabilities
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.
According to IFRS 9, there is a rebuttable presumption that the
credit risk has increased significantly when contractual payments are
more than 90 days past due. Merck therefore analyzes all financial
assets that are more than 90 days past due and examines whether
there is objective evidence of impairment requiring additional risk
provisions.
Credit risk for Merck means the risk of a financial loss if a customer
or other contract partner is not able to meet its contractual payment
obligations. Merck is generally exposed to credit risks from existing
trade accounts receivable other debt instruments, derivatives and
contract assets.
CREDIT RISKS
1,839
143
6,179
657
6,046
243
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
Other financial liabilities
Liabilities to related parties
Trade accounts payable
Maturity date
thereof: positive market value (asset)
thereof: negative market value (liability)
Fair value of the hedging instrument
thereof: non-current
thereof: credit impaired
Loss allowances
thereof: credit impaired
Overdue by
Not yet due
90 days
Overdue by
180 days
0.5%
0.8%
3.3%
Overdue by
360 days
34.8%
More than 360
days past due
53.1%
Total
2,415
399
USD
60
CHF
TWD
24
47
53
125
85
101
122
129
125
169
88
85
125
1,055
85
178
1,180
KRW
JPY
CNY
66
64
3,004
loss allowances
thereof: credit impaired
Loss allowances
thereof: credit impaired
Overdue by
Not yet due
90 days
Overdue by
180 days
Overdue by
360 days
0.9%
1.3%
6.0%
14.1%
More than 360
days past due
93.3%
Total
2,408
402
61
45
Trade accounts receivable before
Expected loss rate
€ million
Jan. 1, 2018
2
1
2
16
30
51
-12
-3
-2
44
-23
-73
-1
-14
-29
-44
272
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
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:
-34
Expected loss rate
-49
-5
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
The Merck Group's net exposure to interest rate changes comprised
the following:
INTEREST RATE RISKS
1The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
1,397.39
126.74
Effects on equity
36.68
2018
+100 basis points
Bank loans
Bonds and commercial paper
Subsequent measurement at amortized cost
Dec. 31, 2018
€ million
The following liquidity risk analysis presents the contractual cash
flows such as repayments and interest on financial liabilities and
derivative financial instruments with a negative fair value:
Liquidity risks are monitored and reported to management on a
regular basis.
flexibility and by Group-wide cash management. Information on
issued bonds and other sources of financing can be found in Note
(35) "Financial liabilities/capital management”.
The risk that Merck cannot meet its payment obligations resulting from
financial liabilities, is limited by establishing the required financial
LIQUIDITY RISKS
The shares in publicly listed companies amounting to € 134 million
(December 31, 2017: € 16 million) are generally exposed to a risk
of fluctuations in fair value. A 10% change in the value of the stock
market would impact equity by € 13 million (December 31, 2017:
€ 2 million). This change in value would be recognized in equity.
SHARE PRICE RISKS
16
-26
-9
6
-100 basis points
+100 basis points
-100 basis points
2017
8.48
1.12
1.22
1:1
1:1
1:1
January 2019-
January 2019-
December 2019
January 2019-
December 2020
December 2020
January 2019-
loss allowances
-10
-3
-8
-5
-3
-49
3
2
-10
-8
December 2020
1:1
January 2019-
December 2020
1:1
January 2019-
January 2021
1:1
(including forward points)
Weighted average hedged rate for the year
7
6
3
3
-5
58
January 1, 2018
-2
determine hedge effectiveness since
-7
-6
3
-3
5
-58
instruments since January 1, 2018
Change in value of outstanding hedging
Hedge ratio¹
Change in value of hedged item used to
460
-9
12
Current financial assets
Cash and cash equivalents
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
589
Assets
€ million
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:
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
Dec. 31, 2017
2
589
47
46
Derivatives without a hedging relationship
568
92
276
936
Other current and non-current assets
2,923
2,923
Loans and receivables
2,923
2,923
Trade accounts receivable
90
Derivatives with a hedging relationship
35
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
35
2
5,530
Total
(measured in accordance with IAS 17)²
696
492
174
30
6,098
673
5,425
Total
1
1
(measured in accordance with IAS 17)²
Finance lease receivables
4
Financial liabilities
4
45
30
50
27
22
259
259
4
1
76
59
50
50
76
Subsequent measurement at amortized cost
Trade accounts payable
Other financial liabilities
Finance lease liabilities
472
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
46
259
46
276
7,258
2
Publicly-traded funds
Fair value determined using input
Total
Other financial liabilities (subsequent Bonds
measurement at amortized cost)
measurement through profit or loss)
Debt instruments (subsequent
comprehensive income)
Debt instruments (subsequent
measurement through other
Fair value determined by official prices
and quoted market values (Level 1)
Equity instruments
12
Bonds
30
in listed companies)
Shares (equity investments
Description of the
measurement technique
Financial
liabilities
assets
Financial
Financial instruments
concerned
Fair Value
€ million
DEC. 31, 2018
is presented in the following table:
The determination of the fair values of financial assets and liabilities
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
17
276
7,258
factors observable in the market (Level 2)
Equity instruments
Interest rates obervable
on the market
Interest rate curves
available on the market
observable on the market
as well as exchange rate
volatilities
2,845
174
flows
2,677 Discounting of future cash
73
14
95 Use of recognized actuarial Spot and forward rates
methods
Quoted prices in an active
market and volatilities
observable on the market
Volatilities observable on
the market
Quoted prices in an
active market
Main input factors used to
determine fair values
Derivation from active
market
Liabilities to banks and
other loan liabilities
Total
Other financial liabilities (subsequent
measurement at amortized cost)
21
Forward exchange contracts
and currency options
Nominal value considering
liquidity discount
conversion right to shares
in companies
22
Convertible note with
Derivatives (with or without a
hedging relationship)
Debt instruments (subsequent
measurement through profit or loss)
Derivation from active
market considering liquidity
discount
118
Shares (equity investments
in listed companies)
Interest rate swaps
2 Measurement within the scope of IAS 17 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
1The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values.
1,427
Liabilities
Derivatives with a hedging relationship
416
416
4
420
Available for sale
12
12
Loans and receivables
Held to maturity
13
13
Current and non-current financial liabilities
Derivatives without a hedging relationship
Other financial liabilities
13
429
4
12
444
Non-current financial assets
568
568
Non-financial items
45
45
45
Derivatives with a hedging relationship
276
Derivatives without a hedging relationship
10,823
10,707
113
1,427
Non-financial items
43
43
43
Derivatives with a hedging relationship
1,059
1,059
Other financial liabilities
Derivatives without a hedging relationship
113
11,074
1,427
43
1,059
2,529
2,195
2,195
2,195
2,195
4
Current and non-current other liabilities
Other financial liabilities
Trade accounts payable
Liabilities from finance leases
Derivatives with a hedging relationship
10,707
10,707
4
113
113
Loans and receivables
259
64
Derivatives with a hedging relationship
-184
449
135
75
115
Exchange rate -10%
Consolidated income statement
-122
18
-45
-14
-8
-12
1,215
(€ depreciation)
-172
39
-44
-38
-19
-18
Exchange rate +10%
(€ appreciation)
Consolidated income statement
122
-18
45
14
8
Equity
12
KRW
TWD
-15
-13
-16
-135
20
-19
-11
-14
Consolidated income statement
62
-27
74
15
JPY
13
Equity
110
-16
8
15
10
12
€ million
Dec. 31, 2017
Net exposure
USD
CHF
CNY
16
Equity
147
-31
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
36
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
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
-74
27
-62
Consolidated income statement
Equity
ble in the market
(Level 3)
(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
Total
Other debt instruments
Trade accounts receivable
Cash and cash equivalents
Subsequent measurement at amortized cost
Financial assets
Dec. 31, 2018
€ million
The following table presents the carrying amounts and the fair values
of the individual financial assets and liabilities as of December 31,
2018, for each individual financial instrument class pursuant to IFRS 9:
(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.
(excluding leasing receivables)
2,170
2,170
2,909
Derivatives without a hedging relationship
Other debt instruments
Contingent considerations
Equity instruments
through profit or loss
Subsequent measurement at fair value
12
12
12
4
8
Other debt instruments
21
21
21
21
Trade accounts receivable
274
140
118
17
274
274
Equity instruments
other comprehensive income
322
26
296
2,909
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.
7
assessment was undertaken as of the balance sheet date and the
initially assumed risk profile was maintained.
Credit risks from other financial assets
Notes to the Consolidated Financial Statements
267
(38) Management of financial risks
Market fluctuations with respect to foreign exchange and interest rates
represent significant profit and cash flow risks for Merck. Merck aggre-
gates these Group-wide risks and steers them centrally, partly by using
derivatives. Merck uses scenario analyses to estimate existing risks
of foreign exchange and interest rate fluctuations. Merck is not subject
to any material risk concentration from financial transactions.
Merck uses marketable forward exchange contracts, options and
interest rate swaps as hedging instruments. The strategy to hedge
interest rate and foreign exchange rate fluctuations arising from
forecast transactions and transactions already recognized in the bal-
ance sheet is set by a risk committee, which meets on a regular
basis. The use of derivatives is regulated by extensive guidelines and
subject to constant risk controls by Group Treasury. Speculation is
prohibited. A strict separation of functions between trading, settle-
ment and control functions is ensured. Derivatives are only entered
into with banks that have a good credit rating. Related default risks
are continuously monitored.
The Report on Risks and Opportunities included in the combined
management report provides further information on the management
of financial risks.
FOREIGN EXCHANGE RISKS
Owing to its international business focus, Merck is exposed to trans-
actional foreign exchange risks within the scope of both its business
activities and financing activities. Foreign exchange risks are contin-
uously analyzed and different hedging strategies used to limit or
eliminate these risks. Foreign exchange risks from the following
transactions are hedged through the use of forward exchange con-
tracts and currency options:
• Forecast transactions in non-functional currency, the expected
probability of which is very high for the next 36 months,
• Firm purchase commitments of the next 36 months in non-func-
tional currency,
Intragroup financing in non-functional currency as well as
• Receivables and liabilities against third parties in non-functional
currency.
Forward exchange contracts are used to hedge foreign exchange
risks arising from transactions already recognized in the balance
sheet. Forecast transactions and firm purchase commitments in
non-functional currency are hedged using forward exchange con-
tracts and currency options which are due within the next 36 months.
The following table shows the net exposure and the effects of
transactional exchange rate movements of the key currencies against
the euro in relation to the net income and equity of the Group on the
balance sheet date.
€ million
Consolidated Financial Statements
Dec. 31, 2018
CHF
CNY
TWD
JPY
KRW
Net exposure
Exchange rate -10%
618
-274
741
153
132
163
(€ depreciation)
Exchange rate +10%
(€ appreciation)
USD
up to 24 months
over 2 years
Impaired
If the impairment of trade accounts receivable and contract assets
had been 10% higher in 2018, profit before income tax would have
been € 8 million lower.
⚫ the identification of customer groups with identical default risks,
⚫ the identification of a substantial increase in the credit risk and
⚫ the calculation of the expected credit losses.
In terms of the impairment of trade accounts receivable and of con-
tract assets there is significant discretion and estimation uncertainty
when it comes to
SIGNIFICANT MANAGEMENT JUDGEMENTS AND SOURCES
OF ESTIMATION UNCERTAINTY - IMPAIRMENT OF TRADE
ACCOUNTS RECEIVABLE AND CONTRACT ASSETS
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
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
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.
DEC. 31, 2018
281
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
-16
729
349
-314
765
Other current and non-current financial liabilities
Financial liabilities
3,136
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".
147
12,597
497
-1,792
-38
-16
-463
-546
Information on Executive Board and Supervisory Board compen-
sation can be found in Note (43) "Executive Board and Supervisory
Board compensation". Activities above and beyond those set forth in
Note (43) such as, for example, the provision of services or the
granting of loans, between companies of the Merck Group and mem-
bers of the Executive Board or the Supervisory Board of Merck KGaA,
the Executive Board or the Board of Partners of E. Merck KG or mem-
bers of their immediate families took place neither in 2018 nor 2017.
(43) Executive Board and Supervisory
Board compensation
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.
rial impact on profit before income tax.
of the other contingent compensations would not have had a mate-
A change in the main input parameters used for the measurement
unchanged (6.3%)
6.8%
5.8%
Change of discount rate
Change in probability of regulatory approval
€ million
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.
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 sales planning assumed to derive royalties and
⚫ the discount rate used.
the estimated probability of occurrence of the individual milestone
events,
•
•
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:
Liabilities to related parties
-10%
10%
For the period from January to December 2018, fixed salaries of
€ 5.9 million (2017: € 6.0 million), variable compensation of
€ 17.2 million (2017: € 16.3 million), and additional benefits of
€ 0.4 million (2017: € 0.3 million) were recorded for members of
the Executive Board of Merck KGaA by E. Merck KG and by companies
included in these consolidated financial statements. Furthermore,
additions to provisions for the Long-Term Incentive Plan for members
of the Executive Board of Merck KGaA resulted in expense of
€ 15.9 million from (2017: gains of € 1.8 million from the release of
provisions), and additions to the pension provisions for members of
the Executive Board of Merck KGaA included current service costs of
€ 3.1 million (2017: € 3.2 million) and, in 2017, past service costs of
€ 0.9 million.
The compensation of the 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).
Notes to the Consolidated Financial Statements
€ million
Consolidated Financial Statements
32
unchanged
-5
38
0
-38
45
5
-34
-42
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
7,040
-400
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,
Financial liabilities¹
106
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.
7,040
(41) Net cash flows from financing
activities
€ million
Bonds
thereof: current
thereof: non-current
Liabilities to related parties
Other current and non-current financial liabilities¹
The change in financial debt was as follows:
133
-869
6,304
Changes
in scope of
Cash inflows Repayments consolidation
-932
Currency
translation
-425
Fair value
changes
Dec. 31,
Other
Jan. 1,
2017
8,731
937
2017
-932
-25
354
335
thereof: non-current
7,794
7,375
-354
thereof: current
€ million
765
375
- 319
821
2,687
10,827
32
407
Bonds
-1,821
-2,463
5
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".
-2
AND SOURCES OF ESTIMATION UNCERTAINTY -
CONTINGENT CONSIDERATIONS
SIGNIFICANT MANAGEMENT JUDGMENTS
0
259
from the sale and purchase
of businesses or shares in
corporations
Interests in
19
unlisted funds
Bond with embedded
7
settlement option for equity
Used of standard market
valuation models
in a unlisted company
492
5
Market observable interest
rates
278
Consolidated Financial Statements
Shares (equity investments
in listed companies)
Main input factors used to
determine fair values
measurement technique
Description of the
Financial
liabilities
assets
Contingent considerations
Financial
Classified as available for sale
Fair value determined by official prices
and quoted market values (Level 1)
Fair Value
€ million
DEC. 31, 2017
Notes to the Consolidated Financial Statements
Financial instruments
concerned
Total
Other debt instruments
Contingent considerations
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
Description of the
measurement technique
Discounting of expected
future cash flows
129
10
Equity interests in unlisted
companies
Financial
liabilities
45
assets
Financial instruments
concerned
Fair Value
Fair value determined using input factors
unobservable in the market (Level 3)
Equity instruments
277
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
Financial
16
Option pricing models
Taking into account the
fair value of the companies
in which the funds are
invested
Option on equity
instruments in an
unlisted company
Derivatives (without hedging
relationship)
agreement
that are intended for sale
due to a factoring
21
Trade accounts receivable
5 Discounting of probability-
weighted future milestone
payments and license fees
Trade accounts receivable
Net asset values of the fund
interests
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
Acquisition cost
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
1
Bonds, investment funds
Derived from
Publicly-traded funds
company
46
Option on equity instru-
ments in an unlisted
Derivatives without a hedging
relationship
18
Interests in unlisted funds
Total
from the sale and purchase
of businesses or shares in
corporations
Contingent considerations
96
6
Financial
liabilities
Financial
assets
Fair Value
277
Equity investements in
unlisted companies
Description of the
measurement technique
Discounting of expected
future cash flows
Main input factors used to
determine fair values
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%)
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.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
280
3
Derived from observable
prices within the scope
of equity refinancing
sufficiently close to the
balance sheet date
443
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
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
287
Financial instruments
concerned
279
54
Forward exchange contracts
Total
Classified as other Liabilities
Fair value determined using input factors
observable in the market (Level 2)
Derivatives with and without a
hedging relationship
Quoted prices in an
active market
70
7,719
7,719
2
active market
35
Bonds
Classified as other liabilities
Total
53
Fair Value determined using input factors
unobservable on the market (Level 3)
Classified as available for sale/
classified as other liabilities
and currency options
actuarial methods
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
€ million
DEC. 31, 2017
Market observable
interest rates
Interest rate curves
available on the market
Use of recognized
Spot and forward rates ob-
servable on the market and
exchange rate volatilities
67
3,355 Discounting of future
cash flows
Liabilities to banks and
other loan liabilities
86
13
Interest rate swaps
3,511
137
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:
3
3
22
-1
Gains (+)/losses (-)
recognized in other comprehensive income
30
30
Currency translation
1
I
1
Disposals due to divestments/
payments received
-80
Transfers out of Level 3 into Level 1/Level 2
Other
-9
-8
259
27
487
-1
-3
3
24
December 31, 2018 (IFRS 9)
8
-9
-28
-29
-20
-4
Net carrying amounts,
held as of the balance sheet date
thereof: attributable to assets/liabilities
22
49
Fair value changes
of Level 1/Level 2
Transfers into Level 3 out
33
I
Gains (+)/losses (-)
8
I
105
conclusion of factoring agreements
Additions due to acquisitions/divestments/
106
46
15
45
recognized in profit or loss
2
24
thereof: financial result
-36
-1
-37
held as of the balance sheet date
-7
thereof: attributable to assets/liabilities
-1
-31
operating result
thereof: other
-1
-7
-29
140
21
-5
3
held as of the balance sheet date
thereof: attributable to assets/liabilities
3
4
03
3
3
-9
-9
held as of the balance sheet date
thereof: attributable to assets/liabilities
-4
-9
thereof: financial result
-9
3
recognized in other comprehensive income
4
397
440
Net carrying amounts, December 31,
2017 (IAS 39)
Transfers out of Level 3 into Level 1/Level 2
-1
Gains (+)/losses (-)
-1
-2
-2
Currency translation
-1
5
5
Disposals due to divestments
277
thereof: other operating result
-6
Other liabilities
thereof:
Derivatives
contingent without a hedging
considerations
relationship
financial assets
Total
Available-for-sale
Financial liabilities
thereof:
contingent
considerations
Financial assets
€ million
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".
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-
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
282
Net carrying amounts, January 1,
2017 (IAS 39)
-6
74
50
recognized in profit or loss.
Gains (+)/losses (-)
Fair value changes
68
68
measurement at cost/Level 1/Level 2
75
Transfers to Level 3 from previous
-2
46
228
258
302
-1
Additions as result of acquisitions/divestments
21
3
January 1, 2018 (IFRS 9)
€ million
Obligations to acquire intangible assets and from collaboration agreements
within one year
in 1-5 years
more than 5 years
266
Dec. 31, 2017
247
1,572
1,242
1,509
2,763
3,328
Other financial obligations were recognized at nominal value.
1,255
447
Dec. 31, 2018
Notes to the Consolidated Financial Statements
151
577
530
150
236
52
The expected maturities of these obligations were as follows:
63
4,308
Obligations to acquire intangible assets existed in particular owing to
contingent considerations within the scope of in-licensing and research
and development collaborations. In these agreements Merck has
entered into an obligation to make milestone payments once specific
targets have been reached. In the not very likely event that all con-
tract partners achieve all milestones, Merck would be obligated to
pay up to € 1,548 million (December 31, 2017: € 1,968 million) for
the acquisition of intangible assets. The table above does not contain
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
3,686
144
€ million
Present value of future payments from finance leases
4
131
308
138
577
More than
2
Within 1 year
5 years
Total
4
1
2
1
1-5 years
Dec. 31, 2018
2
2
Interest component of finance leases
Future finance lease payments
Future operating lease payments
€ million
Dec. 31, 2017
Present value of future payments from finance leases
Total
4
Interest component of finance leases
Future operating lease payments
More than
Within 1 year
1-5 years
5 years
2
Future finance lease payments
Dec. 31, 2017
3,328
The maturities of liabilities from lease agreements were as follows:
Dec. 31, 2018
46
€ million
Financial assets
Subsequent measurement at fair value
through profit or loss
Subsequent measurement
at fair value through other
comprehensive income
Financial
liabilities
Subsequent
measure-
ment at
fair value
through
profit or loss
Equity
instruments
Other debt
Contingent
Derivatives
without a
hedging
relationship
Equity
instruments
277
Trade
accounts
2,763
Net carrying amounts,
102
4
21
-18
7
-1
Adjustment on initial application of IFRS 9
277
18
440
December 31, 2017 (IAS 39)
Net carrying amounts,
Contingent
receivable considerations
46
Consolidated Financial Statements
instruments considerations
283
Operating lease
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
Notes to the Consolidated Financial Statements
-17
Acquisition of property, plant and equipment
Acquisition of intangible assets and due to collaboration agreements
-17
M Ventures portfolio companies
The following equity instruments measured at fair value through
other comprehensive income were disposed of in fiscal year 2018:
2018
€ million
Equity instrument¹
€ million
Cascadian Therapeutics, Inc., United States
Nature's Best Health Products Ltd., United Kingdom
Reasons for the disposal
Portfolio adjustments
and acquisitions
Acquired by Seattle Genetics,
Inc., United States
Sale of Consumer Health
business to Procter & Gamble
Company, United States
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:
1 Disposals due to liquidations are not included.
China's plan for the future
Focus on
biotechnology
in China's
Five-Year Plan
employees on site
What role does the collaboration
with Tongji University play in all of
this?
25
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.
VIBRANT CHINA
3,500
A molecular biology reagent kit that
makes it possible to edit gene se-
quences quickly and simply with the
help of gene scissors. Thanks to
CRISPR, a procedure that used to take
months can now be completed in
just one week. That's a real break-
through in biomedical research.
Simpler access and faster processing
mean that far more researchers
can work on fundamental questions,
such as the influence of individual
genes on various illnesses.
Which concrete products does
Merck offer for CRISPR Cas/9?
and technical expertise as well as
our extensive portfolio of more than
300,000 products. Genome editing
tools, for example, have become much
more readily available thanks to our
technology. This also includes CRISPR
Cas/9, for which we hold fundamen-
tal patents.
Of course. After all, our aim is to solve
the biggest challenges in the life sci-
ences - and we want to accomplish
that together with our customers. For
this purpose, we provide our scientific
Does Merck also provide expertise?
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.
New partner
How did the partnership with
Tongji University come about?
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.
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.
With local production and development
sites, the Performance Materials
business sector is moving even closer
to its partners and customers in
China. In the future, it will concentrate
on the continued growth of its
semiconductor solutions business.
a new driver
of growth
Semicon-
ductors as
in demand for increas-
ingly smaller but more
powerful microchips.
trends such as AI are
driving an increase
Technology mega-
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.
Semiconductors as a new driver of growth
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
from equipment and reagents to lab-
oratory devices and services. As a
partner to the life science research
community, we want to accelerate
innovation.
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?
VIBRANT CHINA
85
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.
Investments in the
Nantong production
site since 2017:
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
ZARA
Lil
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.
24
New partner
New partner
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.
Steve Vermant, Managing Director of the Life
Science business sector and Head of Research
Solutions in China
What role do technologies such
as CRISPR/Cas9 play in academic
research in China?
"The demand
from chip
manufacturers
VIBRANT CHINA
years of presence
in China
"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.
MIDO
€ 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
瑞士美度
Merck's Healthcare business sector
has great ambitions in China -
take, for instance, its partnership
with the Internet giant Alibaba.
The health platform for everyone
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-
ness.
Radis
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.
in China for inno-
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."
-
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
VIBRANT CHINA
VIBRANT CHINA
Big plans for China
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.
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."
25005
PAPAR
RECERCE
路
Research drives us all
vative materials
HEARTBEATS
17
"I am simply fascinated
by everything we
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."
FRANZISKA HÖLY
Deputy Foreman, Performance Materials,
Darmstadt, Germany
MERCK
10
18
VIBRANT CHINA
上海银行
15709
DYNAMIC EVOLUTION, MOTIVATED TEAM
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
2
A GROWTH MARKET WITH IMMENSE
POTENTIAL
VIBRANT CHINA
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
22
40
processes. Demand for innovative materials among
Chinese chip manufacturers will probably continue
to rise in the future," says Winnie Hui, Head of Busi-
ness Planning and acting representative of the
Semiconductor Solutions business unit in China. Born
in Hong Kong, Hui grew up in New Zealand and
has now returned to her home country, where she
works in a team at Merck that is restructuring the
semiconductor business in China.
Head of Business Planning, Specialty
Accounts Business Field, Semiconductor
Solutions
WINNIE HUI
tinue to rise."
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.
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
per year should be
treated with
medications
from Merck by the
year 2025.
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
million patients
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."
Big plans for China
VIBRANT CHINA
NEW INNOVATION CENTERS
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.
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."
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."
will probably con- materials contribute to the development of new
"By 2025 we want every
single person in China
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.
DEMAND FOR TECHNOLOGIES AND EXPERTISE
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.
ALLAN GABOR
to come into contact with
our products or services
in a positive way."
President of Merck China and Head of Performance Materials in China
Notes to the Consolidated Financial Statements
Subsequent measurement at
amortized cost
Derivatives without a hedging
relationship
Subsequent measurement at fair
value through profit or loss
+c+d
Other non-current financial assets
Loans and receivables
Derivatives without a hedging
relationship
Derivatives with a hedging
relationship
Subsequent measurement at fair
value through other comprehensive
Available-for-sale financial assets
income (debt instruments)
Subsequent measurement at
amortized cost
Derivatives without a hedging
relationship
Derivatives with a hedging
relationship
Adjustments from the first-time application of IFRS 9
ƏT
Consolidated Financial Statements
(debt instruments)
Financial assets
Subsequent measurement at
amortized cost
Loans and receivables
291
Consolidated balance sheet item
Cash and cash equivalents
IAS 39
IFRS 9
Explanation
Cash and cash equivalents
Subsequent measurement at
amortized cost
Trade accounts receivable
Loans and receivables
Measurement category
→a
Current financial assets
Loans and receivables
Subsequent measurement at
amortized cost
Available-for-sale financial assets
Subsequent measurement at fair
value through other comprehensive
income (debt instruments)
Derivatives without a hedging
relationship
Other current financial assets
Derivatives without a
hedging relationship
Loans and receivables
Non-current financial assets
→ b
Subsequent measurement at
amortized cost
→a
Derivatives with a hedging
relationship
Derivatives with a hedging
relationship
Carrying amount
13
Remeasure-
-1
30
30
12
12
€ million
13
297
8
420
29
46
15
-8
123
29
-6
-23
29
29
46
46
15
246
in accordance
with IAS 39
Dec. 31, 2017
247
9
ment due to the
application of the
impairment model
589
Carrying amount
in accordance
with IFRS 9
Jan. 1, 2018
Retained earnings
Retained earnings/ Fair value reserve
Gains/losses recognized in equity
Fair value reserve
net retained
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
-13 - ▬▬
RECONCILIATION OF FINANCIAL ASSETS FROM IAS 39 TO IFRS 9 AS OF JANUARY 1, 2018
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.
Notes to the Consolidated Financial Statements
0.3
0.2
0.9
0.4
0.6
0.4
1.0
0.9
11.3
4.1
0.2
10.4
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
• Merck Healthcare KGaA, Darmstadt
3.9
0.4
2.4
8.5
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
2018
2017
thereof:
KPMG AG
Wirtschaftsprü-
fungsgesellschaft,
thereof:
KPMG AG
Wirtschaftsprü-
fungsgesellschaft,
Merck Group
Germany
Merck Group
Germany
10.0
3.5
• Merck Life Science Germany GmbH, Darmstadt
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:
• Merck Life Science GmbH, Eppelheim
Merck Performance Materials Germany GmbH, Darmstadt
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
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:
Consolidated Financial Statements
• Trade accounts receivable
• Other debt instruments measured at amortized cost
• Debt instruments measured at fair value through other compre-
hensive income
Merck uses the simplified impairment model for trade accounts
receivable and contract assets pursuant to which any credit losses
expected to occur over the entire lifetime of the relevant financial
assets are taken into account. Further information can be found in
Note (60) "Financial assets".
Hedge accounting
Merck applied the hedge accounting provisions of IFRS 9 effective
January 1, 2018, and did not opt for the option to continue to apply
IAS 39. The existing hedging relationships were continued, even after
the first-time application of IFRS 9.
The adjustments relevant to Merck arising from the first-time appli-
cation of the IFRS 9 provisions regarding hedge accounting are pre-
sented below:
• In the case of hedging relationships where Merck uses options as
hedging instruments, only the intrinsic value of options has been
designated as the hedging instrument since the first-time applica-
tion of IFRS 9. Changes in the fair value of the time value compo-
nent of options that are used for hedge accounting have to be
recognized in other comprehensive income and in a new reserve
for hedging costs within equity. The subsequent accounting of
these amounts depends on the type of the hedged transaction. The
table presented under "Adjustments of prior periods" shows the
effects on the affected financial statement components arising from
the retrospective application of the hedging approach in accor-
dance with IFRS 9.
• In the case of hedging relationships where Merck uses forward
contracts as hedging instruments, only the spot element is desig-
nated as a hedging instrument. Changes in the fair value of the
forward element in forward contracts are initially recognized in a
new reserve for hedging costs within equity. The subsequent
accounting of these amounts depends on the type of the hedged
transaction. These amendments did not have any impact on the
consolidated balance sheet as of January 1, 2018.
290
Consolidated Financial Statements
• Contract assets
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.
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".
• 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
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.
Subsequent to the balance sheet date, no further events of special
importance occurred that could have a material impact on the net
assets, financial position and results of operations.
Accounting and Measurement Policies
(49) Effects from new accounting
standards and other presentation
and measurement changes
FIRST-TIME APPLICATION OF IAS 29 "FINANCIAL
REPORTING IN HYPERINFLATIONARY ECONOMIES"
IN ARGENTINA
• Merck Patent GmbH, Darmstadt
-16
Derivatives without a hedging
relationship
23
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
35,621
7,455
205
35,621
444
8,317
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
28,166
13,582
4,512
Notes to the Consolidated Financial Statements
565
12,358
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
565
63
12,919
1,081
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
Provisions for pensions and other post-employment benefits
2,257
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
14,003
Consolidated Financial Statements
1
12,379
• 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
• revenue recognition over time for long-term service contracts and
customer-specific construction contracts
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.
296
-6
-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
• variable consideration
9,451
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
Take-or-pay contracts
Multiple-element arrangements
Income tax effect IFRS 15
IAS 29 (after income tax)
Hyperinflation in Argentina
January 1, 2018 (restated)
1
1
12,358
16
32
-16
2
2
-20
17
4
1
-2
-3
4
4
Hedge accounting (mandatory retrospective adoption)
IFRS 9 (after income tax)
12,357
-368
-8,621
December 31, 2017 (as reported)
627
-8,621
1,461
-2
1,459
Income tax
-1
-369
Profit after tax from continuing operations
1,093
628
1,090
-3
Consolidated Financial Statements
2,303
2
2,305
Profit after tax
3,396
-1
3,395
Profit after tax from discontinued operation
Notes to the Consolidated Financial Statements
295
EFFECTS OF CHANGED ACCOUNTING AND MEASUREMENT
POLICIES ON RESERVES AS OF DECEMBER 31, 2017, AND
JANUARY 1, 2018
The following table shows the effects of the first-time application of
IAS 29, IFRS 9 and IFRS 15 on reserves as of December 31, 2017,
and January 1, 2018, respectively.
€ million
Other operating expenses
Operating result (EBIT)¹
Income tax
Profit before income tax
Financial result
Other operating income
-4,702
Administration expenses
Marketing and selling expenses
Consolidated Income Statement
as reported
Profit after tax from continuing operations
Gross profit
Research and development costs
Profit after tax from discontinued operation
-5,071
15,327
-5,320
10,007
2017
IFRS 9
adjustment
IFRS 5
adjustment
adjusted
-809
14,517
249
-560
9,446
Cost of sales
Profit after tax
Net sales
788
ADJUSTMENTS OF PREVIOUS PERIODS
353
4
14,055
2,257
8,036
-17
334
1,489
-17
1
12,903
457
2,790
-434
431
€ million
1,761
1,016
25
2,200
-3
25
8,657
-15
-3
7
5
35,614
298
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
431
-4,349
has significant influence were recognized in accordance with IAS 28
using the equity method of accounting.
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
Fair value adjustments
Tax effect
2,605
Other comprehensive income
When the financial statements of consolidated companies are pre-
pared, business transactions that are conducted in currencies other
than the functional currency are disclosed using the current
exchange rate on the date of the transaction. Foreign currency
monetary items (cash and cash equivalents, receivables and pay-
ables) in the year-end financial statements of the consolidated
303
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
The functional currency concept applies to the translation of financial
statements of consolidated companies prepared in foreign currencies.
The subsidiaries of the Merck Group generally conduct their operations
independently. The functional currency of these companies is nor-
mally the respective local currency. Assets and liabilities are mea-
sured at the closing rate, and income and expenses are measured
at weighted average annual rates in euros, the reporting currency.
Any currency translation differences arising during consolidation of
Group companies are recognized in equity. If Group companies are
deconsolidated, existing currency differences are reversed and
reclassified to profit or loss.
(52) Currency translation
Intragroup sales, expenses and income, as well as all receivables
and payables between the consolidated companies, are eliminated.
The effects of intragroup deliveries reported under non-current
assets and inventories are adjusted by eliminating any intragroup
profits. In accordance with IAS 12, deferred taxes are applied to
these consolidation measures.
63
IFRS 11 was applied for joint arrangements. A joint arrangement
exists when, on the basis of a contractual arrangement, Merck and
third parties jointly control business activities. Joint control means
that decisions about the relevant activities require unanimous con-
sent. Joint arrangements are either joint operations or joint ventures.
Revenues and expenses as well as assets and liabilities from joint
operations were included in the consolidated financial statements in
accordance with Merck's rights and obligations. By contrast, interests
in joint ventures as well as in material associates over which Merck
When additional shares in non-controlling interests are acquired,
the purchase price amount that exceeds the carrying amount of this
interest was offset directly in equity.
Acquisitions were accounted for using the purchase method in
accordance with IFRS 3. In cases where a company was not acquired
in full, non-controlling interests were measured using the fair value
of the proportionate share of net assets. The option to measure
non-controlling interests at fair value on the date of their acquisition
(full goodwill method) was not utilized.
The consolidated financial statements are based on the single-entity
financial statements of the consolidated companies as of the balance
sheet date, which were prepared applying consistent accounting pol-
icies in accordance with IFRSS.
(51) Consolidation methods
1 As from January 1, 2018, in accordance with IFRS 9; see Note (49) "Effects from new accounting standards and other presentation and measurement changes".
Comprehensive income
-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
13,992
1.195
1,049
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
Furthermore, collaboration agreements in the pharmaceutical
area typically allocate the revenue generated in specific markets, or
with specific products, to individual collaboration partners; simulta-
neously, specific income and expense items are carried by the collab-
oration partners according to predefined allocation ratios. Merck
recognizes the revenue from the sale of products to third-party cus-
tomers, if it is the principal within the meaning of IFRS 15. Expenses
resulting from payments made to collaboration partners in connection
with profit-sharing agreements are recognized in other operating
expenses. Reimbursements of research and developments costs made
between the collaboration partners are recognized in research and
development costs. Merck's most important collaboration agreement
is the strategic alliance with Pfizer Inc., United States, in the immuno-
oncology area (see Note (6) "Collaboration agreements of material
significance").
the individual promised goods or services are invariably not distinct
in the context of the contract, the performance obligations are often
integrated into bundles, income from which is recognized in this case
in other operating income during the period where the material
development activities are provided.
305
Notes to the Consolidated Financial Statements
306
Consolidated Financial Statements
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
Sales deductions, such as discounts provided on the invoice as
price-reducing items, which will likely be applied by customers when
making the respective payments, are recognized in the consolidated
balance sheet as reductions of trade accounts receivable. Expected
refunds, such as bonus payments, reimbursements for returns, or
rebates from health plans and programs, are recognized in the sepa-
rate item "refund liabilities" in the consolidated balance sheet (see
Note (30) "refund liabilities").
Net sales are recognized net of sales-related taxes and sales
deductions. When net sales are recognized, estimated amounts are
taken into account for sales deductions, for example rebates, dis-
counts and returns. Payments to customers are generally recognized
as sales deductions, unless the payments are made for distinct goods
or services provided by the customer, provided that their value does
not exceed the fair value of the goods or services received by Merck.
Dividend income is recognized when the right of dividend payment
is established, when it is considered probable that the economic
benefit attributable to the dividend payment will flow to Merck, and
when the dividend payment can be measured reliably.
Notes to the Consolidated Financial Statements
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
Consolidated Financial Statements
Consolidated Financial Statements
The marketing authorizations, patents, licenses and similar rights, (58) 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
13,582
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.
Notes to the Consolidated Financial Statements
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".
Where non-current assets are leased and economic ownership lies with
Merck (finance lease), the asset is recognized at the present value
of the minimum lease payments or the lower fair value in accordance
with IAS 17 and depreciated over its useful life. The corresponding
payment obligations from future lease payments are recognized as
liabilities. If an operating lease is concerned, the associated expenses
are recognized in the period in which they are incurred.
(59) Leasing
The useful lives of the assets are reviewed regularly and adjusted if (60) Financial assets
necessary. If indications of a decline in value exist, an impairment
test is performed. If the reasons for an impairment loss no longer
exist, a reversal of the impairment loss recognized in prior periods
is recognized.
3 to 10 years
maximum of 33 years
maximum of 40 years
6 to 25 years
Useful life
Operating and office equipment; other facilities
Plant and machinery
Administration buildings
Production buildings
USEFUL LIFE OF PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is measured at cost less depreciation
and impairments plus reversals of impairments. The component
approach is applied here in accordance with IAS 16. Subsequent costs
are only capitalized if it is probable that future economic benefits will
arise for the Group and the cost of the asset can be measured reli-
ably. The cost of self-constructed property, plant and equipment is
calculated on the basis of the directly attributable unit costs and an
appropriate share of overheads. If the construction of property, plant
and equipment takes a substantial period of time, the attributable
borrowing costs incurred up until completion are capitalized as part
of the costs. In accordance with IAS 20, costs are reduced by the
amount of government grants in those cases where government
grants or subsidies have been paid for the acquisition or manufacture
of assets (grants related to assets). Grants related to expenses which
no longer offset future expenses are recognized in profit or loss.
Property, plant and equipment is depreciated using the straight-line
method over the useful life of the asset concerned. Depreciation of
property, plant and equipment is based on the following useful lives:
INTANGIBLE ASSETS WITH FINITE USEFUL LIVES
Intangible assets with a finite useful life are amortized using the
straight-line method. The useful lives of customer relationships, brand
names and trademarks as well as marketing authorizations, acquired
patents, licenses and similar rights, and software are between three
and 24 years. Amortization of intangible assets and software is allo-
cated to the functional costs in the consolidated income statement.
An impairment test is performed if there are indications of impairment.
Impairment losses are determined using the same methodology as
for indefinite-life intangible assets. Impairment losses are reversed
if the original reasons for impairment no longer apply.
and other items not yet available for use primarily relate to rights
that Merck acquired for active ingredients, products or technologies
that are still in development stages. Amortization begins when the
product reaches market approval, and is charged on a straight-line
basis over the shorter of the patent or contract term and the esti-
mated useful life.
CLASSIFICATION
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.
28,167
5
2
2,639
-15
4
2,904
90
735
490
589
-16
-3
9
2
2
-15
-3
7
5
35,614
32
-15
-32
3
-3
-15
-15
565
4
12,379
7,447
-2
1,105
205
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).
Expected tax payments based on tax rates that have been enacted or
substantively enacted by the end of the reporting period
Fair value
35.538
Dec. 31, 2017
7.791
134.669
1.168
1,275.923
1.128
1,271.164
34.958
1.144
1,275.143
34.398
1.130
1.112
Dec. 31, 2018
7.869
126.131
2017
7.621
126.921
2018
7.815
130.372
1.153
1,294.331
35.544
1.181
Closing rate
444
2
8,317
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.
Currency translation was based on the following key exchange
rates:
4
€ 1 =
Japanese yen (JPY)
Swiss franc (CHF)
South Korean won (KRW)
Taiwan dollar (TWD)
U.S. dollar (USD)
Average annual rate
Chinese renminbi (CNY)
Expected reimbursement amount
Other receivables (financial instruments)¹
Settlement amount
3,318
-2
-2
-22
2
-24
-18
5
-23
-1,012
35
-1,047
4,246
-168
-125
4,414
-168
4,414
81
-26
106
63
63
-310
-310
188
-1
189
61
-23
4,246
84
3,193
Consolidated Financial Statements
32
-1,632
Research and development costs
-271
28
-299
Administration expenses
-2,373
349
-2,722
Marketing and selling expenses
4,850
-562
5,412
300
-1,340
6,190
-809
6,999
-1,587
Financial performance
adjusted
IFRS 5
adjustment
as reported
2017
Gross profit
Cost of sales
Net sales
€ million
Healthcare
Notes to the Consolidated Financial Statements
248
-1,600
4,164
4,282
299
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
Notes to the Consolidated Financial Statements
EBITDA pre¹
EBITDA pre¹
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
Business free cash flow¹
-118
Consolidated Financial Statements
Group
5.98
0.01
-0.12
0.12
5.87
0.12
2,610
4
2,615
-5
-5
1
1
-1,843
-4
€ million
-1,847
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).
767
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
Other operating income and expenses
43
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
Fair value
Amortized cost or fair value, depending on the business model
(see Note (60) "Financial assets").
302
Fair value
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 assets (current/non-current)
Derivative assets (financial transactions)
Debt instruments
Amortized cost (subsequent measurement: impairment-only approach)
Amortized cost
Amortized cost
Amortized cost (subsequent measurement: impairment-only approach)
Assets held for sale
Measurement principle
Consolidated Financial Statements
Balance sheet item
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
Amortized cost
Amortized cost
Present value of the expenditures expected to be required to settle the
obligation
Notes to the Consolidated Financial Statements
Projected unit credit method
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)
Other provisions (current/non-current)
Provisions for pensions and other post-employment benefits
Equity and liabilities
Measurement principle
688
Equity instruments
Property, plant and equipment
-177
1,949
16
-26
42
-316
-316
27
28
17
-23
40
Business free cash flow¹
EBITDA pre¹
1,773
Other adjustments
Gains (+)/losses (-) on the divestment of businesses
Restructuring expenses
691
2,028
-127
2,155
EBITDA¹
-17
708
Depreciation/amortization/impairment losses/reversals of impairments
1,337
-111
1,447
Operating result (EBIT)¹
731
Acquisition-related adjustments
Financial assets (current/non-current)¹
EBITDA pre¹
-177
With indefinite useful life or not yet available for use
With finite useful life
Other intangible assets
Goodwill
Assets
Balance sheet item
sheet are measured as follows:
The main assets and liabilities disclosed in the consolidated balance
(50) Measurement policies
301
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
¹ Not defined by International Financial Reporting Standards (IFRSS).
1,314
1,949
-134
-49
2
-51
Changes in trade accounts receivable as well as receivables from royalties and licenses
Business Free Cash Flow¹
-34
5
-39
Changes in inventories
-375
35
-411
advance payments for intangible assets
Investments in property, plant and equipment, software as well as
1,773
1,448
Integration expenses/IT expenses
4,514
100.00
Merck d.o.o.
Croatia
100.00
Sofia
Merck Bulgaria EAD
Bulgaria
100.00
Overijse
100.00
Overijse
100.00
Overijse
Sigma-Aldrich BVBA/SPRL
Merck N. V.-S. A.
Zagreb
Merck Chemicals N. V./S. A.
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
Belgium
100.00
Czech Republic
Merck spol. s r. o.
100.00
Espoo
Merck Life Science OY
Finland
100.00
Tallinn
Merck Serono OÜ
Estonia
100.00
100.00
Frederiksberg
Survac ApS
Denmark
100.00
Soborg
Sigma-Aldrich Denmark ApS
Denmark
Prague
100.00
Czech Republic
Sigma-Aldrich spol. s r. o.
Prague
100.00
Vienna
Denmark
Soborg
100.00
Denmark
Merck Life Science A/S
Soborg
100.00
Merck A/S
Finland
Allergopharma Vertriebsgesellschaft m.b.H.
countries
100.00
Darmstadt
Merck Wohnungs- und Grundstücksverwaltungsgesellschaft mbH
Germany
100.00
Gernsheim
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH
Germany
100.00
100.00
Thereof:
Merck KGaA (%)
Equity interest
(%)
Registered office
Darmstadt
Merck Serono GmbH
100.00
Germany
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
Company
Germany
Millipart GmbH
Gernsheim
Other European
100.00
100.00
Steinheim
Sigma-Aldrich Verwaltungs GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Produktions GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Logistik GmbH
Germany
100.00
Steinheim
Sigma-Aldrich Grundstücks GmbH & Co. KG
100.00
Germany
Sigma-Aldrich Biochemie GmbH
Steinheim
100.00
Germany
Austria
Sigma-Aldrich Chemie GmbH
100.00
Germany
Sigma-Aldrich Chemie Holding GmbH
Taufkirchen
100.00
Germany
Steinheim
Merck OY
Espoo
100.00
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
Colleretto Giacosa
Sigma-Aldrich Ireland Ltd.
Country
Ireland
Ireland
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
314
100.00
Arklow
100.00
Carrigtwohill
Millipore Cork Unlimited Company
Shrawdine Limited
Ireland
Ireland
100.00
Dublin
Company
Riga
100.00
Italy
China
China
Merck Performance Materials Hong Kong Ltd.
Merck Pharmaceutical (HK) Ltd.
Hong Kong
100.00
Hong Kong
100.00
China
China
China
Merck Pharmaceutical Distribution (Jiangsu) Co., Ltd.
Merck Pharmaceutical Manufacturing (Jiangsu) Co., Ltd.
Merck Serono (Beijing) Pharmaceutical Distribution Co., Ltd.
Nantong
100.00
Nantong
100.00
Beijing
100.00
Merck S. p.A.
Milan
100.00
Italy
Merck Serono S. p. A.
Rome
Merck Serono (Ireland) Ltd.
99.74
Sigma-Aldrich S. r. I.
Milan
100.00
Latvia
Merck KGaA (%)
Thereof:
Italy
Ireland
100.00
Carrigtwohill
Lyon
Merck Serono S. A. S.
France
100.00
Lyon
Merck Santé S. A. S.
France
99.84
Lyon
Merck S. A.
France
100.00
Trosly-Breuil
Merck Performance Materials S. A. S.
France
100.00
Fontenay s/Bois
Finland
Sigma-Aldrich Finland OY
Espoo
100.00
France
Gonnon S. A. S.
100.00
Lyon
France
Merck Biodevelopment S.A. S.
Lyon
100.00
France
Merck Chimie S.A. S.
100.00
100.00
France
Molsheim
Merck Millipore Ltd.
Ireland
100.00
Carrigtwohill
Merck Finance Limited
Ireland
100.00
Budapest
Sigma-Aldrich Kft.
Hungary
100.00
Budapest
Merck Kft.
Hungary
100.00
Maroussi, Athens
Merck A. E.
100.00
France
Sigma-Aldrich Chimie S. a. r. l.
Saint Quentin Fallavier
100.00
France
Millipore S.A.S.
Sigma-Aldrich Chimie SNC
100.00
France
Sigma-Aldrich Holding S. a. r.l.
Saint Quentin Fallavier
100.00
Greece
Saint Quentin Fallavier
100.00
100.00
Merck Performance Materials Holding GmbH
and other post-employment
benefits
(67) Provisions for pensions
assets.
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.
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
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.
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.
-
(65) Deferred taxes
(68) Other provisions and
contingent liabilities
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.
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.
Merck KGaA
Germany
Germany
Thereof:
Merck KGaA (%)
(%)
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.
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.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
311
(69) Share-based compensation
programs
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.
-
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%.
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
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.
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.
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.
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.
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).
Darmstadt
Merck applied the hedge accounting provisions of IFRS 9 effective
January 1, 2018, and did not opt for the option to continue to apply
IAS 39. The existing hedging relationships were continued, even after
the first-time application of IFRS 9.
Contingent consideration, as well as derivatives with negative market
values, are subsequently measured at fair value. Value changes are
recognized through profit or loss.
⚫ Results recognized directly in
equity (value adjustments)
Recycling of the cumulative
results previously recognized
directly in equity through the
operating result (derecognition)
when asset is disposed
Financial result
Net gain (or loss) on disposal/
value adjustments
Other operating income or
other operating expenses
Financial
ment at fair value
through profit or loss
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
• 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
through other com-
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
surement at fair value
Foreign currency
gains or losses
Other operating income
or other operating
expenses
Financial result
Other operating
income or other
operating expenses
LIABILITIES SUBSEQUENTLY MEASURED AT FAIR VALUE
THROUGH PROFIT OR LOSS
Except for contingent consideration, which only occurs in the context
of business combinations in accordance with IFRS 3, and derivatives
with negative market values, all financial liabilities are subsequently
measured at amortized cost using the effective rate method. Merck
primarily assigns financial liabilities such as issued bonds and bank
loans, trade payables, and non-derivative current and non-current
liabilities to this category.
OTHER FINANCIAL LIABILITIES
(61) Financial liabilities
For further information on the accounting and measurement principles
applied in the previous year (IAS 39 "Financial instruments: recog-
nition and measurement"), please refer to the Annual Report 2017.
ACCOUNTING AND MEASUREMENT PRINCIPLES APPLIED
IN THE PREVIOUS YEAR (IAS 39)
Merck derecognizes financial assets if there is no reasonable expec-
tation that the contract party will fulfill its contractual obligations. In
this context, Merck takes individual discretionary decisions in order
to evaluate whether contract fulfillment can be reasonably expected.
DERECOGNITION
Dividend income from equity instruments of both categories is
recognized in the consolidated income statement in other operating
income. Impairments and impairment reversals of equity instruments
are disclosed together with other fair value changes.
Changes in the fair value of equity instruments held for trading
are recognized through profit or loss (other operating income/
expenses).
For equity instruments not held for trading, Merck has uniformly
exercised the option of recognizing future changes in fair value in
other comprehensive income in the consolidated statement of com-
prehensive income and thus to retain them in consolidated equity
upon disposal of the financial instrument.
Equity instruments are subsequently measured at fair value.
Equity instruments
Provided that Merck expects default risk to be low, the impairments
of all other debt instruments are limited to the 12-month expected
credit losses. If the default risk has increased significantly since
initial recognition, impairments are increased to the amount of credit
losses expected to occur over the entire lifetime of the respective
asset. Merck considers default risk to be low if the risk of non-per-
formance is remote and the contract party is able to fulfill its payment
obligations at short notice at any time. The probabilities used to
establish 12-month expected credit losses, or lifetime expected credit
losses, are based on historical default rates, taking current credit
ratings into consideration.
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
308
Financial result
Other operating income or other Other operating income
operating expenses
Financial result
or other operating
expenses
Financial result
(62) Derivatives and hedge
accounting
Interest income
Financial result
(applying the effective
interest method)
Financial result
(applying the effective
interest method)
Financial result
(applying the effective
interest method)
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.
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
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".
or expenses
Parent
Company
Germany
Germany
Germany
100.00
100.00
Gernsheim
Merck Holding GmbH
Germany
100.00
Darmstadt
Merck Healthcare KGaA
Germany
100.00
100.00
Darmstadt
Merck Healthcare Holding GmbH
Merck International GmbH
Germany
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
Darmstadt
100.00
100.00
Germany
100.00
Wiesbaden
Merck Performance Materials GmbH
Germany
100.00
Darmstadt
Merck Performance Materials Germany GmbH
Germany
100.00
Darmstadt
Merck Patent GmbH
Germany
100.00
100.00
Darmstadt
Merck Life Science Holding GmbH
Germany
Merck Internationale Beteiligungen GmbH
Darmstadt
100.00
Germany
Merck Life Science Germany GmbH
100.00
Darmstadt
Germany
Merck Life Science GmbH
Eppelheim
100.00
100.00
Germany
100.00
100.00
Darmstadt
Merck Consumer Health Holding Germany GmbH
Merck 12. Allgemeine Beteiligungs-GmbH
Germany
100.00
100.00
Greifswald
Litec-LLL GmbH
Germany
100.00
Gernsheim
Emedia Export Company mbH
Germany
100.00
100.00
Darmstadt
Chemitra GmbH
Germany
100.00
AB Allgemeine Pensions GmbH & Co. KG
Allergopharma GmbH & Co. KG
Zossen
100.00
100.00
Reinbek
100.00
Darmstadt
Germany
Darmstadt
100.00
100.00
Germany
Biochrom GmbH
Berlin
Allergopharma Verwaltungs GmbH
Darmstadt
100.00
Germany
Germany
100.00
Darmstadt
Merck China Chemicals Holding GmbH
Germany
100.00
Darmstadt
Merck Chemicals GmbH
Germany
100.00
100.00
Darmstadt
Merck Accounting Solutions & Services Europe GmbH
Germany
100.00
Darmstadt
Merck 21. Allgemeine Beteiligungs-GmbH
Merck 13. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
Germany
Germany
Germany
100.00
Merck 15. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH
Merck 20. Allgemeine Beteiligungs-GmbH
100.00
Darmstadt
100.00
Darmstadt
100.00
Germany
Darmstadt
Shanghai
100.00
China
Alexandria
Allergopharma USA, Inc.
United States
100.00
Urbana
Aldrich-APL, LLC
United States
100.00
St. Louis
Aldrich Chemical Foreign Holding LLC
United States
100.00
Milwaukee
100.00
100.00
100.00
Burlington
Aldrich Chemical Co. LLC
Natrix Separations, Inc.
Sigma-Aldrich Canada Co.
United States
Canada
Canada
100.00
Toronto
Millipore (Canada) Ltd.
Canada
100.00
Mississauga
Oakville
EMD Inc.
United States
Wilmington
Country
United States
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
316
100.00
Wilmington
EMD Finance LLC
100.00
Burlington
EMD Digital Inc.
United States
United States
100.00
Rockland
BioControl Systems, Inc.
EMD Accounting Solutions & Services America, Inc.
100.00
Round Rock
Cerilliant Corporation
United States
100.00
Rocklin
Cell Marque Corporation
United States
100.00
Rockville
BioReliance Corporation
United States
100.00
United States
Canada
100.00
Toronto
Feltham
Millipore (U.K.) Ltd.
United Kingdom
United Kingdom
United Kingdom
100.00
Feltham
Merck Serono Ltd.
United Kingdom
100.00
London
Merck Serono Europe Ltd.
United Kingdom
100.00
Feltham
100.00
Merck Performance Materials Services UK Ltd.
100.00
Feltham
Merck Investments Ltd.
United Kingdom
100.00
Feltham
Merck Holding Ltd.
United Kingdom
100.00
Gillingham
Merck Chemicals Ltd.
United Kingdom
100.00
United Kingdom
Millipore UK Holdings LLP
Feltham
100.00
EMD Crop BioScience Canada Inc.
Canada
100.00
Toronto
EMD Chemicals Canada Inc.
Canada
North America
100.00
Gillingham
Sigma-Genosys Limited
United Kingdom
Merck Management Consulting (Shanghai) Co., Ltd.
Gillingham
Sigma-Aldrich Holdings Ltd.
United Kingdom
100.00
Gillingham
Sigma-Aldrich Financial Services Limited
United Kingdom
100.00
Gillingham
Sigma-Aldrich Company Limited
100.00
Gillingham
SAFC Hitech Limited
United Kingdom
United Kingdom
100.00
Gillingham
SAFC Biosciences Limited
United States
Company
EMD Holding Corp.
EMD Millipore Corporation
100.00
Laramie
Sigma-Aldrich RTC, Inc.
United States
100.00
Natick
Sigma-Aldrich Research Biochemicals, Inc.
United States
100.00
St. Louis
Sigma-Aldrich Missouri Insurance Company
United States
100.00
United States
St. Louis
United States
100.00
St. Louis
Sigma-Aldrich Foreign Holding Co.
United States
100.00
St. Louis
Sigma-Aldrich Corporation
United States
100.00
St. Louis
Sigma-Aldrich Co. LLC
United States
Sigma-Aldrich Manufacturing LLC
Sigma-Aldrich, Inc.
Milwaukee
100.00
Castle Hill
Sigma-Aldrich Oceania Pty. Ltd.
Australia
100.00
Castle Hill
SAFC Biosciences Pty. Ltd.
Australia
100.00
Castle Hill
Proligo Australia Pty. Ltd.
Australia
100.00
Sydney
Merck Serono Australia Pty. Ltd.
Australia
100.00
Bayswater
Merck Pty. Ltd.
Australia
(APAC)
Asia-Pacific
100.00
Bellefonte
Supelco, Inc.
United States
100.00
The Woodlands
Sigma-Genosys of Texas LLC
United States
Merck Serono SIA
Gillingham
St. Louis
United States
Wilmington
Millipore Asia Ltd.
United States
100.00
Evanston
Grzybowski Scientific Inventions Ltd.
United States
100.00
Rockland
EMD Serono, Inc.
United States
100.00
Billerica
100.00
EMD Serono Research & Development Institute, Inc.
100.00
Rockland
EMD Serono Holding, Inc.
United States
100.00
100.00
100.00
Equity interest
(%)
Philadelphia
Burlington
Registered office
Rockland
EMD Performance Materials Corp.
United States
United States
United States
Millipore UK Holdings I, LLC
Wilmington
100.00
St. Louis
Sigma Chemical Foreign Holding LLC
United States
100.00
Rockland
Serono Laboratories, Inc.
100.00
Madison
100.00
Carlsbad
SAFC Carlsbad, Inc.
SAFC, Inc.
100.00
Lenexa
SAFC Biosciences, Inc.
United States
United States
United States
United States
100.00
Cleveland
100.00
San Diego
100.00
Wilmington
Research Organics, LLC
Millipore UK Holdings II, LLC
United States
Ormet Circuits, Inc.
United States
United States
100.00
Sigma Redevelopment Corporation
Epichem Group Limited
United Kingdom
100.00
Schiphol-Rijk
100.00
100.00
Veldhoven
100.00
100.00
Amsterdam
Schiphol-Rijk
100.00
Amsterdam Zuidoost
Serono Tri Holdings B. V.
Merck Window Technologies B. V.
Merck Ventures B. V.
100.00
Merck Holding Netherlands B. V.
Netherlands
Netherlands
Netherlands
Netherlands
Netherlands
100.00
Schiphol-Rijk
Merck B. V.
Netherlands
100.00
Nieuwerkerk Ad Ijssel
100.00
Pietà
Merck Chemicals B. V.
Netherlands
Sigma-Aldrich B. V.
Zwijndrecht
100.00
Algés
Laquifa Laboratorios S.A.
Portugal
100.00
Poznan
Sigma-Aldrich Sp.z.o.o.
Poland
100.00
Warsaw
Merck Sp.z.o.o.
Poland
100.00
Wroclaw
Merck Business Solutions Europe Sp.z.o.0.
Poland
100.00
Oslo
Sigma-Aldrich Norway AS
Norway
100.00
Oslo
Merck Life Science AS
Norway
100.00
Zwijndrecht
Sigma-Aldrich Chemie N. V.
Netherlands
100.00
100.00
Portugal
Pietà
Merck Capital Ltd.
100.00
Luxembourg
Merck Holding S. a. r. l.
Luxembourg
100.00
Luxembourg
Merck Finanz S. a. r. l.
Luxembourg
100.00
Luxembourg
Merck Finance S. a. r.l.
Luxembourg
100.00
Luxembourg
Luxembourg
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
Lithuania
Merck Chemicals Holding S. a.r.l.
Merck Invest SCS
Luxembourg
100.00
Merck Capital Holding Ltd.
Netherlands
Malta
Malta
100.00
Luxembourg
Sigma-Aldrich S. a. r. l.
Luxembourg
100.00
Luxembourg
Sigma-Aldrich Global S. a. r. l.
Luxembourg
100.00
Luxembourg
Ridgefield Acquisition S. a. r.l.
Luxembourg
100.00
Luxembourg
Millipore International Holdings, S.a. r.l.
Luxembourg
100.00
Luxembourg
Millilux S. a. r.l.
Luxembourg
100.00
100.00
Luxembourg
Merck Re S. A.
Luxembourg
BioControl Systems B. V.
100.00
Merck, S.A.
100.00
Switzerland
100.00
Buchs
Sigma-Aldrich (Switzerland) Holding AG
Switzerland
100.00
Coinsins
SeroMer Holding SA
Switzerland
100.00
Coinsins
Merck Serono SA
Switzerland
Switzerland
100.00
Merck Performance Materials (Suisse) SA
Switzerland
100.00
Zug
Merck (Schweiz) AG
Switzerland
51.63
51.63
Altdorf
Merck & Cie
Switzerland
100.00
100.00
Coinsins
Switzerland
Turkey
United Kingdom
Sigma-Aldrich Chemie GmbH
London
BioReliance U.K. Acquisition Limited
United Kingdom
100.00
Aberdeen
BioReliance Limited
United Kingdom
100.00
London
BioControl Systems Limited
United Kingdom
100.00
Feltham
AZ Electronic Materials (UK) Ltd.
United Kingdom
100.00
Gillingham
100.00
Istanbul
100.00
Buchs
100.00
St. Gallen
100.00
Buchs
Aldrich Chemical Co. Ltd.
Merck Ilac Ecza ve Kimya Ticaret AS
Sigma-Aldrich Production GmbH
Sigma-Aldrich International GmbH
100.00
Algés
Thereof:
Merck KGaA (%)
Aubonne
100.00
Ljubljana
Merck d.o.o.
Slovenia
100.00
Bratislava
Sigma-Aldrich, spol. s r.o.
Slovakia
100.00
Bratislava
Merck spol. s r.o.
Slovakia
100.00
Spain
Belgrade
Moscow
Sigma-Aldrich Rus LLC
Merck d.o.o. Beograd
Russia
Serbia
100.00
Moscow
Merck LLC
Russia
100.00
Bucharest
Merck Romania S. R. L.
Romania
100.00
Merck Chemicals and Life Science S. A. U.
Madrid
100.00
Therwil
Registered office
Stockholm
Ares Trading SA
Switzerland
Allergopharma AG
Sigma-Aldrich Sweden AB
Company
Switzerland
Sweden
Country
315
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
100.00
Solna
Merck Chemicals and Life Science AB
Sweden
100.00
Solna
Merck AB
Sweden
100.00
Madrid
Sigma-Aldrich Quimica S. L.
Spain
100.00
Madrid
Merck, S. L. U.
Spain
Equity interest
(%)
Australia
100.00
100.00
Sigma-Aldrich Pty. Ltd.
Castle Hill
100.00
China
Beijing Skywing Technology Co., Ltd.
Beijing
China
100.00
Merck Chemicals (Shanghai) Co., Ltd.
Shanghai
100.00
China
Merck Display Materials (Shanghai) Co., Ltd.
Shanghai
China
Merck Electronic Materials (Suzhou) Ltd.
100.00
100.00
Hong Kong
100.00
Nantong
Merck Life Science Technologies (Nantong) Co., Ltd.
Merck Ltd.
China
China
100.00
Hong Kong
Suzhou
Merck Life Science Ltd.
100.00
Shanghai
Merck Holding (China) Co., Ltd.
China
China
100.00
< 0.5
Darmstadt
Darmstadt
100.00
< 0.5
Ho Chi Minh City
100.00
100.00
Germany
Germany
Germany
Germany
Germany
Germany
Germany
100.00
Germany
100.00
Germany
Merck 24. Allgemeine Beteiligungs-GmbH
Merck 25. Allgemeine Beteiligungs-GmbH
Merck 26. Allgemeine Beteiligungs-GmbH
Merck 27. Allgemeine Beteiligungs-GmbH
Merck 28. Allgemeine Beteiligungs-GmbH
Merck 29. Allgemeine Beteiligungs-GmbH
Merck 30. Allgemeine Beteiligungs-GmbH
Merck 31. Allgemeine Beteiligungs-GmbH
Merck 36. Allgemeine Beteiligungs-GmbH
Merck 37. Allgemeine Beteiligungs-GmbH
Merck 38. Allgemeine Beteiligungs-GmbH
Darmstadt
100.00
100.00
< 0.5
<0.5
Darmstadt
Germany
Germany
100.00
Darmstadt
100.00
<0.5
Germany
Germany
Germany
Merck 40. Allgemeine Beteiligungs-GmbH
Merck 41. Allgemeine Beteiligungs-GmbH
Merck Foundation gGmbH
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
100.00
< 0.5
Darmstadt
100.00
100.00
< 0.5
Other European
F-Star Alpha Limited
Canbex Therapeutics Ltd.
Artios Pharma Limited
United Kingdom
United Kingdom
United Kingdom
United Kingdom
ObsEva SA
Inthera Bioscience AG
Switzerland
Switzerland
Galecto Biotech AB
100.00
< 0.5
Darmstadt
Germany
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
100.00
< 0.5
Darmstadt
100.00
100.00
<0.5
Darmstadt
100.00
100.00
< 0.5
Merck 39. Allgemeine Beteiligungs-GmbH
100.00
Zossen
AB Pensionsverwaltung GmbH
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
100.00
318
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Country
Middle East and
Company
Africa (MEA)
Egypt
Merck Ltd.
100.00
Santiago de Chile
100.00
Santiago de Chile
Sigma-Aldrich Brasil Ltda.
Chile
Merck S.A.
Chile
Sigma-Aldrich Quimica Ltda.
Colombia
Merck S. A.
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
Israel
Mexico
Panama
Peru
Merck Peruana S.A.
Uruguay
ARES Trading Uruguay S.A.
Buenos Aires
100.00
Buenos Aires
100.00
Rio de Janeiro
100.00
São Paulo
100.00
Mexico
Sweden
Inter-Lab Ltd.
InterPharm Laboratories Ltd.
Herzliya Pituach
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
Thereof:
Merck KGaA (%)
Registered office
Equity interest
(%)
Thereof:
Merck KGaA (%)
Fair value
(€ million)
Germany
Germany
100.00
Yavne
100.00
Yavne
Israel
Merck Serono Ltd.
Israel
PMatX Ltd.
Israel
Israel
Kenya
South Africa
South Africa
QLight Nanotech Ltd.
Sigma-Aldrich Israel Ltd.
Merck Healthcare and Life Science Limited
Merck (Pty) Ltd.
Israel
Sigma-Aldrich (Pty) Ltd.
Tunisia
Merck Promotion SARL
Merck SARL
United Arab Emirates
Merck Serono Middle East FZ-Ltd.
Country
Company
II. Companies not consolidated due to secondary importance
Equity interest
Registered office
(%)
Cairo
100.00
Tunisia
SynAffix B. V.
Abacus Diagnostica OY
DNA Script S.A. S.
100.00
Gillingham
Ultrafine Limited
Sigma Entity One Limited
UFC Ltd.
United Kingdom
United Kingdom
United Kingdom
<0.5
100.00
Gillingham
Sigma Chemical Co. Ltd.
United Kingdom
<0.5
<0.5
100.00
Merck Pension Trustees Ltd.
United Kingdom
<0.5
100.00
Feltham
Merck Ltd.
United Kingdom
<0.5
100.00
Feltham
Merck Cross Border Trustees Ltd.
Feltham
Gillingham
100.00
<0.5
A)
62.83
Burlington
<0.5
100.00
St. Louis
China
Australien
(APAC)
Asia-Pacific
Fluka Chemical Corp.
TocopheRx, Inc.
North America
United States
United States
A)
100.00
Gillingham
Wessex Biochemicals Ltd.
United Kingdom
<0.5
100.00
Gillingham
Webnest Ltd.
United Kingdom
<0.5
100.00
Gillingham
United Kingdom
<0.5
100.00
Gillingham
Russia
<0.5
100.00
Moscow
MedChem Limited
Russia
< 0.5
100.00
Moscow
Chemical Trade Limited LLC
Russia
< 0.5
100.00
Amsterdam
Merck Europe B. V.
Netherlands
< 0.5
100.00
Arklow
SAFC Arklow Ltd.
Ireland
< 0.5
100.00
Athens
Sigma-Aldrich (OM) Ltd.
SAF-LAB LLC
Biochrom Australia Pty. Ltd.
Moscow
< 0.5
Fluka Chemicals Ltd.
United Kingdom
<0.5
100.00
Gillingham
<0.5
100.00
Gillingham
A)
73.60
Plan-les-Ouates
Fair value
(€ million)
Merck KGaA (%)
Thereof:
Equity interest
(%)
Registered office
B-Line Systems Limited
Bristol Organics Ltd.
iOnctura SA
Company
United Kingdom
United Kingdom
Switzerland
Country
319
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
100.00
Bayswater
100.00
<0.5
Germany
V. Other equity investments
Yavne
Neviah Genomics Ltd.
(€ million)
Fair value
Thereof:
Merck KGaA (%)
Equity interest
(%)
Registered office
Company
Israel
Africa (MEA)
Middle East and
Country
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
320
A) These are affiliates in the portfolio of M Ventures. The fair value of the M Ventures portfolio on December 31, 2018, amounted to € 145 million.
B) These are closed funds that are classified as debt within the meaning of IFRS 9.
B)
50.58
B)
38.32
St. Louis
St. Louis
Prolog Healthy Living Fund II, L.P.
Germany
United States
Alcan Systems GmbH
Germany
Aveni S. A. S.
Forendo Pharma OY
Netherlands
Netherlands
France
France
Finland
Merck S. A.
Finland
ReWind Therapeutics N.V.
Belgium
Austria
f-star Biotechnologische Forschungs- und
Entwicklungsgesellschaft mbH
countries
Other European
PharmLog Pharma Logistik GmbH
PrintCity GmbH & Co. KG
pharma mall Gesellschaft für Electronic
Commerce mbH
Germany
Germany
Germany
IOmx Therapeutics AG
Germany
Inuru GmbH
Germany
Azelis Deutschland Kosmetik GmbH
InfraServ GmbH & Co. Wiesbaden KG
Germany
Mosa Meat B. V.
Prolog Healthy Living Fund, L.P.
North America
Merck S. A.
Venezuela
Latin America
III. Non-controlled companies majority-owned
<0.5
100.00
<0.5
100.00
Casablanca
Lagos
Merck Pharmaceutical and Life Sciences Ltd.
Merck Maroc S.A.R.L.
<0.5
100.00
Santo Domingo
Nigeria
Morocco
Africa (MEA)
Middle East and
Merck Dominicana, S.R.L.
Dominican Republic
Latin America
<0.5
100.00
Guangzhou
Merck Innovation Hub (Guangdong) Co., Ltd.
Venezuela
United States
Representaciones MEPRO S.A.
Caracas
Caracas
A)
22.06
Basel
Vaximm AG
2
39.11
Muttenz
CAMAG Chemie-Erzeugnisse und
Adsorptionstechnik AG
Switzerland
Switzerland
A)
25.35
Lausanne
Asceneuron SA
Switzerland
A)
38.81
Amsterdam
Calypso Biotech B. V.
Netherlands
countries
Other European
<0.5
100.00
<0.5
100.00
IV. Associates not included at equity due to secondary importance
Sigma-Aldrich de Argentina S. r. I.
countries
Brazil
Australia
(APAC)
Asia-Pacific
A)
< 20.00
Cambridge
Translate Bio, Inc.
United States
<0.5
< 20.00
< 20.00
San Diego
Tioga Pharmaceuticals, Inc.
United States
A)
< 20.00
Durham
A)
< 20.00
Cambridge
Raze Therapeutics, Inc.
Ribometrix Inc.
United States
United States
A)
< 20.00
Middle East and
Menlo Park
Immutep Limited
< 20.00
< 20.00
Haifa
MediSafe Project Ltd.
Israel
A)
22.50
Yavne
Explore Bio 3 Ltd.
Israel
A)
20.00
Yavne
Explore Bio 1 Ltd.
Israel
A)
<0.5
20.00
< 20.00
Yavne
ARTSAVIT Ltd.
Israel
Wilaya de Tipiza
Novapharm Production SARL
Algeria
Africa (MEA)
<0.5
Sydney
Progyny, Inc.
United States
A)
A)
< 20.00
La Jolla
Bird Rock Bio, Inc.
United States
United States
A)
< 20.00
San Diego
A)
< 20.00
Seattle
ApoGen Biotechnologies, Inc.
Bioling Inc.
United States
< 0.5
< 20.00
Seattle
A)
< 20.00
Boston
Akili Interactive Labs, Inc.
Allozyne, Inc.
North America
United States
United States
United States
A)
< 20.00
London
A)
CLEARink Displays, Inc.
United States
Indi Molecular, Inc.
United States
< 20.00
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
Israel
Company
321
Notes to the Consolidated Financial Statements
Consolidated Financial Statements
118
< 20.00
A)
< 20.00
A)
< 20.00
A) These are affiliates in the portfolio of M Ventures. The fair value of the M Ventures portfolio on December 31, 2018, amounted to € 145 million.
Fremont
Culver City
Germantown
Intrexon Corporation
Country
< 20.00
Metabomed Ltd.
< 20.00
Due to the acquisition of Sigma-Aldrich Corporation, United States,
in November 2015, goodwill, in particular for the cash-generating
unit Life Science, increased significantly. In aggregate, goodwill
amounts to EUR 13,764 million and thus represents 37% of the
Group's total assets as of December 31, 2018, with EUR 10,896 million
of this attributable to Life Science.
The financial statement risk
Explanatory notes on the impairment tests can be found in note 19
of the notes to the consolidated financial statements.
IMPAIRMENT TESTING OF GOODWILL
The valuation model and assumptions underlying the recognition and
measurement of income tax liabilities are reasonable. The approach
regarding the recognition and measurement of deferred tax liabilities
is adequate.
Our conclusions
In addition, we analyzed correspondence with the relevant tax author-
ities and assessed the assumptions underlying the determination of
income tax liabilities based on our knowledge and experience of how
the relevant legal requirements are currently applied by the tax author-
ities and courts. We have scrutinized Merck´s approach regarding
the recognition and measurement of deferred tax liabilities, based
on laws and regulations enacted as of the reporting date, and per-
formed recalculations.
We obtained an understanding of existing tax risks through inquiry of
management of the affected group companies and employees of the
tax department. We assessed the competence, capabilities and objec-
tivity of the external experts and evaluated their expert opinions.
We involved our own specialists in international tax law into the audit
team in order to evaluate Merck's assessment of tax risks and the
related opinions of external experts engaged by Merck.
Our audit approach
There is a risk for the financial statements that income tax liabilities
and deferred tax liabilities are not fully recognized or not appropriately
measured.
The measurement of income tax liabilities as well as the assessment
of unrecognized contingent tax liabilities are subject to judgment and
estimation uncertainty. Among others, this relates to intra-group
business transfers, legal disputes attributable to the determination
of earnings under tax law, and transfer pricing adjustments. Merck
routinely engages external experts to support its own risk assessment
with expert opinions from tax specialists.
Merck operates in different jurisdictions with different legal systems.
The application of local regulations on income tax, tax incentives and
transfer pricing rules is complex. The recognition and measurement of
income tax liabilities require Merck to exercise judgment in assessing
tax matters and to make estimates regarding uncertain tax positions.
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
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.
⚫ 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.
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.
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.
• otherwise appears to be materially misstated.
In connection with our audit, our responsibility is to read the other
information and, in so doing, to consider whether the other information
is materially inconsistent with the consolidated financial state-
ments, with the combined management report or our knowledge
obtained in the audit, or
•
Our opinions on the consolidated financial statements and on the
combined management report do not cover the other information, and
consequently we do not express an opinion or any other form of
assurance conclusion thereon.
Management is responsible for the other information. The other infor-
mation comprises the annual report, with the exception of the audited
consolidated financial statements and combined management report
and our auditor's report.
Other Information
The assumptions for the measurement of the provisions for patent law
disputes are appropriate. The disclosures in the notes to the consoli-
dated financial statements appropriately illustrate the key assumptions.
Our conclusions
In addition, we assessed whether the Company's explanations on the
measurement of provisions for patent disputes in the notes to the
consolidated financial statements include appropriate and complete
disclosures on the key assumptions.
To ensure arithmetical accuracy of the valuation model used, we used
a risk-based audit approach to recalculate the Company's calculations
on a sample basis.
As supporting evidence for the estimated expenditure required to
settle the patent disputes, we obtained written confirmations from
external legal counsel engaged by Merck to obtain an understanding
of the current status of the pending legal proceedings, reviewed
correspondence with the plaintiffs and relevant courts and other
authorities, and also assessed underlying documents and minutes.
In this context we also interviewed the Company's in-house patent
counsel, employees in Merck's controlling and accounting depart-
ments, and verified the plausibility and consistency of the explana-
tions obtained with the determination of the best estimate of the
expenditure required to settle the disputes.
Our audit approach
There is a risk for the financial statements that the provisions for
patent disputes were not measured appropriately as of the balance
sheet date. There is also a risk that the notes to the consolidated
financial statements do not contain the required disclosures on the
key assumptions.
If the outflow of ressources embodying economic benefits is probable
the amount of the provisions for patent disputes is determined based
on the best estimate of the expenditure required to settle the dispute.
Consequently, the measurement of related provisions is based on
estimates and judgment of external lawyers and management.
As of December 31, 2018, provisions for legal disputes amount to
EUR 551 million, which among others include provisions for patent
disputes.
The financial statement risk
MEASUREMENT OF PROVISIONS FOR PATENT DISPUTES
Explanatory notes on the provisions for patent disputes can be found
in note 26 of the notes to the consolidated financial statements.
The calculation method used for the goodwill impairment test is
appropriate and in line with the applicable valuation principles. Overall,
the assumptions and parameters used by management are balanced.
The disclosures in the notes to the consolidated financial statements
are complete and properly depict the judgment associated with the
subsequent measurement of goodwill.
Our conclusions
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.
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.
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.
Independent Auditor's Report
326
We reconciled the expected net cash flows underlying the value in use
calculations with the current medium-term plan approved by manage-
ment. To assess the assumptions used in preparing the medium-term
plan, we obtained an understanding of the planning process through
discussions with company representatives, including corporate man-
agement and representatives from the corporate divisions and the
research and development department, we assessed the plausibility
and consistency of the explanations received with the projections,
and we compared the assumptions used with the expectations of
external analysts and sources.
Our audit approach
To determine the amount of net assets transferred, it was necessary
⚫ to assess whether, given that a series of production, supply and
service arrangements were concluded along with a sales agreement,
a disposal of the Consumer Health business activities was realized
at the date of sale, and
In 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.
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.
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
Responsibility Statement
Responsibility Statement
322
Marcus Kuhnert
Belén Garijo
Macus вишива
Kai Beckmann
Udit Batra
UditBatry Bohm
Stefan Oschmann
S. man
Darmstadt, February 14, 2019
A) These are affiliates in the portfolio of M Ventures. The fair value of the M Ventures portfolio on December 31, 2018, amounted to € 145 million.
A)
< 20.00
Caesarea
Wiliot Ltd.
Israel
A)
< 20.00
Yavne
Pantheon Biosciences Ltd.
Israel
A)
A)
Darmstadt, February 14, 2019
report includes a fair review of the development and performance of
the business and the position of the Group, together with a description
of the material opportunities and risks associated with the expected
development of the Group.
S. ma
Stefan Oschmann
On April 19, 2018, Merck entered into a contract with The Procter &
Gamble Company, United States (Procter & Gamble), regarding the
sale of the Consumer Health business. The sale of the business
activities was completed on December 1, 2018.
The financial statement risk
Explanatory notes on the sale of Consumer Health business activities
can be found in note 5 of the notes to the consolidated financial
statements.
MEASUREMENT OF DISPOSAL GAIN RECORDED FROM THE
SALE OF THE CONSUMER HEALTH BUSINESS
Key audit matters are those matters that, in our professional judg-
ment, were of most significance in our audit of the consolidated
financial statements for the financial year from January 1, 2018, to
December 31, 2018. These matters were addressed in the context
of our audit of the consolidated financial statements as a whole, and
in forming our opinion thereon, we do not provide a separate opinion
on these matters.
Key Audit Matters in the Audit of the
Consolidated Financial Statements
Independent Auditor's Report
324
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.
Basis for the Opinions
Pursuant to Section 322 (3) sentence 1 HGB, we declare that our
audit has not led to any reservations relating to the legal compliance
of the consolidated financial statements and of the combined man-
agement report.
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.
Yavne
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.
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
Opinions
Brompton-on-Swale
A)
< 20.00
Japan
Merck Serono Co., Ltd.
Tokyo
100.00
Japan
Sigma-Aldrich Japan G.K.
Tokyo
100.00
Malaysia
Malaysia
New Zealand
New Zealand
Merck Sdn Bhd
Sigma-Aldrich (M) Sdn Bhd.
Merck Ltd.
Sigma-Aldrich New Zealand Co.
Petaling Jaya
Kuala Lumpur
100.00
100.00
Palmerston North
100.00
Christchurch
100.00
Philippines
100.00
Merck Business Solutions Asia Inc.
Tokyo
Japan
Merck Specialities Pvt. Ltd.
Sigma-Aldrich Chemicals Private Limited
Mumbai
100.00
Mumbai
100.00
Mumbai
100.00
Bangalore
100.00
Indonesia
Indonesia
P.T. Merck Chemicals and Life Sciences
P.T. Merck Tbk.
Jakarta
100.00
Jakarta
86.65
Japan
BioReliance K.K.
Tokyo
100.00
Japan
Merck Ltd.
Tokyo
100.00
Merck Performance Materials Ltd.
Bonifacio Global City
99.99
Philippines
100.00
Taiwan
Merck Ltd.
Taipei
100.00
Taiwan
Merck Performance Materials Ltd.
Taipei
100.00
Taiwan
Vietnam
Thailand
SAFC Hitech Taiwan Co. Ltd.
Merck Ltd.
Merck Vietnam Ltd.
Kaohsiung
100.00
Bangkok
45.11
Greece
100.00
Latin America
Argentina
Argentina
Brazil
Yongin City
Sigma-Aldrich Korea Ltd.
South Korea
100.00
Merck Inc.
Bonifacio Global City
100.00
Singapore
Merck Performance Materials Pte. Ltd.
Singapore
100.00
Singapore
Singapore
Merck Pte. Ltd.
Sigma-Aldrich Pte. Ltd.
Singapore
Merck Performance Materials Pvt. Ltd.
100.00
100.00
South Korea
Merck Electronic Materials Ltd.
Seoul
100.00
South Korea
Merck Ltd.
Seoul
100.00
South Korea
Merck Performance Materials Ltd.
Pyeongtaek-shi
Singapore
Merck Life Science Pvt. Ltd.
India
India
Maastricht
A)
< 20.00
Paris
A)
< 20.00
Massy
A)
< 20.00
Turku
<0.5
< 20.00
Turku
A)
< 20.00
Leuven-Heverlee
A)
< 20.00
Vienna
<0.5
< 20.00
< 20.00
Neuried
3
< 20.00
< 20.00
A)
Nijmegen
< 20.00
Windsor
A)
< 20.00
Cambridge
A)
< 20.00
Cambridge
A)
< 20.00
Cambridge
A)
< 20.00
< 20.00
London
< 20.00
London
A)
< 20.00
Cologny
A)
23.28
Schlieren
A)
< 20.00
Lund
A)
A)
Merck S.A.
Bönen
< 20.00
Registered office
(%)
Merck KGaA (%)
China
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
Beijing
100.00
China
Merck Serono Co., Ltd.
Beijing
100.00
China
SAFC Hitech (Shanghai) Co., Ltd.
Shanghai
100.00
China
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
Shanghai
100.00
China
Sigma-Aldrich (Wuxi) Life Science & Technology Co., Ltd.
Wuxi
100.00
India
India
Company
Country
Thereof:
Equity interest
Sankt Augustin
A)
< 20.00
Martinsried
< 0.5
< 20.00
Berlin
2
< 20.00
Wiesbaden
2
< 20.00
1
< 20.00
A)
< 20.00
Darmstadt
A)
7.75
69.00
Peratech HoldCo Limited
Storm Therapeutics Limited
F-Star Beta Limited
F-Star Delta Limited
Macrophage Pharma Limited
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
317
Moers
Druckfein
Trade accounts receivable
We exercise professional judgment and maintain professional skep-
ticism throughout the audit. We also:
2015
2016
2017¹
2018
in %
11,363
12,845
15,024
14,517
14,836
2.2%
1,762
1,843
2,481
2,423
2014
change
Business Development 2014-2018
4 Proposal on the appropriation of profits for 2018.
Financial liabilities
Non-current
Current
Liquidity
Investments in intangible assets³
Investments in property, plant and equipment³
Business free cash flow²
1,727
Net financial debt²
Equity ratio (in %)²
Research and development costs
Dividend per share (in €)
Employees (number as of December 31)
1 Fiscal 2017 has been adjusted, see Note (49) "Effects from new accounting standards and other presentation and measurement changes" in the Notes
to the Consolidated Financial Statements.
2 Not defined by International Financial Reporting Standards (IFRSS).
3 According to the consolidated cash flow statement.
Other key data
-28.7%
15.5%
14.3%
> 100.0%
3,388
3,630
4,490
4,246
3,800
-10.5%
-272
29.8%
29.9%
29.3%
25.6%
1,557
1,487
2,154
2,129
28.3%
Equity
-82
-276
16.5%
16.7%
11.6%
FINANCIAL CALENDAR
for 2019
3,123
3,354
4,415
-75
4,164
-15.3%
27.5%
26.1%
29.4%
28.7%
23.8%
-265
3,528
Cash and cash equivalents
March
3/7/2019
Inventories
Auditor's Responsibilities for the Audit
of the Consolidated Financial State-
ments and of the Combined Man-
agement Report
The Supervisory Board is responsible for overseeing the Group's
financial reporting process for the preparation of the consolidated
financial statements and of the combined management report.
Furthermore, management is responsible for the preparation of the
combined management report that, as a whole, provides an appro-
priate view of the Group's position and is, in all material respects,
consistent with the consolidated financial statements, complies with
German legal requirements, and appropriately presents the oppor-
tunities and risks of future development. In addition, management
is responsible for such arrangements and measures (systems) as
they have considered necessary to enable the preparation of a com-
bined management report that is in accordance with the applicable
German legal requirements, and to be able to provide sufficient
appropriate evidence for the assertions in the combined management
report.
In 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
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.
Independent Auditor's Report
August
8/8/2019
Half-yearly Financial Report
April
4/26/2019
Annual General Meeting
November
11/14/2019
Quarterly Statement Q3
May
5/14/2019
Annual Press Conference
Quarterly Statement Q1
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.
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.
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.
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.
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.
• 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.
German Public Auditor Responsible for
the Engagement
on the combined management report. We are responsible for the
direction, supervision and performance of the group audit. We
remain solely responsible for our opinions.
• Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures, and
whether the consolidated financial statements present the 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.
• 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
• Evaluate the appropriateness of accounting policies used by man-
agement and the reasonableness of estimates made by manage-
ment and related disclosures.
• 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.
Independent Auditor's Report
328
• 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
1,461
E
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).
Margin (% of net sales)²
Adjustments²
EBITDA pre²
Margin (% of net sales)2
Profit before income tax
Profit after tax
Earnings per share (in €)
EBITDA²
Assets and liabilities
Non-current assets
of which:
Goodwill
Other intangible assets
Property, plant and equipment
Current assets
of which:
Total equity and liabilities
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.
Margin (% of net sales)²
Net sales
The German Public Auditor responsible for the engagement is Bodo
Rackwitz.
Frankfurt am Main, February 15, 2019
KPMG AG
Wirtschaftsprüfungsgesellschaft
[Original German version signed by:]
Braun
Wirtschaftsprüfer
[German Public Auditor]
Operating result (EBIT)²
Rackwitz
[German Public Auditor]
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
Wirtschaftsprüfer
Other Legal and Regulatory Requirements
- 31.4%
1,124
2,766
3,318
3,193
2,508
-21.4%
559
12,654
11,513
10,144
6,701
-33.9%
45.4%
33.8%
36.7%
39.5%
2,605
-0.9%
910
919
-16.8%
2,076
4,097
3,788
2,790
2,215
-20.6%
46.7%
143
132
392
106
-72.9%
481
514
716
179
1,704
1.00
1,709
1,976
Published on March 7, 2019 by
Merck KGaA, Group Communications
Frankfurter Strasse 250,
64293 Darmstadt, Germany
Telephone: +49 6151 72-0
Fax: +49 6151 72-5577
E-Mail: service@merckgroup.com
Website: www.merckgroup.com
CONCEPT AND DESIGN
3st kommunikation GmbH, Mainz
www.3st.de
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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.
Information and Service
2,108
2,225
5.6%
1.05
1.20
1.25
1,254
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.
39,639
50,348
52,880
51,713
-2.2%
331
332
Information and Service
49,613
8,033
8,809
9,616
-1.8%
5,694
14,492
15,015
13,582
13,764
1.3%
27,652
5,702
9,980
8,317
7,237
-13.0%
2,990
4,008
4,231
10,930
4,512
28,166
30,737
1,633
2,615
3,396
2.66
2.56
3.75
5.99
30,589
7.76
26,010
38,081
38,258
35,621
36,888
3.6%
15,530
29.9%
29.5%
1,165
4,811
10,480
589
2,170
> 100.0%
11,801
12,855
14,050
14,066
939
17,233
5,637
13,713
12,597
10,823
8,896
-17.8%
3,561
22.5%
6.6%
832
0.3%
7,344
7,670
7,455
9,236
23.9%
1,660
2,610
2,879
2,609
2,764
5.0%
2,220
2,738
2,889
2,923
2,931
2,632
Further Information pursuant to
Article 10 of the EU Audit Regulation
"Syntropy aims to
help researchers
collaborate securely
Sometimes, a needle
prick can also
physiology
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.
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.
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.
The needle-free sensor
BEYOND TOMORROW
31
"Bioling is on the verge
of improving and
simplifying the lives
of millions of people
living with diabetes with
just a small patch."
EDWARD KLIPHUIS
Investment Director of M Ventures
and Bioling Board Member
221 Mg/dl 8 Mg/dl
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.
M Venture's investment in Bioling is more than just
a strategic move to help Merck gain a foothold in the
growing field of what is known as biosensoring; in
the medium term, a paradigm shift in medicine initi-
ated by Biolinq could well be on the horizon - a
shift toward needle-free blood monitoring.
Liquid biopsy
make everything easier.
As noted, daily needle pricks can be a burden for a
diabetic. But there are other patients for whom a blood
sample can bring genuine relief – in particular when so
much information can be derived from the blood drawn
that complex diagnostic procedures and therapeutic
failures can be avoided. For example, within the concept
of personalized medicine, many types of cancers are
now treated with highly specialized therapeutics. But
that requires precise knowledge of the characteristics
of the tumor cells and their genetic basis. In some types
of cancer, the tumor is positioned in such a way that
a needle biopsy is risky. One way to get around this is
a liquid biopsy, in which traces of mutated genetic
material of cancer cells are detected in the blood.
That is precisely the focus of the research collaboration
Merck began in 2016 with Biocartis, a Belgian mole-
cular diagnostics company. This collaboration is already
seeing results: In November 2017, Biocartis and Merck
were proud to announce the CE-IVD marking for their
first two fluid biopsy tests, the Idylla™ ctKRAS Mutation
Assay and the IdyllaTM ctNRAS-BRAF Mutation Assay.
Together, they detect 44 mutations of colorectal cancer
tumor cells that are relevant for choosing the appropri-
ate treatment. "With these tests, we can help patients
with colorectal cancer around the world," explains Erwin
Sablon, Head of Research and Development at Biocartis.
"With these tests,
we can help patients
with colorectal
cancer around the
world."
ERWIN SABLON
Head of Research and Development at Biocartis
The tests are based on Biocartis' Idylla™ platform,
a fully automated molecular diagnostics system. It
integrates all the sample preparation steps and pro-
vides doctors with sameday results of the desired test.
This enables quicker access to the right treatment
for patients - and as such they can benefit from further
progress in personalized medicine.
32
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.
Ketone
Lactat
Glukose
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.
28
BEYOND TOMORROW
3
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
BEYOND TOMORROW
A platform for the fight against cancer
Syntropy will drive the creation of
new knowledge and accelerate scien-
tific discovery.
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.
If, one day, there is a clear
global demand for "clean" meat
that does not require killing
animals...
If, as a developer of
"clean" meat, you could
make one wish...
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.
MARK POST
If, in ten years' time, the aim
is for 100 million people all
around the world to eat Mosa
Meat's ground beef...
not ensure that a greater share
of the world's meat is produced
without large-scale livestock
farming...
If, in the near future, we do
IF
35
A platform for the
fight against cancer
Real meat without the side effects
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.
Burger with patty
made by Mosa Meat
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.
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,
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".
side effects
without the
Real Meat
Real meat without the side effects
BEYOND TOMORROW
34
ALEXANDER KARP
Palantir Technologies co-founder and CEO
to realize the value
of scientific data,
driving discoveries
that will deliver
better treatments
to patients faster."
THEN
...then the overheated production of meat will have
a major negative impact on climate change and
the food security of the soon-to-be ten billion people
on this planet. This in turn will make meat a rare,
expensive, and thus exclusive product for those who
can still afford it.
BEYOND TOMORROW
...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.
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.
...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.
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
to tailoring Syntropy
to meet the precise
needs of cancer
researchers and
clinical doctors."
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
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.
BEYOND TOMORROW
A platform for the fight against cancer
...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.
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
36 BEYOND TOMORROW
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
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
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.
1 Excluding the Consumer Health business divested in 2018.
Letter from Stefan Oschmann
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.
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.
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.
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.
•
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.
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.
2 MSCI European Pharma Index.
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.
45
46
To Our Shareholders
Letter from Stefan Oschmann
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.
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 Performance Materials, we aim to expand our position as a leading solutions
supplier for the electronics industry. The electronics sector is considerably
benefiting from the megatrends of digitalization, mobility and urbanization.
It services a broad range of different customers, making it less susceptible
to the ups and downs of individual markets. In particular, our business with
semiconductor materials will continue to advance Performance Materials over
the long term.
At Merck, we are also working on technologies of the future beyond our three
business sectors.
The announced Syntropy joint venture we plan to create with Palantir Tech-
nologies represents a particularly exciting project. Syntropy aims to markedly
accelerate cancer research. To achieve this, the large volume of biomedical
data being collected by scientists and physicians worldwide every day plays
a key role. This data may prove very valuable to science. Far too often, how-
ever, it's not accessible to the scientists who need it. We aim to change this
through Syntropy. We want to enable researchers to structure and analyze
data from various sources through the use of pattern recognition. In addition,
it is planned that scienctists can securely exchange data in a traceable manner
while retaining control of their own data at all times.
Syntropy is a project with considerable potential, an attribute it shares with
other issues of the future - for example, new interfaces between the human
body and the digital world and new technological approaches for liquid biopsy
or for the biotechnological production of meat. Please see the magazine section
of this Annual Report for more information on these issues.
To Our Shareholders
3 Dow Jones European Chemical Index.
GROWTH HAS ITS PRICE
Chairman of the Executive Board and CEO
44
Fundamental Information
about the Group
55
Merck
61
Strategy
68
Internal Management System
72
Corporate Responsibility
81
Research and Development
91
People at Merck
50 Merck Shares
99
101
Macroeconomic and
104
111
-
-
-
Sector-Specific Environment
Review of Forecast against Actual
Business Developments
Course of Business and Economic Position
Merck Group
Healthcare
Life Science
Report on Economic Position
The Executive Board
48
55
New heroes wanted
BEYOND TOMORROW
37
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?
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
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.
http://futureinsightprize.merckgroup.com
Future Insight Prize
Merck plans to support
courageous projects
over the next years in
the following areas:
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
Letter from Stefan Oschmann
43
41-52
53-162
Combined
Management
Report*
Shareholders
Performance Materials
To Our
Table of Contents
TABLE OF CONTENTS ANNUAL REPORT
38
CO2-to-fuel converter - Generating fuel through
photocatalytic conversion of atmospheric CO2
(category: energy)
2022
Food generator - Technology to help feed the
world's growing population (category: nutrition)
Annual Report
Stefan Oschmann
Corporate and Other
Report on Risks and Opportunities
Business Development 2014-2018
332
Information and Service
Financial Calendar for 2019
* The management report of Merck KGaA has been
combined with the Group management report and
published in both the 2018 Merck Annual Report and
the annual financial statements of Merck KGaA. The
authoritative German versions of the annual financial
statements and the combined management report of
the Merck Group and Merck KGaA for 2018 have been
filed with the electronic German Federal Gazette and
are available on the website of the German company
register.
39
TABLE OF CONTENTS ANNUAL REPORT
TO OUR
SHAREHOLDERS
41-52
TO OUR
SHAREHOLDERS
43
Letter from Stefan Oschmann
48
The Executive Board
50
Merck Shares
Letter from Stefan Oschmann
To Our Shareholders
In the Performance Materials business sector, we have developed a new
strategy and restructured our organization. With the help of our multi-year
"Bright Future" transformation program, we will implement our new strategy
and create the basis for future profitable growth beyond 2019. Our goals in
taking this step are to sharpen our focus on our customers' needs as well
as to centrally decide on the assessment of projects and the related use
of resources as part of an integrated approach to research and development.
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.
.
•
330
• 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).
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.
Dear shareholders, dear
of March,
dear friends
43
Letter from Stefan Oschmann
To Our Shareholders
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.
137
Independent Auditor's Report
322
150
Report on Expected Developments
154 Report in accordance with Section 315a
(1) of the German Commercial Code
(HGB)
156
Additional Information on Merck KGaA
in accordance with the German
Commercial Code (HGB)
Corporate
TABLE OF CONTENTS ANNUAL REPORT
Consolidated
Financial Statements
197-321
Consolidated Income Statement
Governance
200
201
Responsibility Statement
163-196
165
Notes to the Consolidated Financial
Statements
206
195 Objectives of the Supervisory Board
with respect to Its Composition and
Profile of Skills and Expertise
Consolidated Statement of Changes
in Net Equity
Report of the Supervisory Board
193
Comprehensive Income
204
166
Consolidated Cash Flow Statement
203
Consolidated Balance Sheet
201
Capital Structure and Corporate Bodies
of Merck KGaA
Statement on Corporate Governance
Consolidated Statement of
In addition, we launched two new technologies at the annual
meeting of the European Society of Human Reproduction and Embry-
ology (ESHRE) in Barcelona. Our connectivity platform QBOX IVF
streamlines the data transfer between lab instruments and electronic
medical records, improving data management across the clinic. GeriⓇ
Assess 2.0 extends our innovative software portfolio, enabling auto-
matic detection of key events in embryo and blastocyst development.
The Pergoveris® Pen is the first product with a combination of
recombinant follicle-stimulating hormone (FSH) and recombinant
luteinizing hormone (LH) in a ready-to-use liquid version, eliminating
the need for mixing. It thus provides an improved and convenient
treatment option for women with severe deficiency of both FSH and
LH, a group of patients that is difficult to treat. Launches will con-
tinue. The number of countries in which PergoverisⓇ Pen has launched
reached 13 in 2018 and we will continue to provide patients with
access to this innovative therapeutic.
- Healthcare
Merck Shares
To Our Shareholders
Key share price data¹
MERCK SHARES
52
Source: Bloomberg (closing rates).
Dec.
Nov.
Oct.
Sept.
2018
Aug.
June
May
Apr.
Mar.
Feb.
Jan.
Share price high December 3, 2018 → € 99.82
MSCI European Pharma Index
Dow Jones European Chemical Index
• Merck
• DAX®
Share price low March 26, 2018 → € 74.80
July
2017
Dividend²
Share price high
Market value of authorized shares5 (at year-end)
39,021
39,121
€ million
473,740
583,653
number
89.75
89.98
€
87.90
74.80
€
114.40
99.82
€
1.25
1.25
€
Market capitalization (at year-end)
Daily average number of Merck shares traded³
Year-end share price
Share price low
гори
€ million
-20
-15
Executive Board and CEO
Chairman of the
Stefan Oschmann
Chief Financial Officer
Marcus Kuhnert
Member of the Executive Board
CEO Life Science
Member of the Executive Board
Udit Batra
The Executive Board
The Executive Board
Kai Beckmann
Member of the Executive Board
CEO Performance Materials
To Our Shareholders
47
Chairman of the Executive Board and CEO
Dr. Stefan Oschmann
Stefan Suman
Sincerely,
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.
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.
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.
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.
Letter from Stefan Oschmann
48
Belén Garijo
Member of the Executive Board
CEO Healthcare
- 10
-5
0
5
10
15
in %
Share price development from January 1, 2018 to December 31, 2018
MERCK SHARES
51
Merck Shares
To Our Shareholders
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%).
In 2018, the Merck Executive Board and the Investor Relations team
gave in-depth briefings to more than 660 investors at investor con-
ferences as well as during roadshows and conference calls.
The 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.
At a glance
Merck Shares
To Our Shareholders
Merck Shares
50
49
The Executive Board
To Our Shareholders
thin
11,629
11,599
1 Share-price relevant figures relate to the closing price in XETRAⓇ trading on the Frankfurt Stock Exchange.
22018 dividend subject to approval by the AGM.
Fundamental Information
about the Group
55
Merck
Fundamental Information about the Group
Combined Management Report
The separate, combined non-financial (Group) report of Merck KGaA, which we issue pursuant to sections 289b-289e and 315b-315c HGB, is available as online version on
our website as of April 15, 2019 at https://www.merckgroup.com/en/cr-report/2018/. It is integrated into the 2018 Corporate Responsibility Report in accordance with DRS 20
subsection 252 (b). We have prepared an overview of the information contained in the combined non-financial (Group) declaration at https://www.merckgroup.com/nfr18.
The figures presented in this combined management report have been rounded. This may lead to individual values not adding up to the totals presented.
This combined management report contains certain financial indicators such as operating result (EBIT), EBITDA, EBITDA pre, business free cash flow (BFCF), free cash flow, net financial
debt and earnings per share pre, which are not defined by International Financial Reporting Standards (IFRSS). These financial indicators should not be taken into account in order to
assess the performance of Merck in isolation or used as an alternative to the financial indicators presented in the consolidated financial statements and determined in accordance with
IFRSS.
*The management report for Merck KGaA has been combined with the Group management report and published in the 2018 Merck Annual Report as well as in the annual financial state-
ments of Merck KGaA. The annual financial statements and the combined management report of the Merck Group and Merck KGaA for 2018 are filed with the electronic German Federal
Gazette (elektronischer Bundesanzeiger) and are available on the website of the German company register.
Additional Information on Merck KGaA
in accordance with the German
Commercial Code (HGB)
Merck
156
154
Report on Expected Developments
150
Report on Risks and Opportunities
137
- Corporate and Other
People at Merck
91
- Performance Materials
- Life Science
Report in accordance with Section 315a (1)
of the German Commercial Code (HGB)
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.
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.
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.
Earlier pipeline highlights included the presentation of new data for
M7824 (TGF-B-trap/anti-PD-L1) in a range of tumors, adding to
existing evidence for the potential of this bifunctional immunotherapy
and supporting our plans to continue its exploration in advanced solid
tumors and ongoing cohort expansions. Additionally, in August we
initiated a trial to investigate M7824 compared with pembrolizumab
as a first-line treatment in patients with PD-L1-expressing advanced
non-small cell lung cancer (NSCLC). In December, the FDA granted
orphan drug designation to M7824, its first regulatory designation,
for the treatment of biliary tract cancer (further details can be found
under "Research & Development"). Data shared for oral MET inhib-
itor tepotinib included positive results in NSCLC and advanced hepa-
tocellular carcinoma (HCC). We are currently assessing the potential
of investigating tepotinib in combination with novel therapies for the
treatment of advanced HCC after the two HCC Phase II trials met
their primary endpoints, with clinical activity and safety demon-
strated both as first-line and second-line treatment. Both M7824 and
tepotinib were discovered in-house at Merck.
We are continuing to explore all potential options and have entered
into a number of strategic collaborations to evaluate avelumab in
combination with a range of complementary oncology medicines
(further details can be found under "Research & Development"). Key
data from the JAVELIN program were presented at major medical
congresses in 2018, including the European Society for Medical
Oncology Congress (ESMO), where we shared promising new results
from the Phase III JAVELIN Renal 101 study evaluating avelumab in
combination with axitinib compared with sunitinib as initial therapy
for patients with advanced renal cell carcinoma.
The BavencioⓇ approvals were based on data from our compre-
hensive clinical development program JAVELIN, which currently
comprises at least 30 clinical programs, including several Phase III
trials and over 9,000 patients evaluated across more than 15 differ-
ent tumor types. In addition to MCC and UC, these cancers include
gastric/gastro-esophageal junction, head and neck, non-small cell
lung, ovarian and renal cell carcinoma.
Together with Pfizer Inc., we are developing much-needed new
treatment options for patients with hard-to-treat cancers. We have
made key progress in this area, with regulatory approvals in 46 coun-
tries for our anti-PD-L1 antibody avelumab under the brand name
BavencioⓇ. In 2018, approvals were granted in several countries
including Australia and Brazil for Merkel cell carcinoma (MCC), Israel
for both MCC and urothelial carcinoma (UC) and Canada for UC.
BavencioⓇ was initially granted two approvals in 2017 by the U.S.
Food and Drug Administration (FDA) for the treatment of adults and
pediatric patients 12 years and older with metastatic MCC and pre-
viously treated patients with locally advanced or metastatic UC.
These indications were approved under accelerated approval based
on tumor response rate and duration of response. Continued approval
for these indications may be contingent upon verification and descrip-
tion of clinical benefit in confirmatory trials. The prognosis for both
patient groups is very poor, so for patients around the world this may
represent a welcome new treatment option.
Erbitux® (cetuximab) remains the second-best-selling drug in terms
of revenue in the portfolio of our Biopharma business and is our
flagship product in oncology. Treating more than 900,000 patients
since authorization, the product is a standard of care for patients
with epidermal growth factor receptor (EGFR)-expressing, RAS wild-
type metastatic colorectal cancer (mCRC), as well as both recurrent
and/or metastatic and locally advanced squamous cell carcinoma
of the head and neck (SCCHN). We continue to invest in Erbitux®Ⓡ
and are committed to making it available to those patients it will
benefit most.
-
Merck
Fundamental Information about the Group
Combined Management Report
56
2 Merck also has employees at sites which are not fully consolidated subsidiaries. These figures refer to all people directly employed by Merck and therefore may deviate from figures in the
financial section of this report.
1The Consumer Health business was transferred to Procter & Gamble (P&G) on December 1, 2018, and was already classified as a discontinued operation according to IFRS 5 in April 2018.
With the completion of the sale, around 3,300 employees joined P&G.
In March, we announced positive Phase IIb data for the first
Bruton's tyrosine kinase (BTK) inhibitor to show clinical proof-of-
concept in relapsing MS, namely evobrutinib, a highly specific, oral
BTK inhibitor, and we further demonstrated our commitment to
improving the lives of people with MS and other chronic progressive
diseases via scientific advances and new data on our marketed and
pipeline therapies (further details can be found under "Research &
Development").
2018 also saw further launch progress of MavencladⓇ (cladribine
tablets), with approvals encompassing more than 40 countries. In
addition, in July, the FDA accepted the resubmission of the New Drug
Application (NDA) for cladribine tablets. The acceptance indicates that
the FDA found the company's resubmission sufficiently complete to
permit a substantive review. We view MavencladⓇ as a complementary
new oral treatment option in our MS product portfolio. Our MS treat-
ment Rebif® is and remains a well-established therapy.
2018 marked the 20th anniversary of the European Commission's
approval of our top-selling product Rebif® (interferon beta-1a), a
disease-modifying drug used to treat relapsing forms of MS, acting
in a way similar to that of interferon beta protein produced by the
human body. RebifⓇ, which was approved in Europe in 1998 and in
the United States in 2002, is registered in more than 90 countries
worldwide. Rebif® has been proven to delay the progression of disa-
bility, reduce the frequency of relapses and reduce magnetic resonance
imaging (MRI) lesion activity and area.
Our Biopharma business discovers, develops, manufactures and mar-
kets innovative pharmaceutical and biological prescription drugs to
treat cancer, multiple sclerosis (MS), infertility, growth disorders as
well as certain cardiovascular and metabolic diseases. Biopharma
is the larger of our Healthcare businesses and operates in four fran-
chises: Oncology, Neurology & Immunology, Fertility and General
Medicine & Endocrinology. Our R&D pipeline positions us with a clear
focus on becoming a global specialty innovator in oncology, immuno-
oncology and immunology including MS.
BIOPHARMA
Europe and North America generated 58% of Healthcare's net sales
in 2018. In recent years, we have steadily expanded our presence in
growth markets. In 2018, Asia-Pacific and Latin America accounted
for 35% of sales.
Our Healthcare business sector comprises the two businesses Bio-
pharma and Allergopharma. On December 1, our Consumer Health
business tranferred to Procter & Gamble (P&G). Since 2015, Belén
Garijo has been CEO of the Healthcare business sector and member
of the Executive Board. In 2018, Healthcare generated 42% of Group
sales and 37% of EBITDA pre (excluding Corporate and Other),
making it the largest of our three business sectors. The regions
Healthcare
Apart from our three business sectors, our financial reporting
presents the five regions Europe, North America, Asia-Pacific (APAC),
Latin America as well as Middle East and Africa (MEA). As of Decem-
ber 31, 2018, we had 51,749 employees worldwide¹, which compares
with 52,941 on December 31, 2017.²
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.
Research and Development
81
- Merck Group
Course of Business and Economic Position
Source: Nasdaq Shareholder Identification. Total number of shares outstanding: 129.2 million.
United States
35.6%
28%
Value
Europe (excl. Germany/UK)
16.1%
Index
19%
3%
Hedge
10.3%
Germany
Identified investors by type as of December 2018
in %
MERCK SHARES
United Kingdom
14.8%
Rest of World
7.0%
German Retail/Undisclosed
16.2%
Identified investors by region as of December 2018
in %
MERCK SHARES
Source: Bloomberg, Thomson Reuters.
5 Based on the number of shares in free float (129.2 million).
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).
Source: Nasdaq Shareholder Identification.
To Our Shareholders
1%
Other
17%
GARP (Growth At
Reasonable Price)
111
Review of Forecast against Actual Business Developments
104
Macroeconomic and Sector-Specific Environment
101
Report on Economic Position
99
Corporate Responsibility
72
Internal Management System
68
Strategy
61
Merck
55
about the Group
Fundamental Information
55
REPORT*
COMBINED MANAGEMENT
53-162
REPORT*
COMBINED MANAGEMENT
32%
Growth
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.
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.
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%.
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.
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.
-
Merck
Fundamental Information about the Group
Combined Management Report
60
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.
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
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.
Performance Materials
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.
In October, we announced an agreement to sell our AmnisⓇ Flow
Cytometry and Guava® Technologies businesses to Luminex Corpo-
ration for € 63 million. The transaction transferred our flow cytometry
platforms Amnis and Guava as well as the associated reagents under
those brands. This included a portfolio of leading technologies serving
the research space.
In 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.
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.
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.
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.
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 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
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.
THE ROADMAP
Strategically, what we have achieved is the transformation of a
classic chemicals and pharmaceuticals supplier into the vibrant sci-
ence and technology company with leading positions in Healthcare,
Life Science and Performance Materials. To further achieve our stra-
tegic goals from 2011-2017, we completed a transformation and
growth program known as "Fit for 2018", primarily targeting organi-
zational effectiveness and process optimization, and in the later years
new initiatives such as the commencement of our Merck Innovation
Center in Darmstadt, new product innovations and the new Merck
brand.
helped us further diversify our product portfolio that was strongly
driven by liquid crystals.
THE TRANSFORMATIONAL JOURNEY SINCE 2007
Throughout the past years, Merck has grown significantly through a
series of strategic moves that have enabled us to develop into the
vibrant science and technology company we are today. We have
systematically and continuously strengthened and focused our port-
folio of innovative science and technology throughout our business
sectors. In Healthcare we divested our Generics business (2007) to
focus on highly specialized products and acquired Serono (2007) to
expand our pipeline and strengthen our business. This focused
approach has continued until today with the divestments of the Bio-
similars business (2017) and Consumer Health business (2018), so
that we can increase our efforts on our Oncology, Immuno-oncology
and Immunology franchises. Within Life Science, we have signifi-
cantly transformed to become a diversified industry leader through
the acquisition of Millipore (2010) and Sigma-Aldrich (2015). We
continue to leverage the Sigma-Aldrich e-commerce platform to
expand our reach and leadership in the industry as well as investing
in strategic initiatives such as Gene Editing & Novel Modalities and
End-to-End Bioprocessing. During this time, Performance Materials
has continued to deliver profitable growth and a significant cash
contribution, and we evolved this business further into attractive
science and technology areas such as semiconductor materials
through the acquisition of AZ Electronic Materials (2014), which also
Group Strategy
Together, we have defined the road ahead for Merck until 2022.
This strategy is based on our Group Foundation, external trends that
will impact our industry and a concrete map on how to reach our
future ambition.
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.
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.
61
Fundamental Information about the Group _ Strategy
Combined Management Report
Strategy
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.
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.
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.
General principles
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.
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.
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.
58
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.
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.
ALLERGOPHARMA
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.
CONSUMER HEALTH
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.
Combined Management Report
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.
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.
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.
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.
57
Merck
Fundamental Information about the Group
Combined Management Report
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.
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.
Fundamental Information about the Group
-
59
Merck
Fundamental Information about the Group
Combined Management Report
A key goal for our Life Science business units is to help our cus-
tomers that manufacture drugs, from small to large innovator com-
panies, bring life-enhancing medicines and therapies to market - and
In October, we also opened a new, 1,000-square-meter M Lab™
Collaboration Center in São Paulo, Brazil, to serve the Latin America
region. The lab, which is one of nine such centers around the world,
includes a non-good manufacturing practice (non-GMP) pilot and
bench scale labs for customers. This allows customers to engage in
process development support, troubleshooting, demonstrations and
hands-on training to explore new ways to increase productivity,
improve processes and mitigate risks.
In 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.
Merck
In June, we announced expansion plans to our operations in
Gillingham, United Kingdom. The distribution center, which will grow
by 5,250 square meters, will supply the pharmaceutical industry, bio-
technology companies, research institutes and academic centers with
biochemical and chemical reagents, laboratory supplies and testing
services. The € 9 million investment will boost distribution capabilities
for the business. Anticipated to open in early 2019, the updated facil-
ity will serve as the primary distribution center for the United Kingdom.
In September, we established our first Mobius® single-use manu-
facturing facility in China to support the development of the bio-
pharma industry in the region. This facility, which is expected to be
operational by the first quarter of 2019, will provide flexible and
customized single-use solutions to support local customers in accel-
erating drug development and manufacturing.
In the 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.
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.
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.
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).
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.
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.
Life Science
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.
62
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.
Fundamental Information about the Group _ Strategy
We began the year 2018 with a recently signed commercial sup-
ply agreement to manufacture viral vectors for bluebird bio, Inc., of
Cambridge (Massachusetts, United States), a clinical-stage company
that develops potentially transformative gene and cell therapies for
severe genetic diseases and T-cell-based immunotherapies for cancer.
As part of the multi-year agreement, we will manufacture lentiviral
vectors for bluebird bio's drug products developed to treat a variety
of rare genetic diseases.
3. Establish new growth pillars through our four strategic initia-
tives: Gene Editing & Novel Modalities, BioReliance® End-to-End
Solutions, BioContinuum® Platform and BrightLab™.
2. Strengthen the core organization by rejuvenating chemistry
and reagents, expanding our leadership in bioprocessing, con-
tinuing to access new growth areas and strengthening our
e-commerce platform to maintain our leadership position
1. Ensure operational excellence by focusing on creating value,
building a strong organization and implementing consistent
processes
To sustain our leadership for the future, Life Science has estab-
lished a strategy based on three key pillars:
Our aspiration remains to reinforce our leadership position as a
tools and equipment supplier that is solving the toughest problems
in life science. This has allowed us to achieve quality growth with a
well-leveraged balance sheet.
The Life Science business sector is executing an ambitious strat-
egy to capture near-term opportunities and to invest for future growth.
Our integration is on track, and we have consistently outperformed
the market during the largest integration in our history and that of
the industry.
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.
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.
On December 1, 2018, we announced the completion of the sale
of our Consumer Health business to Procter & Gamble. The divest-
ment of Consumer Health was aligned with our strategy of focusing
on our pipeline of innovative medicines.
In this context, strategic collaborations are an integral part of
delivering on our commitment to transforming the lives of patients
living with serious unmet medical needs. We recognize the value
of collaboration in the research and development of breakthrough
therapies, as well as in strengthening our current portfolio. Here, we
focus on balancing the right blend of internal capabilities and exter-
nal partnerships, building strong collaborations with other leaders in
the industry.
success.
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
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 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.
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.
LIFE SCIENCE
65
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.
Combined Management Report
We ensure that we can fulfill our obligations at all times. In this
context, we pursue a conservative, proactive financing strategy in
which we deploy a variety of financial instruments. We have diver-
sified and profitable business activities as the basis for our strong
and sustainable cash flow generation capacity. In addition, we have
several sources of financing, including a € 2 billion syndicated loan
facility that was renewed in 2018 and is in place until 2023 to cover
any unexpected cash needs. The facility is a pure back-up credit
facility and has not been drawn on so far. In addition, we have a
commercial paper program with a volume of € 2 billion at our dis-
posal. Within the scope of this program, we can issue short-term
commercial paper with a maturity of up to one year. Furthermore,
in 2018 we used bilateral bank loan agreements with first-class banks
in order to optimize the funding structure and cost.
FINANCIAL FLEXIBILITY AND A CONSERVATIVE FUNDING
STRATEGY
We are pursuing a conservative financial policy characterized by the
following aspects:
Strategic finance and dividend policy
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
• Allocate our resources more efficiently to maintain an above-
industry EBITDA pre margin of around 30%
• Focus on the attractive electronics market to achieve long-term
organic growth perspective of 2-3% per year (CAGR)
66
Our priorities are:
We have a solid foundation: a strong global customer network,
a proven track record of delivering high-tech solutions, an efficient
production infrastructure and the highest quality standards through-
out the industry. Our innovative solutions allow us to establish inti-
mate and long-term customer relationships, and understand the
changing requirements of end customers in markets as diverse as
consumer electronics, automotive and cosmetics.
Within the electronics market, we are active in the field of semi-
conductor and display solutions, targeting a material market of
about € 85 billion. We are already one of the largest players in this
field, while operating in selected and highly attractive market seg-
ments. In coming years, we expect that the market for liquid crystal
materials for TVs - still our largest business and one of the most
attractive - will continue to decline. For us, after 2019, this devel-
opment is expected to be more than offset by growth in OLED mate-
rials and photoresists as well as in semiconductor materials and our
solutions for surfaces. As a result, we want to achieve an attractive
average sales growth of 2-3% after 2019 and to generate EBITDA
pre margins of around 30%, substantially above the specialty chem-
icals industry average.
The remaining 20% of our sales relate to the automotive and
cosmetics market served by Surface Solutions. We expect demand
in these segments to likewise benefit from global trends such as
increasing affluency in developing countries.
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.
PERFORMANCE MATERIALS
Strategy
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).
Fundamental Information about the Group Strategy
Fundamental Information about the Group
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
China is a major innovation hotspot and one of our strategically
most important growth markets. Cornerstones of our strategy are
further localization via our Healthcare and Life Science production
sites in Nantong and the OLED application center in Shanghai, the
engagement of key stakeholders in the local environment and tap-
ping into the Chinese innovation ecosystem via our future innovation
hubs in Shanghai and Guangzhou. The establishment of both these
hubs is already well underway, with scheduled openings in the second
half of 2019. Together they will create a strong platform for us and
our partners to drive innovation, while also significantly contributing
to the range of our activities and general footprint in China.
The focus of Performance Materials is on bringing the business
back to a 2-3% organic sales growth trajectory from 2020 onwards,
implementing our 5-year "Bright Future" transformation program
and ensuring efficient resource allocation to foster the EBITDA pre
margin of around 30%. We aim to further strengthen Performance
Material's position as a leading electronics solutions provider, ensure
a stronger focus on existing end market needs and implement a
rigorous innovation and project prioritization process.
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.
63
Fundamental Information about the Group _ Strategy
Combined Management Report
We are a highly differentiated leader, positioned for sustained
and profitable growth, in Life Science. Working towards 2022, our
strategy is to sustain above-market growth in our core businesses,
with a focus on our leadership in Bioprocessing and delivering on our
strategic initiatives such as End-to-End Bioprocessing and Gene
Editing & Novel Modalities. The business sector will concentrate on
advancing the already favorable portfolio mix with exposure to
growth market segments, full operating leverage driving margin pro-
gression, ensuring that our strategic initiatives enable sustained
above-market growth and making capacity investments that support
industry growth dynamics.
People
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.
Our priority area "Performance" includes all activities that create
sustainable, profitable growth. We have defined a strategic roadmap
until 2022 to meet our ambition. Our primary aim is to deliver accel-
erated profitable growth through sustained core business delivery
and selective portfolio strengthening.
Performance
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".
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.
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.
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.
Combined Management Report
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.
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.
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.
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.
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.
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.
HEALTHCARE
Business strategies
Merck's transformation towards a science and technology com-
pany is evident at our Darmstadt site, which we are growing into a
center of excellence for science and technology. Our largest site in
the world already stands for excellent research and development as
well as production that creates value. Darmstadt is the only site at
which all three Merck business sectors have a presence. In addition
to being global Group headquarters, Darmstadt is home to our Exec-
utive Board and Group functions. At our new Innovation Center in
Darmstadt, internal and external experts collaborate on identifying
trends of significance to our business and markets as well as gener-
ating technology-driven growth going forward. All in all, this site
offers a very good foundation for implementing our Group strategy
successfully.
Additionally we focus on disruptive innovation beyond our cur-
rently established business sectors. To achieve innovation success,
we transform ideas into businesses through different pathways. They
include M Ventures, the strategic corporate venture capital fund of
Merck, with a total volume of € 300 million. M Ventures invests in
promising start-ups and businesses within our core business areas
and in innovations outside these areas by providing financial and/or
strategic value. Furthermore, our Digital Office works to generate
new digital business opportunities within our areas of expertise.
It also supports the existing businesses in selecting digital projects
where maximum value for Merck can be generated. The Innovation
Ecosystem is responsible for scouting, ideating and delivering new
internal projects across and beyond Merck's current scope.
Furthermore, we opened our Innovation Center in Darmstadt as
a Group-wide infrastructural commitment to our science- and tech-
nology-driven growth. The Innovation Center aims to develop entirely
new businesses beyond the current spectrum as well as bring
together people, scientific expertise, technologies and skills from
different areas under one roof. Our cross- and beyond-sector inno-
vation offers incremental and disruptive ideas and aims to keep us
ahead of the game. We are focusing on our activities within three
core innovation fields of interest: Liquid Biopsy, Clean Meat and
Biosensing and Interfaces. With liquid biopsies, a variety of diseases
can be diagnosed through the detection of biomarkers in body fluids.
This could be a key technology for early disease detection and for
expanding the delivery of precision medicine to more patients. The
innovation field Clean Meat comprises technological innovations to
meet the world's growing demand for protein- and nutrient-dense
foods made by ethical, eco-friendly methods. The innovation field of
Biosensing and Interfaces focuses on the integration of electronics
with the human body to create a digital human/biological interface.
Our priority area "Technology" is twofold. It is inherent in our business
sectors through our innovations, product pipelines and digitalization
strategies. In addition, the ways in which we address cross-sector
innovations is reflected in our approach to potentially disruptive tech-
nologies. It covers the closely interlinked areas of innovation and
digitalization. Developing and marketing innovative products and
services are at the forefront of our Group strategy and all the busi-
ness strategies. Our objective is to foster innovations both within the
businesses and between them as well as beyond existing businesses
into areas in which we are not yet active. In particular, we want to
capture the opportunities that digitalization offers in order to create
value for patients, customers and business associates. To us, digi-
talization means the digital integration of our entire value chain, the
digitalization of our products, services and communication interfaces
to customers as well as the development of new digital business
models. This is supported by state-of the-art methods to collect
and analyze vast amounts of data. Another example is Syntropy,
our intended joint venture with Palantir Technologies to advance
cancer research. Syntropy is expected to empower scientists and
research centers with a collaborative technology platform to advance
cancer research, help drive scientific discovery and improve human
lives. Research institutions around the world are generating a rapidly
growing amount of biomedical data, but much of it is trapped in
silos within and between institutions. Today, this critical data is often
inaccessible to the scientists and clinicians who need it to advance
their work. Syntropy aims to unlock the value of this untapped data,
enabling the world's leading experts to collaborate in the fight against
cancer and many other diseases.
This could enable faster and more accurate (remote) health moni-
toring and treatment.
Technology
Fundamental Information about the Group _ Strategy
Combined Management Report
64
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.
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 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.
-46
-24.4%
Gains (-)/losses (+) on the divestment of businesses
-310
Acquisition-related adjustments
> 100.0%
188
335
25
142
> 100.0%
-24.6%
-15
61
46
-15.3%
-636
58
3,528
2
-1
4,164
Integration expenses/IT expenses
63
BUSINESS FREE CASH FLOW (BFCF)
-97.2%
Business free cash flow¹,2
58
Change
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
Fundamental Information about the Group _ Internal Management System
Combined Management Report
70
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.
-10.5%
-446
4,246
3,800
EBITDA pre²
-28.1%
-23
81
58
Other adjustments
-61
1
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.
1,743
14,836
2018
Net sales
€ million
Net sales¹
MERCK GROUP
Net sales are defined as the revenues from the sale of goods, services
rendered to external customers, commission income and profit-sharing
from collaborations, net of value added tax and after sales deductions
such as rebates or discounts. Net sales are the main indicator of our
business growth and therefore an important parameter of external as
well as internal performance measurement. In addition, acquisition-
and currency-adjusted sales are used for internal performance man-
agement. Organic sales growth shows the percentage change in net
sales versus a comparative period, adjusted for exchange rate and
portfolio effects. Exchange rate effects may arise as a result of foreign
exchange fluctuation between the functional non-euro currency of a
consolidated company and the reporting currency (euro). By contrast,
portfolio effects reflect sales changes due to acquisitions and divest-
ments of consolidated companies or businesses.
NET SALES
The three key performance indicators 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.
Key performance indicators of
the Group and its businesses
69
Fundamental Information about the Group — Internal Management System
Combined Management Report
1 Not defined by International Financial Reporting Standards (IFRSS).
M&A = Mergers & Acquisitions
POS¹ = Probability of success
eNPV¹ = expected Net present value
IRR¹ = Internal rate of return
Net present value
€ million
ROCE¹ = Return on capital employed
NPV¹
Change
2017
€ million
in %
in %
-28.7%
-696
2,423
€ million
2017
2018
1,727
Restructuring expenses
EBITDA²
Impairment losses/reversals of impairment losses
Depreciation and amortization
1,742
Operating result (EBIT)²
Change
Reconciliation EBIT to EBITDA pre¹,2
MERCK GROUP
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.
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
EBITDA PRE
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.
14,517
2.2%
319
€ million
2018
1,198
EBITDA pre²
368
> 100.0%
in %
29.5%
€ million
769
12
10
-57
-2,303
22
2017
2,605
3,374
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
-428
€ million
-2,246
796
> 100.0%
5.92
5.10
-13.8%
-355
2,574
2,219
0.4%
-3
-3
-9.0%
73
-814
-741
> 100.0%
264
64
327
-1.9%
-23
BFCF¹ = Business free cash flow
1,175
> 100.0%
2017
RECONCILIATION OF NET INCOME TO NET INCOME PRE¹, 2
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,
-123
-22
-145
2,508
Business free cash flow²
Elimination first-time consolidation of BioControl Systems
Changes in trade accounts receivable as well as receivables
from royalties and licenses
> 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
4,246
3,800
> 100.0%
IT expenses for selected projects, restructuring expenses, gains/
losses on the divestment of businesses, acquisition expenses and
other adjustments. Moreover, amortization of acquired intangible
assets as well as impairment losses on property, plant and equipment
and intangible assets are eliminated. The adjustment excludes
impairment losses on intangible assets for acquired research and
development (R&D) projects below a threshold value of € 50 million.
Income tax is calculated on the basis of the company's underlying
tax rate. The following table presents the reconciliation of net income
to net income pre for the calculation of EPS pre.
-2
3,193
NET INCOME, EARNINGS PER SHARE (EPS) AND
EARNINGS PER SHARE PRE (EPS PRE)¹
Capital market-related parameters
71
Fundamental Information about the Group — Internal Management System
Combined Management Report
MEVA gives information about the financial value created in a period.
Value is created when the return on capital employed (ROCE) of the
company or the business is higher than the weighted average cost
of capital (WACC). MEVA metrics provide us with a powerful tool to
weigh investment and spending decisions against capital require-
ments and investors' expectations.
MERCK VALUE ADDED (MEVA)
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
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.
INTERNAL RATE OF RETURN (IRR)
The main criterion for the prioritization of investment opportunities
is net present value. It is based on the discounted cash flow method
and is calculated as the sum of the discounted free cash flows over
the projection period of a project. The weighted average cost of
capital (WACC), representing the weighted average of the cost of
equity and cost of debt, is used as the discount rate. Depending on
the type and location of a project, different mark-ups are applied to
the WACC.
NET PRESENT VALUE
Sustainable value creation is essential to secure the long-term
success of the company. To optimize the allocation of financial
resources, we use a defined set of parameters as criteria for the
prioritization of investment opportunities and portfolio decisions.
Investments and value management
2 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.
-21.4%
-685
2
MEVA¹ = Merck value added
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.
EBITDA pre¹ = Earnings before interest, income tax, depreciation and amortization as well as adjustments
Healthcare
systems
NGOS
Competitors
Customers
74
Combined Management Report
Community
EPS Earnings per share
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.
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.
Strategic sphere of activity:
Global Health
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
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.
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.
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.
Strengthen the availability of healthcare solutions
Scientists
Patients
Global Health: In low- and middle-income countries, many people
lack access to high-quality health solutions. We join forces with part-
ners to provide local solutions and develop treatments for neglected
tropical diseases in Africa. For instance, we are using praziquantel
tablets to fight schistosomiasis. Through our Global Health Institute,
we are developing diagnostics, therapies and preventive solutions to
address infectious diseases such as malaria and therapeutic chal-
lenges such as antimicrobial resistance.
Sustainable Solutions: We are constantly working to improve the
sustainability footprint of our products - even during their use phase -
which also helps our customers achieve their own sustainability goals.
To this end, we have established systematic approaches for product
development such as Design for Sustainability, a program within our
Life Science business sector that allows us to assess the sustaina-
bility of our products during development. Product developers use
various tools, such as product lifecycle analyses.
-0.82
Our corporate responsibility efforts are aligned with the United
Nations (UN) Sustainable Development Goals (SDGs), and we are
working to help achieve this ambitious agenda by 2030. In addition
to promoting the SDGs, we also support relevant responsible gov-
ernance initiatives. Through our membership in the UN Global Com-
pact we are committed to upholding the Compact's principles on
human rights, labor standards, environmental protection and anti-
corruption. We ensure that we live our own corporate responsibility
Sales &
business
partners
Regulatory
agencies
Employee
represen-
tatives
Employees
Merck
family
Share-
holders
Suppliers
Federations
& policy
makers
Merck
Media
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.
We have developed a kit for malaria diagnosis based on our MuseⓇ
cell analyzer. It aims to accurately diagnose malaria and measure the
type of malaria parasite as well as the infection level. The malaria
kit was launched for research use in 2018. At the end of 2018, we
divested the technology platform developed by our Life Science busi-
ness sector to the U.S. laboratory supplier Luminex, which is now
marketing the diagnostic kit.
Additionally, we are working towards demonstrating the efficacy
of our product IR3535Ⓡ for malaria prevention in Africa. The insect
Strategic sphere of activity:
Sustainable Solutions
Through our products, we are helping overcome global challenges
such as climate impact and resource scarcity. In doing so, we are
also supporting our customers in reducing the impacts of their own
activities and achieving their own sustainability goals.
Life Science: reducing environmental impacts throughout the
product life cycle
It is important to us that we improve the environmental impact of
our products. This applies to the entire life cycle - from production
and use through to the disposal of our products. With our Design for
Sustainability (DFS) program, we have developed a comprehensive
approach for more sustainable life science products. This keeps sus-
tainability criteria in the foreground during product development or
re-engineering, and documents them in a scorecard. When develop-
ing a new product, our aim is to improve on as many of these criteria
scores as possible. The objective is to lower environmental impacts
of devices and instruments, also during use by customers. Beginning
with the concept stage, product teams identify potential environmen-
tal impacts and opportunities to make improvements. By the end of
2018, 27% of these product development projects met three or more
sustainability criteria.
In addition, our researchers are developing innovative solutions
in line with the "12 Principles of Green Chemistry" developed by chem-
ists Paul T. Anastas and John C. Warner. The objective is to permit
research that is as environmentally compatible as possible, and to
minimize adverse effects on human health. More than 750 greener
alternatives to conventional products are available so far. With
DOZNⓇ, we have developed a web-based quantitative Green Chem-
istry analysis tool. To date, we have used this matrix to assess and
improve more than 40 products. It is our goal to make this system
available to our customers in 2019, so that they can measure the
environmental impact of their research and make more environmen-
tally conscious decisions.
We are expanding our portfolio to include greener alternatives,
such as the new bio-based solvent, Cyrene™, which is derived from
waste cellulose and is employed as an alternative to solvents that
are widely used but are under increasing regulatory restriction due
to their associated toxicity.
Fundamental Information about the Group Corporate Responsibility
-
Performance Materials: increasing the sustainability
of manufacturing processes and end products
In 2018, our Performance Materials launched the new liquid crystal
technology SA-VA (Self-Aligned Vertical Alignment). We have been
developing the materials and process in the scope of close technical
partnerships with our customers. SA-VA is an eco-friendly and
resource-conserving technology that requires less energy and cre-
ates fewer waste products than conventional technologies during
display manufacture. SA-VA also provides a more efficient display
manufacturing process. Since SA-VA technology can be applied at
lower temperatures, it is also suitable for sensitive materials such as
those used in premium products, or for forward-looking applications
such as flexible displays.
Organic light-emitting diodes (OLEDS) likewise increase the
energy efficiency of displays while also providing brilliant colors and
razor-sharp images. To further enable unique display applications
and efficient production of large-area OLED displays, Merck is devel-
oping high-performance OLED materials for vacuum evaporation
methods or printing processes.
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).
For the semiconductor industry, we have developed a series of
environmentally sustainable specialty chemicals and materials
including PFOS-free antireflective and photoresist coatings.
In the cosmetics industry, we are addressing the continuing trend
for ingredients that meet stringent sustainability criteria. Our port-
folio of fillers eliminates the need for microplastic particles that are
heavily criticized for polluting waters and damaging marine life. We
are also committed to continuously increasing the energy efficiency
of our production processes. Our cosmetic formulations comply with
strict criteria. By the end of 2018, 68 of our cosmetic pigments and
active ingredients were certified according to Ecocert's COSMOS
standard for organic and natural cosmetics.
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.
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.
Combined Management Report
Fundamental Information about the Group _ Corporate Responsibility
75
repellent is already used for complementary prevention from vec-
tor-borne diseases, such as dengue fever or ZIKA. Products contain-
ing this active ingredient stand out due to their particularly good
tolerance in young children and pregnant women. In 2018, we
entered a collaboration to support the National Malaria Control Pro-
gram in Ghana. Here we develop malaria prevention solutions based
on IR3535®.
Address affordability challenges
Through intellectual property initiatives and equitable pricing strat-
egies we are able to provide assistance to those people who are
unable to pay for the health solutions they need. Publicly available
databases enable us to be transparent about our patents and patent
applications. To strengthen our commitment to the London Decla-
ration to fight neglected tropical diseases, we formed a partnership
with the Drugs for Neglected Diseases initiative (DNDI), under which
we are involved in the Drug Discovery Booster project for neglected
tropical diseases. The objective is to find potential cures for leish-
maniasis and Chagas disease.
As one of more than 100 members of WIPO Re: Search, an open
innovation platform sponsored by the World Intellectual Property
Organization (WIPO), we share intellectual property and knowledge
with the aim of accelerating early discovery for infectious diseases.
Through WIPO we are collaborating with the University of Buea
(Cameroon) and University of California San Diego (United States)
to find potential cures for onchocerciasis, leishmaniasis, Chagas dis-
ease and African trypanosomiasis (sleeping sickness).
We continue to work with the World Health Organization (WHO)
to combat the worm disease schistosomiasis in Africa. In 2018, we
donated approximately 200 million praziquantel tablets for distribu-
tion in 34 African countries, and this year our donation program was
expanded to include Burkina Faso, Niger and Sierra Leone. We keep
production capacities at a level sufficient for manufacturing 250 mil-
lion tablets a year. Since 2007 we have supplied almost 900 million
tablets free of charge, which is equivalent to the treatment of around
360 million schoolchildren. As a founding member of the Global
Schistosomiasis Alliance, we are helping to eliminate schistosomiasis
worldwide.
Raising awareness
Health professionals, communities and patients are empowered
through access to the appropriate tools, knowledge and skills to help
them make informed decisions about prevention, diagnostics, treat-
ment and care. Our regular campaigns help to increase awareness
of certain diseases globally, with a focus on those diseases where we
have extensive expertise, such as cancer, thyroid disorders, diabetes
and multiple sclerosis. In addition, Merck has championed World
Malaria Day with awareness campaigns and through engagement
around the One Merck for Malaria program. In 2018, we hosted
events in Ghana that created the opportunity for collaborations in
research and business activities to tackle preventive methods against
malaria. Via the Merck Foundation, a charitable organization, we bring
together some of our activities in underserved regions of the world.
Our Access Dialogues series promote discussion with numerous
public and private stakeholders on access-to-healthcare challenges.
Dialogues in 2018 covered the topics of innovation and intellectual
property as well as supply chain and delivery.
A schistosomiasis health education project in Ethiopia was
launched jointly with the NALA Foundation at the end of 2017, with
the aim of promoting the long-term behavioral change that is needed
to eliminate schistosomiasis. The project targets a rural area in
Ethiopia, focusing on approximately 260,000 students in 290 schools
through activities such as distribution of customized educational
material. In 2018, we reached 74 schools with nearly 70,000 stu-
dents. The goal is to extend this model to other regions in Africa.
The Global Pharma Health Fund (GPHF), a non-profit organization
funded by Merck, works to combat falsified medicines in developing
and emerging countries. To date, the GPHF has supplied 843 Minilabs
at cost to detect falsified medicines in around 100 countries. In 2018,
the GPHF developed testing methods for five additional active ingre-
dients so that the Minilab can now test 90 active ingredients, ranging
from antimalarials, antimycobacterials and antivirals to antipyretics
and antibiotics.
Promoting accessibility and improving supply chains
We promote initiatives to strengthen supply chains and to develop
localized health solutions in order to deliver and reach out efficiently
at the point of care. We are a founding member of the Accessibility
Platform, an informal, private-sector initiative that is working on a
comprehensive approach to meeting supply chain and distribution
challenges in developing countries. The platform promotes informa-
tion exchanges between the various stakeholders and creates joint
options for action.
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.
73
Fundamental Information about the Group _ Corporate Responsibility
Fundamental Information about the Group Corporate Responsibility
Sustainable
Business
Merck Group
The Value Creation and Financial KPI Pyramid, which summarizes
the important financial performance measures of the Merck Group,
reflects the comprehensive framework of financial KPIs to steer
the businesses and prioritize the allocation of cash resources. It
consists of three managerial dimensions, namely Merck Group,
Business and Projects, each of which require the use of different
indicators.
As a global company with a diverse portfolio of products and services,
we use a comprehensive framework of indicators to manage perfor-
mance. The most important KPI (key performance indicator) to
measure performance is EBITDA pre¹.
Internal Management System
Fundamental Information about the Group _ Internal Management System
Net sales,
EBITDA pre,
BFCF
Combined Management Report
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.
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.
DIVIDEND POLICY
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.
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-
STRONG INVESTMENT-GRADE RATING
68
Net Sales,
EBITDA pre, BFCF
Net income, EPS,
Dividend ratio,
Credit rating
MEVA
Abbreviations
EBITDA pre margin, ROCE
Payback period,
NPV, IRR,
Capex
EBITDA pre margin,
POS, ROCE
EBITDA pre margin,
EPS, ROCE, MEVA
Combined Management Report
Projects
Licensing
NPV, IRR,
M&A
EBITDA pre margin
Net sales growth,
ROCE, MEVA
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.
MAINTAINING SUSTAINABLE AND RELIABLE BUSINESS
RELATIONS WITH A CORE GROUP OF BANKS
eNPV, IRR,
Fundamental Information about the Group Strategy
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.
Humankind is being confronted with global societal challenges
such as climate change, resource scarcity and insufficient access to
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.
-
-
Responsibility
Global
Health
CR
Strategy
Broad
Minds
License
to
Operate
Solutions
67
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.
-13.9%
Fundamental Information about the Group Corporate Responsibility
Combined Management Report
Corporate Responsibility
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 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.
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.
INNOVATION
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.
CREDIT RATING
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).
Other relevant/non-financial
performance measures
Apart from the indicators of the financial performance of the busi-
nesses, non-financial measures also play an important role in fur-
TALENT RETENTION
Combined Management Report
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.
DIVIDEND RATIO
72
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.
Combined Management Report
Fundamental Information about the Group Corporate Responsibility
Safety of our chemical products
Numerous regulations are in place to ensure that chemicals pose no
risk to humans or the environment. Compliance with these regulatory
requirements is an important part of our work. Through a Group-wide
policy, we have established global processes for defining, directing
and implementing product safety, as well as the corresponding 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.
Promoting literature
78
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.
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.
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.
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.
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.
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.
Boosting scientific education
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.
Strategic sphere of activity:
Broad Minds
77
_ Corporate Responsibility
Fundamental Information about the Group
Combined Management Report
2,117
The Deutsche Philharmonie Merck
Safety of our Healthcare products
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.
Quality of our products
Total energy consumption
2018
2017
2016
2015
In gigawatt hours
ENERGY CONSUMPTION 1, 2
Climate impact and resource scarcity are key challenges facing
society in the 21st century. As a responsible company, it is especially
important for us to do our part. We have therefore set ourselves the
goal of reducing total direct and indirect greenhouse gas emissions
by 20% by 2020 (2006 baseline), irrespective of production growth.
In 2018, the CDP (formerly the Carbon Disclosure Project) gave our
efforts for the sustainable use of energy a "C" rating (2017: B). The
CDP assesses companies in terms of their performance and trans-
parency in climate impact and water management.
Focus areas: Energy efficiency, greenhouse gas emissions,
water, waste and recycling
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 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
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.
Environmental management system
Responsibility for the environment
79
Fundamental Information about the Group _ Corporate Responsibility
Combined Management Report
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").
Responsibility for our employees
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.
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).
Supplier management
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.
Our goal is to provide customers and patients at all times with high-
quality original products. Through our quality vision - "Quality is
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.
an ISO 14001 group certificate for the tenth consecutive year. This
certificate covers 81 sites around the world.
2,194
Solid tumors
0.0
Electricity
1.1
1.1
0.4
0.0
Steam, heat, cold
0.0
0.0
0.0
0.0
¹In line with the Greenhouse Gas Protocol, for all previous years (up to the 2006 baseline) the energy consumption has been calculated based on the corporate structure as of December 31 of
the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2 All reported environmental key figures do not include data on the Consumer Health business, since these operations were transferred to Procter & Gamble - effective December 1, 2018 - and
have been classified as discontinued operations within the meaning of IFRS 5 since April 2018.
3 Light and heavy fuel oil, liquefied petroleum gas (LPG), diesel and gasoline.
Combined Management Report
0.4
1.1
1.1
Total energy sold
122
Indirect energy consumption
2,873
2,833
3,150
3,276
Electricity
Fundamental Information about the Group Corporate Responsibility
2,527
2,624
2,740
Steam, heat, cold
346
342
526
536
2,491
80
TOTAL GREENHOUSE GAS EMISSIONS (SCOPE 1 AND 2 OF THE GHG PROTOCOL) 1, 2
In metric kilotons
408
0
331
305
13
14
331
13
344
13
354
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.
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
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.
Responsibility for society
We see ourselves as part of society - both at our individual sites and
worldwide. Taking responsibility towards society is an integral part
of our entrepreneurial approach. We believe that we can make an
important contribution to the community through our knowledge,
our skills and our products.
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.
3 Baseline for our emission targets is 2006.
4 eq = equivalent.
119
373
391
Total CO₂eq emissions
thereof
direct CO2eq emissions
Indirect CO2eq emissions
Biogenic CO2 emissions
2006³
2015
384
2016
2018
786
722
689
704
698
378
2017
122
119
Biomass and self-generated renewable energy
33
34
Indirect energy consumption
798
787
875
910
34
Electricity
692
729
761
Steam, heat, cold
96
95
146
702
149
33
32
2,232
Phase I
Direct energy consumption
1,343
1,330
1,319
1,322
Biomass and self-generated renewable energy
Natural gas
1,260
1,254
1,256
Liquid fossil fuels³
110
36
32
1,200
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.
Total energy sold
0.3
7,898
8,035
Direct energy consumption
4,835
4,748
4,759
Natural gas
7,621
4,320
4,514
4,522
Liquid fossil fuels³
396
130
115
115
4,536
0.3
7,708
2017
0.1
0.0
Electricity
Steam, heat, cold
0.3
0.3
0.1
2018
0.0
0.0
0.0
0.0
In terajoules
Total energy consumption
2015
2016
0.0
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.
4,788
Fundamental Information about the Group _ Research and Development
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Solid tumors
Phase I
Hematological malignancies
Phase I
Non-small cell lung cancer, 1st line
Phase III
Gastric cancer, 1st line maintenance
Phase I
Solid tumors
Phase II
Hepatocellular cancer
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)
Phase III
Immuno-Oncology
Indication
Status
Relapsing multiple sclerosis
Multiple sclerosis
Registration¹
Phase II
Non-small cell lung cancer
Phase II
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Ovarian cancer, 1st line
Phase III²
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
Avelumab (anti-PD-L1 mAb)
Non-small cell lung cancer, 1st line
Solid tumors
Phase I
Hematological malignancies
Phase I
Combined Management Report
Solid tumors
Phase I
Phase II
Tepotinib (MET kinase inhibitor)
M7824 (anti-PD-L1/TGF-ẞ trap)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Avelumab (anti-PD-L1 mAb)
Phase III
Phase III
Avelumab (anti-PD-L1 mAb)
Locally advanced head and neck cancer
Phase III
Abituzumab (pan-av integrin inhibiting mAb)
Avelumab (anti-PD-L1 mAb)
Phase II
Avelumab (anti-PD-L1 mAb)
Solid tumors
Phase II³
Avelumab (anti-PD-L1 mAb)
Non-small cell lung cancer
Phase II³
Merkel cell carcinoma, 1st line
Tepotinib (MET kinase inhibitor)
Urothelial cancer, 1st line maintenance
Renal cell cancer, 1st line
2,141
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.
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.
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.
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
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.
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.
Fundamental Information about the Group _ Research and Development
Combined Management Report
82
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.
Oncology
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.
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.
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.
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.
Neurology & Immunology
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.
-
General Medicine & Endocrinology
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.
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.
86
85
Combined Management Report
BIOPHARMA PIPELINE
as of December 31, 2018
Cladribine tablets (lymphocyte-targeting agent)
Evobrutinib (BTK inhibitor)
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.
Neurology
Therapeutic area
Compound
Fundamental Information about the Group _ Research and Development
Fundamental Information about the Group _ Research and Development
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.
84
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.
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.
Combined Management Report
Fundamental Information about the Group _ Research and Development
Combined Management Report
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.
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).
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.
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.
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.
Electronics
We help to create, im-
prove and prolong lives.
employees
Share of
net sales
NN
Share of
EBITDA pre
We are advancing
digital living.
Healthcare
39%
Life Science
women in leadership positions
AT A GLANCE
nationalities
141
Share of
net sales
9
62,908
Together, we impact life
and health with science.
Share of
EBITDA pre
Asia-Pacific
44% 45%
13
Merck
A strong team
22
Strategy
Group
13
€6,936 million
18% 15%
Share of
EBITDA pre
€737 million
Middle East and
Africa
€1,331 million
Latin America
€6,037 million
Europe
41%
38%
€5,952 million
North America
Net sales per region
Share of
net sales
1 Not defined by International Financial Reporting Standards (IFRS).
8.49
2019
1 Not defined by International Financial Reporting Standards (IFRS).
-11.2%
-475
4,259
3,784
Operating cash flow
-15.5%
-1.56
10.05
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation, amortization,
impairment losses, and reversals of impairment losses.
Earnings per share pre (€)¹
-1.16
7.65
6.49
Earnings per share (in €)
-15.1%
28
-505
3,339
2,834
-15.2%
Merck Group
Net sales
€ million
16,152
2019
5,201
2020
17,534
2020
6,103
2021
19,687
2021
6,849
2022
22,232
2022
5,879
2023
20,993
2023
€ million
EBITDA pre¹
Merck Group
4,385
Internal Management System
99
Research and Development
301
Report on Risks and Opportunities
77
Employees
290
Contingent Liabilities
Corporate and Other
76
Operating Assets, Liabilities and
Capital Structure, Investments and
267
249
Group Structure
242
General Disclosures
235
Electronics
73
Healthcare
69
Operating Activities
Life Science
94
Financing Assets
The Executive Board
Profit after tax
8
Letter from Belén Garijo
6
To our shareholders
Independent Auditor's Report
Business Development 2019-2023
Financial Calendar
363
362
Report on Expected Developments
350
Other Information
Additional Information on Merck KGaA
in Accordance with the German
Commercial Code (HGB)
155
Scope of Consolidation
339
Other Disclosures
336
Report in Accordance with Section 315a
of the German Commercial Code (HGB)
Non-Financial Statement
96
349 Responsibility Statement
35
65
55
Compensation Report
224
218
197
Fundamental Information about the
Report
Combined Management
Merck Shares
9
Capital Structure and Corporate Bodies
of Merck KGaA
196
8
164
Letter from Belén Garijo
6
To our Shareholders
Corporate Governance
Table of contents
Report on Economic Position
48
The Executive Board
Merck Group
Statement on Corporate Governance
Consolidated Financial
Statements
Notes to the Consolidated Financial
Statements
Consolidated Statement of Changes in
Net Equity
Position
235
Course of Business and Economic
55
Business Development
234
Review of Forecast against Actual
Report of the Supervisory Board
Objectives of the Supervisory Board
with Respect to its Composition and
Profile of Skills and Expertise
52
233
Environment
Consolidated Balance Sheet
232
Macroeconomic and Sector-Specific
48
Comprehensive Income
231 Consolidated Statement of
230 Consolidated Income Statement
Consolidated Cash Flow Statement
30.8%
321,232
Margin (% of net sales)¹
Apr.
May
June
July
Aug.
Sept. Oct.
Nov.
Dec.
Merck shares
Mar.
Key share price data¹
-3.35%
-20.34%
2023
2022
Dividend²
Share price high
Share price low
Year-end share price
Daily average number of Merck shares traded³
4.76%
€
Feb.
-30%
Share price development from January 1, 2023, to December 31, 2023, in %
• Merck
• DAX ®
• MSCI European Pharma Index
• Dow Jones European Chemical Index
⚫ PHLX Semiconductor Sector Index
• S&P 500 Life Sciences Tools & Services Index
64.90%
20.31%
13.55%
Jan.
80%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
70%
Merck Shares
2.20
€
1
11
| | |
1.40
1.85
2.20
2.20*
2014¹
2015
Dividend development since 2014
2016
2018
2019
2020
2021
2022
2023
1 Adjusted to the new number of shares after the share split (June 30, 2014).
* 2023 dividend subject to approval by the Annual General Meeting.
9
2017
2.20
Merck Shares
4 Based on the theoretical number of shares (434.8 million).
201.10
222.90
€
135.45
156.10
€
144.10
180.90
Number
5 Based on the number of shares in free float (129.2 million). Source: Bloomberg, Thomson Reuters.
329,074
€ million
62,651
78,651
Market value of authorized shares 5 (at year-end)
€ million
18,624
23,380
1 Share price-relevant figures relate to the closing price in XetraⓇ trading on the Frankfurt Stock Exchange.
2 2023 dividend subject to approval by the Annual General Meeting.
3 Based on the floor trading systems of all German exchanges and the regulated market on Xetra®.
Market capitalization (at year-end)
28.0%
Merck Shares
10
Net sales
%
€ million
2022
2023
€ million
Change
Merck Group
KEY FIGURES 2023
20,993
Merck
Annual Report
To Our Shareholders
Letter from Belén Garijo
6
Dear shareholders,
dear friends of turck,
At Merck, we have successfully navigated through many challenging times in our 355-year history. The year
2023 provided yet another opportunity to demonstrate our resilience to the world. Despite a difficult global
macroeconomic environment and the geopolitical situation, our Group performed robustly.
Once again, we demonstrated the competitive strengths of our people, the diversification of our business
sectors, and our global footprint. In our Life Science business, demand declined as expected in 2023 due to the
end of the Covid-19 pandemic. Pronounced destocking by customers within Process Solutions has also been
longer in duration than expected. In parallel, our Electronics business faced a prolonged downcycle in
Semiconductor Solutions and the Display Solutions unit was affected by low customer demand.
The strong performance of our Healthcare business sector mainly offset these temporary, industry-wide
challenges. In particular, our new products experienced robust growth. Full-year net sales of our multiple
sclerosis medicine MavencladⓇ exceeded US$ 1 billion for the first time, joining our cancer medicine Erbitux®,
which maintained its blockbuster status for the second year in a row. Our immuno-oncology drug BavencioⓇ, to
which we regained sole ownership rights on June 30, 2023, generated organic net sales growth of 23.4%. This
was complemented by the solid performance of both our Fertility and our Cardiovascular, Metabolism, and
Endocrinology franchises.
2023
The competitive strength of our global business footprint was demonstrated by moderate Group exposure to
localized economic trends in 2023. Our business operations in Asia-Pacific, North America and Europe as well as
other geographic regions made important financial contributions.
22,232
3,609
-14.2%
-970
6,849
5,879
EBITDA pre¹
29.3%
26.1%
Margin (% of net sales)¹
-15.6%
Operating result (EBIT)¹
-1,015
5,489
EBITDA²
20.1%
17.2%
Margin (% of net sales)¹
-19.3%
-5.6%
-1,239
-865
4,474
6,504
To Our Shareholders
Overall, Group net sales of € 21.0 billion were about at the mid-point of the absolute guidance range. Due to
the aforementioned factors as well as negative foreign exchange effects and inflationary pressures, EBITDA pre
in 2023 was also within our guidance range at € 5.9 billion, albeit at the lower end of the corridor.
CC
Chair of the
Executive Board
and CEO
Member of the
Executive Board
Member of the
Executive Board
Chief Financial Officer
CEO Electronics
CEO Healthcare
CEO Life Science
Short biographies
More information can be found at our website.
Member of the
Executive Board
To Our Shareholders
9
Merck shares
At a glance
The stock markets got off to a restrained start in 2023 before finishing strongly, with some indices hitting
record levels in December as interest rate concerns eased. There was a significant level of sector divergence
with subdued performance in Life Sciences and Pharma. Consequently, our share price performance was
dampened during 2023.
The resilience of our multi-industry business model was demonstrated with Healthcare largely offsetting
market-driven challenges in Electronics and Life Science. Despite the financial results, our share price declined
by around 20% in the course of the year. Merck shares underperformed compared with the DAX® index of
German blue-chip companies, which rose by around 20% over the year. Our share performance correlated
strongly to the share performance of the life sciences industry across the year and tracked the index (-3%)
until the December evobrutinib announcement. In comparison, the index for the pharmaceutical industry
outperformed Merck shares, rising by almost 5%. The semiconductor industry index rose by around 65% driven
by a handful of chip developers and their products for artificial intelligence applications. Merck shares closed at
€ 144.10 on December 29, 2023 (2022: € 180.90).
The first six months were heavily influenced by uncertainties tied to the continued economic recovery, inflation,
rising interest rates and geopolitical tensions. The Covid-19 pandemic business continued to decline, which
created a difficult environment in the life science market. Moreover, customers of the Life Science business
sector mainly focused on cash preservation as well as working capital optimization, in light of high interest
rates. While the semiconductor market is preparing for artificial intelligence fueled growth, it has not yet
translated into volume growth for the materials sector. The existing portfolio of Healthcare had a strong year;
however, the negative results of the Phase III trials of evobrutinib had a share price impact in December. Taken
together, these factors explain why our share price underperformed the DAX® and relevant sector indices in
2023.
At approximately 329,000 shares per day, the average daily trading volume of Merck shares in 2023 was up
around 2% on the prior-year figure of around 321,000. This meant Merck shares bucked the general trend of
lower turnover on German securities trading platforms in 2023 compared with the previous year.
Our shareholder structure remained largely stable in 2023 compared with the previous year: Europe continues
to account for the largest proportion of the free float at around half, followed by the United States with around
29%. Compared with 2022, the proportion of the value-oriented investors fell slightly in favor of growth
oriented investors and GARP (growth at a reasonable price) investors. The top five investors held around 24%
of the free float at the end of 2023, up around two percentage points on the previous year.
In 2023, our Executive Board and Investor Relations team held over 1,000 discussions with investors on topics
such as strategy, the business model, business performance, corporate governance, and sustainability at our
company during investor conferences, roadshows, and conference calls.
Merck Shares
We are grateful to our approximately 63,000 employees around the world for their exceptional dedication and
resilience and would like to thank our many partners and suppliers for their important contributions to this
performance. Furthermore, in recognition of the contribution of shareholders, we will propose to the Annual
General Meeting a dividend of € 2.20 per share for 2023.
Matthias Heinzel
Belén Garijo
We remain firmly positioned to return to growth in
2024 and generate long-term, sustainable value for
our owners, shareholders, customers, patients,
employees, and society.
Belén Garijo
To Our Shareholders Letter from Belén Garijo
7
Looking forward, we expect that global economic and geopolitical challenges will continue to adversely affect
our activities through 2024. However, based on current forecasts, we anticipate a gradual return to organic
sales growth during the year.
We expect our Life Science business sector to recover in the course of the year with the expected end of the
destocking phase within Process Solutions on the one hand and improving conditions in Science & Lab Solutions
on the other hand. Within our Healthcare business sector, growth rates should begin to normalize and more
closely align with our mid-term targets. And within our Electronics business sector, we expect to benefit from
an upswing in customer demand for Semiconductor Solutions as the market gradually recovers.
Looking beyond 2024, our Group remains firmly positioned for long-term growth and impact as a leading
science and technology company with a clear purpose to advance human progress. In addition to favorable
macrotrends such as the digital transformation of markets by generative AI and machine learning technologies,
many other forces are expected to drive growth across each of our three sectors. They include novel drug
modalities in Life Science, growing patient needs for cancer, neurological and immunological treatments in
Healthcare, and AI-enabling chips and high-performance computing demanding more and novel materials in
Electronics. Our teams are closely monitoring these and other trends to help us anticipate potential scenarios
and adapt with speed and agility to protect or expand our competitive positions.
We continue to make strategic investments, enter collaborations, and adapt our businesses in order to
constantly improve our competitive position and anticipate emerging market needs even more proactively. In
Germany, the United States, Switzerland, China, the United Kingdom, Korea, and other countries across our
global network, we invested significantly in new and upgraded sites and capabilities. With these and other
significant capital expenditure projects, we are striving to move even closer and become more responsive to
customers and patients worldwide. We assume that this overall momentum in operational expenditure will
continue through 2025 and beyond. However, we reserve the flexibility to respond to further market changes.
Despite the disappointing news in December 2023 that the Phase III clinical trials of evobrutinib did not meet
their primary endpoints, we remain confident in the position of our Healthcare business sector as a global
specialty innovator. In addition to the continued resilience of our established product portfolio, we look forward
to the progress of many investigational therapies within our Healthcare pipeline, such as xevinapant in oncology
and enpatoran to treat autoimmune diseases such as systemic and cutaneous lupus erythematosus. Boosted by
various in-licensing of external innovation, including those announced in 2023, such as with Hengrui and
Abbisko, we aim to introduce one new product or major indication every 1.5 years on average.
Finally, I am pleased by the significant strides being made to achieve our three core sustainability targets. By
2030, we aim to have fully integrated sustainability into our value chains and contributed to human progress
for more than one billion people through sustainable science and technology. And by 2040, we expect to
achieve climate-neutrality and significantly reduce our resource consumption. After entering into virtual power
purchase agreements in 2023, renewable energy is expected to cover 100% of our current electricity purchases
in Europe, more than 90% in North America, and 70% worldwide from 2025.
As you continue to read this Annual Report, you will see that we remain firmly positioned to both return to
growth in 2024 and generate long-term, sustainable value for our owners, shareholders, customers, patients,
employees, and society.
On behalf of the Executive Board, I thank you and all our other shareholders for your ongoing trust and support.
Peter Guenter
Sincerely,
Chair of the Executive Board and CEO
To Our Shareholders
The Executive Board
The Executive board
80
Helene von Roeder
Member of the
Executive Board
Kai Beckmann
Belén Garijo
Merck Shares
Pursuant to the information on voting rights submitted to us in accordance with the German Securities Trading
Act (WpHG), on December 31, 2023, no shareholders owned direct or indirect investments exceeding 10% of
the voting rights.
Report on Risks and Opportunities
The Executive Board is authorized to increase the company's share capital with the approval of the Supervisory
Board and of E. Merck KG on one or more occasions, up to and including April 21, 2027, by a total of up to
€ 56,521,124.19 by issuing new no-par value bearer shares in exchange for cash and/or non-cash contributions
(Authorized Capital 2022). Limited liability shareholders are generally granted statutory rights to subscribe to
the new shares. However, the Executive Board is authorized, with the approval of the Supervisory Board, to
exclude limited liability shareholders' subscription rights, either in full or in part, in the case of a capital
increase in exchange for cash contributions pursuant to or by analogous application of section 186 (3) sentence
4 AktG, if the issue price of the new shares is not substantially lower than the stock exchange price of the
company's shares already listed and if the new shares issued under exclusion of these subscription rights do
not exceed a proportional amount of 10% of the share capital either at the time of Authorized Capital 2022
taking effect or being utilized.
Combined Management Report __ Report in Accordance with Section 315a of the German Commercial Code (HGB)
This restriction to 10% of the share capital shall include the proportional amount of the share capital that is
attributable to shares that are issued under exclusion of subscription rights or sold during the term of
Authorized Capital 2022, based on an authorization to issue new shares or sell own shares by direct or
analogous application of section 186 (3) sentence 4 AktG. This restriction shall also include the proportional
amount of the share capital that is attributable to shares which may or must be issued in order to service bonds
carrying a conversion or option right or a conversion or option obligation, if the bonds are issued during the
term of Authorized Capital 2022 under exclusion of limited liability shareholders' subscription rights by
analogous application of section 186 (3) sentence 4 AktG.
It is likewise possible to exclude the subscription rights of limited liability shareholders with the approval of the
Supervisory Board in the case of capital increases in exchange for non-cash contributions, particularly for the
purpose of acquiring enterprises, parts of enterprises, or interests in enterprises. In addition, with the approval
of the Supervisory Board, limited liability shareholders' subscription rights can be excluded in order to enable
E. Merck KG to exercise its right pursuant to article 32 (3) of the company's Articles of Association to
participate in a capital increase by issuing shares or freely transferable share subscription rights.
It is likewise possible to exclude, with the approval of the Supervisory Board, the subscription rights of limited
liability shareholders in order to enable E. Merck KG to exercise its right pursuant to article 33 of the Articles of
Association to convert its equity interest into share capital, either in full or in part.
Moreover, with the approval of the Supervisory Board, the subscription rights of limited liability shareholders
can be excluded if and to the extent this is necessary to grant the holders or creditors of conversion or option
rights, and/or the holders or creditors of financing instruments carrying conversion or option obligations, which
were or are issued by the company or by a domestic or foreign company in which the company directly or
indirectly holds the majority of the votes and capital, subscription rights to the extent to which they would be
entitled after the exercise of the conversion or option rights or after the performance of a conversion or option
obligation.
Finally, with the approval of the Supervisory Board, the subscription rights of limited liability shareholders can
be excluded in order to offset any fractional amounts resulting from a capital increase.
The sum of shares issued on the basis of Authorized Capital 2022 under exclusion of limited liability
shareholders' subscription rights must not exceed a proportional amount of 10% of the share capital, taking
into account other shares of the company which, during the term of Authorized Capital 2022, are sold or issued
under exclusion of subscription rights or which are to be issued under bonds issued after April 22, 2022, under
exclusion of subscription rights; this limitation shall apply both at the time of this authorization taking effect
and at the time of this authorization being exercised.
To the extent that subscription rights are not excluded under the above provisions, they may also be granted to
limited liability shareholders by way of indirect subscription rights pursuant to section 186 (5) AktG or, in part,
by way of direct subscription rights, and otherwise by way of indirect subscription rights pursuant to
section 186 (5) AktG. Furthermore, the Executive Board is authorized, with the approval of the Supervisory
Board, to determine the additional details of the capital increase and its implementation, including the content
of rights attached to the shares as well as the terms and conditions of the share issue.
The Articles of Association also encompass contingent capital. The share capital is contingently increased by up
to € 66,406,298.40 composed of 51,081,768 shares (Contingent Capital I). The contingent capital increase
serves to grant exchange rights to E. Merck KG in accordance with article 33 of the Articles of Association to
enable the conversion of its equity interest. The shares carry dividend rights from the beginning of the fiscal
year following the year in which the conversion option is exercised.
46
97
Combined Management Report __ Report in Accordance with Section 315a of the German Commercial Code (HGB)
98
Moreover, the share capital is contingently increased by up to € 16,801,491.20 composed of up to 12,924,224
no par value bearer shares (Contingent Capital II). This contingent capital increase is only to be implemented
insofar as the bearers or creditors of option or conversion rights, or with an obligation to convert or exercise
options on warrant bonds, option participation certificates, option participation bonds, convertible bonds,
convertible participation certificates, or convertible participation bonds that are issued or guaranteed by the
company or a subordinate Group company on the basis of the authorization resolution of the Annual General
Meeting of April 28, 2023, to April 27, 2028, utilize their option or conversion rights, or to fulfill their conversion
obligation or obligation to exercise options insofar as they are obliged to fulfill their conversion or option
exercise obligation, or insofar as the company exercises an option, in full or in part, to grant shares in the
company instead of paying the sum of money due, and to the extent that in each case a cash settlement is not
granted, or own shares or other forms of fulfillment are used. Each issue of new shares shall take place at the
determined option or conversion price, pursuant to the aforementioned authorization resolution. The new
shares participate in the profit from the beginning of the fiscal year in which they are created; insofar as this is
legally permissible, the Executive Board may, with the approval of the Supervisory Board, and in deviation from
section 60 (2) AktG, stipulate that the new shares also participate in the profit for a past fiscal year. The
Executive Board is authorized, with the approval of the Supervisory Board and of E. Merck KG, to stipulate the
further details of the implementation of the increase in contingent capital.
The Articles of Association can be amended by a resolution at the Annual Meeting that requires the approval of
the general partners. Notwithstanding any statutory provisions to the contrary, the resolutions of the Annual
General Meeting are adopted by a simple majority of the votes cast. Where the law requires a capital majority
in addition to the voting majority, resolutions are adopted by a simple majority of the share capital represented
in the vote. The Articles of Association of the company encompass authorized and contingent capital.
The company is not authorized to acquire its own shares.
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 following information is provided in accordance with section 315a of the German Commercial Code (HGB) in
connection with section 289a HGB and the explanatory report pursuant to section 176 (1) sentence 1 of the
German Stock Corporation Act (AktG).
Combined Management Report Report on Expected Developments
95
Net sales
For fiscal 2024, we expect to return to organic sales growth, which is likely to be slight to moderate. The
Healthcare business sector is expected to be the strongest growth driver, with MavencladⓇ and products from
the Cardiovascular, Metabolism & Endocrinology franchise making the main contributions to growth. For
Life Science, we assume that sales in the first half of the year will still be influenced by customer destocking of
increased inventories and that the expected recovery will thus mainly set in during the second half of 2024. We
do not expect any further significant contributions from demand for products in connection with Covid-19 in
2024. In the Electronics business sector, we forecast that the turnaround in the semiconductor materials
market will come in the second half of the year, leading as expected to organic sales growth with products from
the Semiconductor Materials business. The expected declining Display Solutions business will have a negative
impact as will the project business within the Semiconductor Solutions business unit, which, as expected, is
subject to stronger fluctuations owing to the dependency on major individual orders. Overall, we forecast
foreign exchange effects of 0% to -3% for the Merck Group.
EBITDA pre³
For Group EBITDA pre, we also forecast a slight to moderate organic increase, which is expected to be driven
primarily by the Healthcare business sector. Apart from the expected sales growth, the termination of the
alliance with Pfizer Inc., USA, effective June 30, 2023 and the subsequent regain of the exclusive rights to
develop, manufacture and commercialize BavencioⓇ had a positive effect on EBITDA pre as did lower costs,
especially in research and development, as a result of the failure of evobrutinib to meet its primary endpoint as
demonstrated by the results of the clinical trials published on December 6, 2023. EBITDA pre of the Life Science
business sector is expected to be adversely impacted by negative mix effects, which we will mitigate as far as
possible with corresponding cost savings. In the Electronics business sector, a favorable mix effect on sales as
well as positive effects from active cost management are expected; however, the sale of a portfolio of licenses
and patents in fiscal 2023 will have an opposing effect. The rise in costs in Corporate and Other will be mainly
attributable to lower foreign currency hedging gains. The forecast foreign exchange development is likely to
lower Group EBITDA pre by between -1% and -4%.
Operating cash flow
The forecast for operating cash flow is generally subject to a higher fluctuation corridor than the forecast for
EBITDA pre. We provide an estimate of the development of operating cash flow only for the Group as a whole.
The development of operating cash flow will be in line with the expected positive performance of the operating
business. In addition, we expect positive effects from stringent management of working capital. Foreign
exchange is expected to have a negative effect. Accordingly, for the Merck Group, we forecast a moderate to
strong increase in operating cash flow. As regards the composition of operating cash flow, we refer to the
section entitled “Internal Management System" in the combined management report as well as the
Consolidated Cash Flow Statement in the Consolidated Financial Statements.
3 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation, amortization,
impairment losses, and reversals of impairment losses.
Combined Management Report __ Report in Accordance with Section 315a of the German Commercial Code (HGB)
96
96
Report in Accordance with
section 315a of the
German commercial
code (HGB)
As of December 31, 2023, the company's subscribed capital is divided into 129,242,251 no-par value bearer
shares plus one registered share. Each share therefore corresponds to € 1.30 of the share capital. The holder of
the registered share is E. Merck Beteiligungen KG. It is entitled and obliged to appoint one-third of the
members of the Supervisory Board representing the limited liability shareholders. If the holder of the registered
share is a general partner, he or she has no such right of appointment. The transfer of the registered share
requires the company's approval. The approval is granted at the sole discretion of the personally liable general
partner with an equity interest, namely E. Merck KG.
We also expect a persistently volatile environment as regards the development of foreign exchange rates. For
2024, we forecast an unfavorable foreign exchange development, albeit to a weaker extent than in fiscal 2023.
The negative foreign exchange effects are expected to be primarily attributable to the development of the U.S.
dollar as well as individual Asian currencies. For the average euro/U.S. dollar exchange rate, our full-year
assumption ranges between 1.07 and 1.11 for 2024.
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.
Non-Financial Statement
Chemical industry's Responsible Care® Global Charter,
•
Company network Together for Sustainability (TFS),
Pharmaceutical Supply Chain Initiative (PSCI),
Initiative Chemie³, a collaboration between the German Chemical Industry Association (VCI), the
German Employers' Federation of the Chemical Industry (BAVC), and the German Mining, Chemical and
Energy Industrial Union (IG BCE).
Strategic and organizational approach to sustainability
The world is facing numerous challenges that also affect us as a company. These include climate change,
international conflicts and economic crises, for instance. Our ambition is to leverage science and technology to
achieve sustainable progress for mankind.
We pursue three overarching sustainability goals. In 2023, we revised our sustainability strategy, which we had
communicated in 2020. In particular, we sharpened the second goal.
In 2030, we will achieve human progress for more than one billion people through sustainable science and
technology.
By 2030, we will fully integrate sustainability into our value chains.
By 2040, we will achieve climate neutrality and reduce our resource consumption.
We describe our sustainability strategy in the "Strategy" section of the combined management report within
this Annual Report for 2023 and, in more detail, in the Sustainability Report for 2023 in the chapter entitled
"Sustainability Strategy".
Measuring progress made with the sustainability strategy
We use 14 key indicators to record and assess our progress towards achieving our sustainability goals. We
defined these indicators back in 2021 and did not identify any significant non-financial performance indicators.
The key indicator "Percentage of employees trained in sustainability” was dropped in 2023 because we had
achieved the associated target. Instead, as of 2023, we began using several questions in our annual Employee
Engagement Survey to measure how mature the sustainability culture is within our organization.
Combined Management Report_
•
Combined Management Report_
United Nations Global Compact,
Based on the requirements set forth in charters, principles and policies, our internal standards give specific
guidance for operational processes. They are constantly updated by the relevant departments and are available
on our intranet. Our managers implement these standards in their respective areas of responsibility and ensure
that they are adhered to. In addition, we educate and train our employees on all guidelines that apply to them.
We employ management systems to steer processes and define goals, actions, and responsibilities. These
systems are based on standards such as the internationally recognized quality management standard
ISO 9001, good working practices (GXP) in the pharmaceutical industry and ISO 14001 for environmental
management. Our company regularly undergoes ISO 14001 and ISO 9001 certification, which are conducted
by an independent auditing firm. We hold group certificates for both standards.
99
99
**
Non-Financial statement*
The combined management report of Merck KGaA and the Merck Group for the fiscal year 2023 includes a
combined non-financial statement in accordance with sections 315b and 315c in conjunction with 289b to 289e of
the German Commercial Code (HGB) in the form of a separate chapter. The scope of consolidation of this non-
financial statement corresponds to that of the Annual Report for 2023. The concepts and results presented relate
to both Merck KGaA and the Merck Group. We explicitly state when, in individual cases, the information provided
deviates from this. Our non-financial statement orients towards the requirements of the Global Reporting Initiative
(GRI) standards. It also includes our reporting in accordance with the EU taxonomy regulation.
Deloitte GmbH Wirtschaftsprüfungsgesellschaft conducted a limited assurance engagement of the combined
non-financial statement. References to information not included in the management report are not part of the
non-financial statement. The additional content provided on both the company's websites as well as external
websites that are linked in this report are not part of the information assured by Deloitte. Our Sustainability
Report 2023 is produced in accordance with GRI Standards. It will be available online as of April 11, 2024 and
will also be subject to a separate limited assurance engagement by Deloitte. With this, we also disclose topics
set forth by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related
Financial Disclosures (TCFD).
Description of our business model
Our business model as well as our Group structure, governance and strategy are described under
“Fundamental Information about the Group".
Governance
The requirements we place on responsible corporate governance are derived from our company values on the
one hand and from the regulations, external initiatives, and international guidelines to which we are committed
on the other hand. We have integrated these requirements into our sustainability strategy and our Group-
wide guidelines. These guidelines comprise charters and principles that are valid for the entire company as
well as specific standards and procedures for individual business sectors and sites.
Some examples: Our Human Rights Charter aligns with the UN Guiding Principles for Business and Human
Rights. Our Group-wide Social and Labor Standards Policy reflects the labor standards of the International
Labour Organization (ILO). Our EHS Policy (Corporate Environment, Health and Safety Policy) for
environmental impact mitigation and health and safety forms the basis for implementing the chemical
industry's Responsible Care® Global Charter within our company. Our standard entitled Corporate Chemicals
Regulations Governance describes the processes and management structures required to ensure global
compliance with the pertinent chemical and product safety regulations.
We endeavor to comply with all applicable laws as a matter of principle. Where necessary, we review our
internal guidelines, standards and instruction manuals on compliant behavior and adapt them to reflect changes
in the regulatory landscape.
** The summarized non-financial statement was not subject to a content review as part of the audit of the financial statements but was subject to a separate
limited assurance audit by Deloitte.
Combined Management Report Non-Financial Statement
Roles and responsibilities
We support the following responsible governance initiatives:
Against the backdrop of the ongoing highly dynamic development of macroeconomic, geopolitical and industry-
specific conditions, the forecast is also subject to greater uncertainty and volatility in fiscal 2024 than is
normally the case. In terms of expected inflation, we assume a slow normalization.
100
1 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Likewise, complications with the changeover of IT systems could negatively impact the earnings situation. Close
monitoring of critical IT projects serves to mitigate this risk.
Despite the mitigation measures applied and functional continuity plans, the effects of cybercrime or the failure
of business-critical IT applications and their influence on EBITDA pre and operating cash flow are considered to
be possible and with a significant impact.
Environmental, climate-related, and safety risks
Risks arising from environment, climate as well as plant and equipment
As a company with global production operations, we are exposed to risks of possible damage to personnel, goods
and our reputation. These include physical risks stemming from exposure to droughts, storms, and floods.
Mitigation measures such as audits, consultations and trainings on environmental protection, occupational health
and safety minimize these risks to people as well as the environment. In order to ensure the continuity of plant
and equipment, we monitor these risks both at our own sites as well as at suppliers and contract manufacturers.
By adhering to high technical standards, our rules of conduct, and all legal requirements in environmental
protection as well as occupational health and safety, we ensure the preservation of goods and assets.
We have taken sufficient appropriate accounting measures for the environmental risks known to us. We monitor
regulatory risks in connection with the transition to a low-carbon economy, which could materialize in the mid- and
long-term through rising carbon prices through emissions trading systems, taxes or energy legislation. We mitigate
those risks with our energy and CO2 management measures. Mainly, we classify these as possible risks with
moderate impacts. However, a critical impact on EBITDA pre or operating cash flow cannot fully be ruled out.
Risks due to climate change
In 2022, we performed a qualitative climate risk and vulnerability assessment to identify transitional and
physical climate-related risks that are material to our activities. In 2023, in accordance with TCFD
recommendations, we conducted a quantitative climate scenario analysis to identify climate-related risks and
opportunities. Consequently, we conducted an evaluation in relation to impacts of transition risks and the
exposure related to physical hazards.
During this assessment, we utilized two climate pathways (1.5°C and 4°C) considering different time horizons
(2030 and 2050) to identify climate-related risks and opportunities. Based on our findings, we determined the
potential effects of physical risks on our key sites and evaluated the impact of transitional risks on our business.
In line with our ongoing dedication to risk mitigation, we continuously develop innovative and sustainable
approaches. As a result, we foresee no significant deviations from our expectations regarding impacts on
EBITDA pre or operating cash flow.
For further details on climate-related risks, please see "Increased uncertainty due to climate risks" in the
"Notes to the Consolidated Financial Statements".
Combined Management Report_
Report on Risks and Opportunities
93
Overall view of the risk and opportunity situation and management
assessment
Globally used IT applications form the basis for the contractual delivery of products and solutions. The failure of
business-critical IT applications could therefore have a direct influence on our ability to deliver and on the
quality of our products. This also applies to the failure of a data center. To achieve the required service quality,
we use a quality management system certified to ISO 9001 that also applies to the provision of IT. In addition,
to reduce the risk of failure, we operate several redundantly designed data centers. Furthermore, insurance
solutions for cybercrime offenses are in place at Group level.
The most significant individual risks or risk clusters have been outlined in this report, with business- and
market-related risks being the most significant alongside IT and legal risks. Of particular significance are the
still ongoing global macroeconomic and geopolitical developments, increasing existing risks related to more
restrictive regulatory requirements regarding drug pricing and reimbursement, the demand for our products,
business interruptions at our production sites, lack of availability of good quality materials or services, and risks
related to R&D.
Cyber Security is part of our Group Corporate Security Office. In addition, we have a Group Chief Information
Security Officer and a network of Information Security Officers within the business sectors, each supported by
dedicated networks. The individual sectors hold risk ownership and act as our first line of cyber security
defense. Our Global Cyber Security function acts as a second line of defense and has responsibilities regarding
cyber security risk governance and oversight. Our third line of defense consists of internal audits.
2
91
Fundamental assumptions
Risks in connection with a settlement agreement concluded by the divested
Generics group
Citalopram: In connection with the generics business that was divested in 2007, Merck was accused of
breaching EU antitrust law through agreements entered into by its former subsidiary Generics (UK) Ltd., United
Kingdom, relating to the antidepressant Citalopram patented by Lundbeck A/S, Denmark. The European
Commission imposed a fine in June 2013. Appeals against the decision were unsuccessful. Following the
payment of the fine of around € 18 million, British health authorities brought legal claims for damages against
Merck and other companies in a mid-triple-digit million-euro amount in fiscal 2023 due to alleged infringements
of competition law. In addition, there were further claimants from various other jurisdictions who have not yet
quantified their claims. In response to the latest developments in the proceedings, the provision was adjusted
as of December 31, 2023, and is now recognized in a high single-digit million-euro amount. A cash outflow
within the next twelve months is considered possible.
Product liability risks
Operating in the chemical and pharmaceutical industries, we are exposed to product liability risks. Product
liability risks can lead to considerable claims for damages, costs to avert damages, and potentially loss of
reputation. In view of this, we have taken out standard liability insurance to mitigate such risks. However, it
could be that the insurance coverage available is insufficient for individual cases. Although the occurrence of
product liability claims in excess of the existing insurance coverage is considered improbable, individual cases
could still have a critical effect.
Human resources risks
Our future growth is highly dependent on our innovative strength. Therefore, the expertise and engagement of
employees in all business sectors in which we operate are crucial to our success. The markets relevant to the
company are characterized by intense competition to recruit qualified specialists and talents, and by the
challenge of being perceived by the public as an attractive employer. Fluctuation risks specific to countries and
industries have to be identified ahead of time and specifically addressed in order to keep the skills and
expertise critical to success and business within the company.
Recruiting as well as retaining specialists and talent are therefore key priorities for the company and are
managed through the targeted use of, for instance, employer branding initiatives, global talent, and succession
management processes as well as competitive compensation packages. Nevertheless, employee-related risks
that affect business activities are possible; even though their impact is difficult to assess we evaluated a
potential impact on the qualitative rating scale as moderate.
Information technology risks
We use a variety of IT systems and processes to optimally support our globalization. Trends in information
technology offer various opportunities but also harbor risks.
Risks due to cybercrime and the failure of business-critical applications
We maintain and operate an information protection management system based on ISO 27001. Our governance
framework contains organizational, process-related, and technical information security countermeasures based on
recognized international standards. In addition, we employ harmonized electronic and physical security controls (e.g.
access control and security monitoring) to bolster our ability to handle sensitive data, such as trade secrets.
Combined Management Report_
Report on Risks and Opportunities
92
By implementing risk mitigation measures such as continually improving management actions (organizational
responsibilities and process improvements), utilizing existing insurance coverage, and taking accounting
precautions, we have successfully taken counteraction, particularly against significant individual risks.
Increasing international networking and the related possibility of IT system abuse are resulting in cybercrime
risks for us, such as the failure of central IT systems, the loss of the data integrity or the disclosure of
confidential data from R&D as well as business activities, the manipulation of IT systems in process control, or
an increased burden or adverse impact on IT systems as a result of virus attacks.
Based on our assessment, we believe that the most promising opportunities arise from business-related
opportunities. The activities described hold significant opportunities for us in the medium to long term, beyond
the forecast period. We actively pursue the opportunities that arise and specify their expected effects in the
forecast development of EBITDA pre and operating cash flow. Additionally, we proactively seek out new
opportunities, assess their feasibility, and drive them forward where appropriate. If opportunities arise in
addition to the forecast developments, or these occur more quickly than anticipated, this could have positive
effects on our EBITDA pre or operating cash flow.
• About stable organic development
to moderate organic growth
⚫ About stable to slightly negative
foreign exchange effect
EBITDA pre¹
•
Slight to moderate organic growth
⚫ Negative foreign exchange effect
-1% to -4%
⚫ Moderate organic decline to slight
organic growth
⚫ About stable to moderate negative
foreign exchange effect
•
Slight to significant negative
foreign exchange effect
⚫ Moderate organic decline to
moderate organic growth
About stable to moderate negative
foreign exchange effect
⚫ Rise in costs due to lower
currency hedging gains
The overall risk of the Group, which is derived from the probability-weighted aggregation of the identified risks,
leads to the assessment that an existence-threatening risk-scenario, for which coverage and financing of the
losses are questionable, is improbable. We are convinced that we will also successfully manage the
aforementioned challenges in the future and benefit from diversification through our different products and
markets.
⚫ Moderate to strong growth
Operating cash flow
Organic growth in the low teens
percentage range
⚫ Moderate to solid organic growth
About stable to slightly negative
foreign exchange effect
Slight organic decline to slight
organic growth
94
94
⚫ About stable to slightly negative
foreign exchange effect
Combined Management Report Report on Expected Developments
Report on Expected
Developments
The following report provides a forecast for the development of net sales and EBITDA pre for the Merck Group
and the individual business sectors Life Science, Healthcare and Electronics as well as a forecast for Group
operating cash flow in 2024.
Net Sales
.
€ million
Electronics
•
Life Science
Healthcare
Slight to moderate organic growth
Negative foreign exchange effect
0% to -3%
Merck Group
Corporate and
Other
12.4
9.2
Wastewater discharged directly
2023
stress areas
Water
2023
Merck
Group
11.1
9.5
0.110
8.6
3.4
0.000
Wastewater discharged to third parties
4.1
3.8
3.8
0.100
We continuously work to optimize our production streams and purification processes to conserve water and
minimize residues. We have appointed an expert for each of our business sectors to provide guidance for our
sites. This approach aims to reduce the amount of pharmaceutically active ingredient residues as well as all
substances with water-hazardous properties. All wastewater from relevant sites is processed in wastewater
treatment plants before being discharged into the environment. This is done either in our own plants or by
offsite third parties such as municipal wastewater treatment plants.
Assessing our water management practices
In addition to reporting on our climate action efforts, we also report water-related data to the CDP, which
collects environmental data from companies once a year and evaluates their processes and performance on a
scale from A to D-. As in the previous year, we were awarded a B for our water management practices in 2023.
13.3
2022
2021
7.6
13.4
0.156
2022
6.7
2020
6.3
6.3
5.8
0.002
5.4
5.2
5.0
4.8
0.06
Total wastewater volume (millions of m³)
0.06
0.06
0.002
These figures do not include the ground water that we use for safety measures at our Gernsheim site in
Germany. Here, the water is fed back directly into natural circulation.
Using water more efficiently
We seek to minimize our impact on water availability in the vicinity of our sites. In 2023, we withdrew
12.1 million m³ of water in total (2022: 13.2). We assess local conditions to determine whether a sufficient
water supply is available. In our water conservation efforts, we pay particular attention to sites in water-scarce
areas. To measure how we improve our water efficiency, we have defined the Merck Water Intensity Score,
which relates the amount of water either purchased or withdrawn from our own wells at a site to the number of
hours worked, taking local water availability into account.
In 2023, we already exceeded our target set for 2025 to lower the Merck Water Intensity Score by 10% (baseline
year 2020). Initiatives that helped us reach our original goal include effects from shifts in product mix as well as
initiatives such as recycling of wastewater in Rio de Janeiro (Brazil), St. Louis (USA) and Mollet del Valles (Spain).
We have therefore set ourselves a new target: By 2030 we will reduce our sales-normalized water intake by 50%
compared with 2020 (2020: 792 m³ per million € net sales (100%), 2023: 580 m³ per million € net sales (-30%)).
In the past, our Gernsheim site in Germany was excluded from both the score and our water conservation
efforts because we must extract a minimum water quantity from our own wells to meet regulatory
requirements. Our new target will cover the entire Group, including Gernsheim.
Our wastewater
In 2023, we generated a total of 11.1 million m³ of wastewater (2022: 12.4). This comprised around 7.6 million m³
of "direct discharge" water (2022: 8.6) into surface waters. 3.4 million m³ was classified as "indirect discharge"
(2022: 3.8) water and treated at external treatment plants.
Wastewater volume
2020
2021
0.06
In GWh
2611
2023
2
2
2
Downstream leased assets (category 13)
42
234
23
End-of-life treatment of sold products (category 12)
1,137
138211
1,296
2
1,164
Processing of sold products (category 10)9
105
6
84
8
Downstream transportation & distribution (category 9)
Upstream leased assets (category 8)8
767
99
94
0.002
Use of sold products (category 11)10
Franchises (category 14) 12
Investments (category 15)
0
Energy consumption¹
In 2023, we signed virtual power purchase agreements (VPPAs) in Europe for a total of around 300 gigawatt
hours (GWh) of renewable energy per year. This means that 100% of our electricity currently purchased in the
European Union (EU) and Switzerland will be covered with renewable energy certificates as of 2025.
In 2023, we further strengthened our focus on purchasing electricity from renewable sources. In this period, we
sourced 51% of our purchased electricity from renewable energies, meaning direct supply contracts and energy
attribute certificates (2022: 47%). The share of our total energy consumption by renewable energies increased
to 23% in 2023 (2022: 20%).
We consumed 2,337 gigawatt hours of energy in 2023 compared with 2,432 gigawatt hours in 2022. As in the
previous year, our energy intensity relative to sales remained at 0.11 kWh/€ in 2023.
Energy consumption and renewable energy
We report to CDP on an annual basis. This organization assesses the ways in which companies are working to
lower greenhouse gas emissions and minimize the risks and consequences of climate change, along with their
strategy for doing so. Companies are rated from A to D-, with A being the top score. In 2023, we scored A-
(2022: B) for climate change.
Transparency on CO2 emissions and energy consumption
108
Environmental Matters
Combined Management Report Non-Financial Statement
Biogenic emissions (Scope 3), if present, are not being recorded.
12 This category is not relevant for us as we do not operate franchises, i.e. businesses operating under a license to sell or distribute another company's
goods or services. Out-licensing in the pharmaceutical sector is not regarded as franchising.
11 Due to high efforts for data preparation, we partly use 2020 data for 2022.
10 In 2023, we adapted the Category 11 calculations to the modified global warming potentials of the IPCC 6th assessment report (previously IPCC 5th
assessment report) and restated previous years accordingly.
9 Our company produces a huge variety of intermediate products for various purposes. Due to their many applications and our customer structure, the
associated greenhouse gas emissions cannot be tracked in a reasonable fashion.
8 Already covered under Scope 1 and 2 emissions.
7 We adjusted our calculation methodology to take into account the results of an internal employee survey on home office use.
6 We adjusted our calculation methodology to remove non-GHG relevant waste streams.
5 In 2023, we introduced a new and improved calculation methodology based on primary data from suppliers/logistics service providers and an energy-
based bottom-up calculation approach.
4 Due to high efforts for data preparation, we reference 2020 data for 2021.
3 We updated environmentally extended input-output analysis (EEIO) factors, and we adjusted our emission calculation approach for service categories
using primary supplier data.
1 In line with the Greenhouse Gas Protocol, for all previous years, greenhouse gas emissions were calculated based on the current corporate structure as of Dec. 31
of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2 The reported figures contain 95-97% of our total spend. The difference stems from smaller sites that are not integrated in our Group-wide purchase
volume data. 2020 data are slightly over-reported (approx. 3%) as the currency conversion factor (USD to EUR) from 2021 was used. Non-categorized
spends are distributed pro rate to category 1 and 2.
1
2
1
2023
1.4
950
1.9
0
Indirect energy consumption
1,113
1,142
1,138
1,092
10
Electricity
90
964
984
38
982
Steam, heat, cold
163
178
154
110
0
Total energy sold
0.2
0.1
0.01
0.00
10
36
38
35
2,382
2,463
2,432
2,337
78
Direct energy consumption
1,269
1,321
1,294
1,245
68
Natural gas
1,182
1,235
1,188
1,164
59
Liquid fossil fuels²
52
48
70
43
9
Biomass and self-generated renewable
energy
0.0
1.8
Electricity
0.1
The cooling water used in our production processes generally runs in a circular system. Depending on
regulatory standards and the energy footprint, we sometimes use freshwater for cooling in a once-through
system. However, this is only done in regions with high freshwater availability. For certain applications, we treat
production wastewater and reuse it. In 2023, we recycled a total of 20.5 million m³ of water (2022: 20.7).
Water withdrawal
millions of m³
Total water withdrawal
Combined Management Report
Non-Financial Statement
Environmental Matters
110
Surface water (rivers, lakes)
Groundwater
Drinking water (from local suppliers)
For the most part, we draw water used for our production processes from our own wells and source drinking
water from local suppliers. In doing so, we do not want water extraction to impair any protected areas,
sensitive ecosystems or habitats. We extract less water from our own wells than the amounts permitted. We
simultaneously monitor potential trends that could lead to the reclassification of water sources, which involves
assigning heightened levels of protection to specific regions.
Rain water and other sources
2021
2022
2023
Merck
Group
2023
Water
stress areas
14.0
13.5
13.2
12.1
0.162
1.8
2020
Water withdrawals from our own wells and local suppliers
Our Wastewater Standard defines criteria for assessing our wastewater discharges into ecosystems. It also
helps us achieve our targets regarding trace substances in wastewater from our operations. The Water Use
Standard sets out mandatory Group-wide requirements for the responsible consumption of water. The Water
Risk Management standard establishes a way for us to manage the risks that arise from direct or indirect water
extraction and covers risks such as contaminated rainwater and flooding. We perform internal EHS audits to
verify that our sites comply with our three standards. All sites are required to measure and assess the risks and
impacts of the hazardous substances in their wastewater. Moreover, they must also analyze withdrawal and
wastewater risks and comply with the respective requirements of the local authorities.
-
0.01
0.00
0.0
Steam, heat, cold
0.0
0.0
0.00
0.00
0.0
1 In line with the Greenhouse Gas Protocol, for all previous years energy consumption has been calculated based on the current corporate structure as of
Dec. 31 of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors
(portfolio-adjusted).
2 Light and heavy fuel oil, liquefied petroleum gas (LPG), diesel, biodiesel, gasoline and kerosene.
We use photovoltaics to produce power at multiple sites.
-
We currently only record purchased secondary energy this is primarily electricity and, to a lesser extent, heat,
steam and cold. Details on the local energy mix, including the respective percentage of primary energy,
renewable energy, etc. are not available. Data on local energy efficiency in electricity or heat generation are not
available either. Our production sites are located in countries with a widely varying energy mix.
Combined Management Report Non-Financial Statement
Environmental Matters
109
Water management
To us, sustainable water management means obtaining freshwater or discharging treated wastewater without
negatively impacting aquatic ecosystems. We are also concerned with addressing water scarcity. To determine
whether a site is in a water-stressed area, we apply a risk factor of the Aqueduct Water Risk Atlas of the World
Resources Institute (WRI). We want to reduce the environmental impact of our wastewater and make our
processes more water efficient. In the medium term, we will also consider water-related risks in our supply
chain when purchasing important raw materials. In the long term, we aim to transparently map water use and
environmental impacts throughout the entire life cycle of our products.
To this end, we have defined two targets: Firstly, we originally aimed to achieve a 10% reduction in our Merck
Water Intensity Score by 2025 compared with the baseline of 2020. In 2023, we met and surpassed this target,
successfully lowering the Merck Water Intensity Score by 25% in comparison with the baseline year 2020.
Consequently, we have set a new target based on a new and more transparent calculation. By 2030, we strive
to achieve a 50% reduction in our water efficiency ratio of water intake per revenues compared with the 2020
baseline. The new target covers the complete water intake of our company. Our 2020 baseline year was chosen
to align this new target with other existing environmental goals. Our second objective focuses on mitigating our
environmental impact. Specifically, we are committed to reducing potentially harmful residues in our
wastewater to levels below the established no-effect threshold.
Our regular EHS audits at our production and development facilities also review site-specific water management
practices. Our water management efforts focus more heavily on our manufacturing sites than our
administrative facilities as production generally poses a higher risk to aquatic ecosystems.
Roles and responsibilities
The Group function Corporate Sustainability, Quality and Trade Compliance is responsible for water
management. At our sites, engineers work closely with our EHS managers to reduce water consumption and
treat wastewater. Further information can be found under "Environmental protection".
Our commitment: Standards and procedures
Our Sustainable water management principles set the framework for three Group-wide standards that
detail how we integrate mechanisms of sustainable water management into our management system:
Sustainable Water Management Part 1 - Wastewater; Sustainable Water Management Part 2 - Water Use; and
Sustainable Management Part 3 Water Risk Management. All three standards are based on the commitments
we made under the Responsible Care® initiative.
0.2
Employee commuting (category 7)
metric kilotons
78
⚫ Plant, process and transport safety
• Water management
• Climate action
• Environmental management
Topic
Social matters
Employee-related matters
Environmental matters
Aspect
The following topics achieved the relevance threshold for double materiality in 2023. They cover fiscal year
2023 and pertain to our entire Group. Any deviations from the reporting framework are indicated on a case-by-
case basis.
Pursuant to section 289c (3) and section 315c (2) of the German Commercial Code (HGB), we are obligated to
review topics for their double materiality. The principle of double materiality requires companies to disclose
non-financial information as soon as the following two criteria are met: Firstly, the information makes it
possible to understand how the company's activities affect non-financial aspects. And secondly, the information
is necessary to understand the course of business, results of operations and economic position of Merck KGaA
and the Merck Group. In 2023, we examined the topics identified within the scope of a materiality analysis in
accordance with the Global Reporting Initiative standards (GRI) for their double materiality.
• Chemical product safety
Topics for the non-financial statement
Non-Financial Statement
Combined Management Report_
The Merck Sustainability Advisory Panel (MSAP) supports our company as an external expert committee for
sustainability. The panel is chaired by the Head of SQ. It comprises independent experts on sustainability-related
topics from various institutions worldwide whom we invite on an ad hoc basis. The MSAP advises our company on
selected issues and assesses planned activities. Moreover, the members apply their knowledge to help address
societal and political challenges and developments that could be strategically relevant for our businesses.
In 2023, the Sustainability Board met 11 times by video conference. In addition to climate-related issues and
new sustainability reporting requirements, it also addressed the adaptation of the strategy and new objectives
for circular economy and water management.
The Sustainability Board steers and monitors the Group-wide implementation of the sustainability strategy,
defines priorities and stipulates globally applicable sustainability policies. In addition, the Sustainability Board
ensures that the initiatives of our various business sectors, Group functions and subsidiaries align with our
global sustainability strategy. Moreover, it recommends corresponding initiatives to the Executive Board. Within
their respective area of responsibility, each Executive Board member is also responsible for sustainability,
reviews the priorities that have been set, and decides on the implementation of initiatives.
Group Corporate Sustainability is also responsible for coordinating the Merck Sustainability Board, which is
chaired by the Head of SQ, who simultaneously serves as Chief Sustainability Officer. The committee consists of
representatives from our business sectors and from key Group functions, such as Procurement,
Communications and Controlling.
The Group Corporate Sustainability unit is responsible for developing and shaping the sustainability strategy
and it informs the Executive Board at least once a year about the progress made and the need for action. It is
part of the Group function Corporate Sustainability, Quality and Trade Compliance (SQ), which reports to the
Chair of the Executive Board. At Executive Board level, responsibility for Environment, Social, Governance
(ESG) also lies with the Chair of the Executive Board.
Our Executive Board has Group-wide responsibility for our sustainability strategy. It has adopted our three
strategic goals (details can be found under "Strategy").
Roles and responsibilities
102
Combined Management Report Non-Financial Statement
103
April 11, 2024
• Attracting and retaining talent
Diversity, equity and inclusion
-
Roles and responsibilities
Minimizing negative environmental impacts and taking meaningful climate action require a holistic approach
while also constantly monitoring practices and performance. Our goal is to decouple business growth from
negative environmental impacts wherever possible. Our production sites are located in established industrial
and commercial zones. Before acquiring a company and thus its facilities - we first conduct an environmental
risk assessment.
Environmental protection
Environmental Matters
104
Environmental Matters
Combined Management Report Non-Financial Statement
As part of our approach to comprehensive risk and opportunity management, we also identify current and
potential risks and opportunities resulting from environmental, social and governance aspects. This includes
tracking information on the gross risks in terms of potential damage and probability, as well as the residual net
risks remaining after mitigation measures have been executed. As of the reporting date and pursuant to the
risk analysis of the material non-financial topics, no significant risks within the meaning of section 289c (3)
sentence 1 no. 3 and 4 of the German Commercial Code (HGB) from the company's own business activities or
from business relationships are known that are very likely to have or will have serious negative effects on non-
financial aspects. Additional risks are described in the “Report on Risks and Opportunities" in the combined
management report.
• Interactions with health systems (including responsible marketing)
⚫ Sustainable innovation and research & development
• Governance and compliance (including anti-corruption anti-competitive
behavior)
•
⚫Human rights
Other topics
Anti-corruption and anti-bribery
Respect for human rights
Digital ethics
•
⚫ Bioethics
⚫ Clinical studies
• Prices of medicines
⚫ Patient safety
Responsible supply chain (including the mica supply chain)
⚫Health and safety
⚫ Data protection and cyber security
Sustainability Report 2023 as of
Will be published in the
Water management
⚫ Percentage of women in leadership positions
⚫ Result of the employee engagement survey
on sustainability culture²
Sustainability key indicator
Sustainable and transparent supply chain
Our people and communities; providing a
diverse and inclusive environment
Sustainability in our ways of working &
decision making
Focus area
Goal 2: By 2030, we will fully integrate sustainability into our value chains.
Will be published in the SASB
index within the Sustainability
Report 2023 as of April 11, 2024
Sustainable innovation and
technology
Further details
• Environment, Health and Safety (EHS)
Incident Rate
1 The key indicator is used to determine the sustainability factor for the Merck Long-Term Incentive Plan (LTIP).
• Percentage of newly published patent
families with positive sustainability impact
Sustainability key indicator
Impact of our products on health and
wellbeing
Sustainability innovation and technologies
Focus area
Goal 1: In 2030, we will achieve human progress for more than one billion people through
sustainable science and technology.
Our key indicators
Moreover, our annual Long-Term Incentive Plan (LTIP) for Executive Board members and senior executives
contains a sustainability factor. We use it to measure performance over a period of three years based on
selected key indicators for each of our three sustainability goals. Consequently, target achievement based on
the key financial performance indicators can increase or decrease by up to 20%. Details on how this
sustainability factor is calculated can be found in the "Compensation Report", which is subject to both a
formal audit and a separate content audit performed by Deloitte. In 2023 and for the first time, the company
tied 15% of variable employee compensation to sustainability parameters. Details on this can be found under
“Sustainable innovation and technology" within this non-financial statement.
101
Combined Management Report_ Non-Financial Statement
Total energy consumption
⚫ People treated with our Healthcare products
and pharma products enabled by our
Life Science business sector¹
⚫ Lost Time Injury Rate (LTIR)
Percentage of relevant suppliers (in terms of
number and supplier spend) that are covered
by a valid sustainability assessment¹
• Violations of Global Social and Labor
Standards Policy
Sustainability Report 2023 as of
April 11, 2024
Will be published in the
Climate action
1 The key indicator is used to determine the sustainability factor for the Merck Long-Term Incentive Plan (LTIP).
2 A new key figure will replace this key figure from the 2024 reporting year.
• Wastewater quality
• Water Intensity Score²
• Waste Score²
⚫ Indirect greenhouse gas emissions (Scope 3) Climate action
Percentage of purchased electricity from
renewable sources
Climate action
Further details
• Greenhouse gas emissions (Scope 1+2)1
Sustainability key indicator
Water and resource intensity
Climate change and emissions
Focus area
Goal 3: By 2040, we will achieve climate neutrality and reduce our resource consumption.
2 The key indicator "Percentage of employees trained on sustainability" is no longer applicable in 2023, as the target was achieved.
Human rights
Responsible supply chain
Health and safety
Plant, process and transport
safety
Diversity, equity and inclusion
Attracting and retaining talent
Further details
1 The key indicator is used to determine the sustainability factor for the Merck Long-Term Incentive Plan (LTIP).
The Chair of the Executive Board and CEO of our company is responsible for environmental protection, which
also covers climate action, water management, waste and recycling, air emissions, biodiversity, and plant and
process safety. Her duties include approving overarching Group-wide guidelines such as our Environment,
Health and Safety (EHS) Policy. Furthermore, the Merck Sustainability Board (MSB) monitors the Group-wide
implementation of environmental protection goals.
The Group function Corporate Sustainability, Quality and Trade Compliance (SQ) is responsible for steering all
the related measures globally. SQ senior leadership approves operational standards and regularly reports on
environmental protection to the Merck Sustainability Board. Every year, SQ prepares a comprehensive
environment, health and safety report covering topics such as climate action, water management and waste
and recycling as well as plant and process safety. The Merck Sustainability Board uses this report to steer the
strategic direction and provide verification for our ISO 14001 and ISO 45001 certifications.
Across our business sectors, the Operations Leadership Committee (OLC) makes strategic decisions on issues
pertaining to emissions, energy, water, and waste. This body comprises representatives from Life Science,
Healthcare and Electronics as well as SQ. Decisions made by the OLC and any resulting actions are
implemented by the respective business sector. Once per quarter, the OLC members update their leaders on
matters relating to environmental protection and this information, if relevant, is then shared with the MSB.
Our commitment: Standards and standard operating procedure
Our approach to environmental management is founded on our Group EHS (Environment, Health and
Safety) Policy, which has been approved by our Executive Board. Aligned with the requirements of the
chemical industry's Responsible Care® Global Charter and the ISO 14001 environmental management
standard, this policy underscores our leaders' responsibility for environmental protection and health and safety.
It is also aimed at our suppliers, calling on them to likewise adopt high environmental sustainability and safety
standards. Our EHS policy thus complements the Supplier Code of Conduct of our Group Procurement
function. Through our Contractor EHS Management Standard, we aim to ensure that our contract partners also
take environment, health and safety aspects into account.
6,680
5,799
5,103
Total gross other indirect emissions (metric kilotons CO2
equivalents)
2023
2022
2021
2020
Other relevant indirect greenhouse gas emissions (Scope 3 of the GHG Protocol)¹
We have included the following gases in our calculation of direct and indirect CO2eq emissions:
Direct CO2 emissions: CO2, HFCS, PFCS, CH4, N2O, NF3, SF6.
Indirect CO2 emissions: CO2.
7 We adapted the calculations to the complete Greenhouse Gas Protocol requirements.
4,594
6 The figures presented here have been calculated in accordance with the market-based method.
4 In 2023, we adjusted our Scope 1 and Scope 2 calculations to reflect minor data corrections.
equivalent.
3 eq
1 In line with the Greenhouse Gas Protocol, for all previous years greenhouse gas emissions were calculated based on the current corporate structure as of Dec. 31
of the reporting year and retroactively adjusted for acquisitions or divestments of (parts of) companies, or for changes in emission factors (portfolio-adjusted).
2 Baseline for our emission targets is 2020.
0
7
15
14
14
227
242
5 In 2023, we adapted the Scope 1 calculations to the modified global warming potentials of the IPCC 6th assessment report (previously IPCC 5th
assessment report) and restated previous years accordingly.
Purchased goods & services (category 1)²
3,040
3,572
26
32
Business travel (category 6)
326
576
79
85
Waste generated in operations (category 5)
2365
319
2644
264
Upstream transportation & distribution (category 4)
115
121
143
102
Fuel- and energy-related emissions, not included in Scope 1 or
2 (category 3)
3403
388
291
293
Capital goods (Category 2)²
2,5173
4,200
325
15
86
1,236
1,626
Moreover, we aim to reduce our Scope 3 emissions across the entire value chain by 52% compared with 2020
(per euro of gross profit) by 2030. This target was also approved by SBTI.
We also aim to cover 80% of our purchased electricity with renewables by 2030.
In May 2022, this goal for 2030 was approved by the Science Based Targets initiative (SBTI), which
independently assesses and approves company targets based on its strict climate science criteria. This approval
by SBTi confirms that we are contributing to limiting global warming to 1.5 °C, thus complying with the
requirements of the Paris Agreement.
By 2030, we intend to lower our direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions by 50%
compared with the base year 2020. We aim to achieve this mainly by reducing process-related emissions,
implementing energy efficiency measures and purchasing more electricity from renewable sources.
We want to do our part to preserve the climate and comply with the Paris Agreement on climate change.
Therefore, we have set our own objectives:
Climate action
106
Environmental Matters
Non-Financial Statement
Combined Management Report
Annual external audits are used to monitor our certifications. As part of a defined sample procedure for the
Group certificate, a total of 34 sites were externally audited in 2023, with all audited facilities passing (2022:
12). In addition to external inspections, internal audits serve to ensure Group-wide compliance with our
requirements.
By 2040, we intend to have achieved climate-neutral operations throughout our entire value chain; this target
covers our Scope 1, 2 and 3 emissions.
Since 2009, our company has held an ISO 14001 Group certificate that requires all production sites with more
than 50 employees to implement an environmental management system with predefined indicators such as
greenhouse gas emissions and water consumption. Other facilities are not obligated to undergo certification.
The annual internal audit reports and management reviews carried out under the Group certificate give us a
better overview of how all our sites are performing. As in the previous year, 95 of our sites worldwide were
covered by the ISO 14001 certificate in 2023.
In 2023, we recorded no (2022: two) significant incident-related releases of substances.
In the event of a major occurrence, our digital Rapid Incident Report System (RIRS) promptly notifies the SQ
and Group Communications functions, which, if necessary, inform the Executive Board. Major incidents could
include fatalities, accidents with multiple casualties, incidents that impact neighboring communities, or natural
disasters such as earthquakes and flooding. Through the RIRS, we can quickly coordinate with all those
involved and inform the other sites immediately of the respective event. In addition, employees as well as
external stakeholders can report any violations of our standards to Group Compliance.
To review critical situations, near misses and environmental incidents as quickly as possible and take
countermeasures, we have a set of reporting procedures in place that allow us to track the respective incident,
its degree of severity and all risk mitigation efforts. We record all incidents Group-wide and report them to the
Executive Board annually.
Reporting incidents and violations
As a matter of principle, we conduct risk-based assessments along with audits of all our production facilities
every three years with the goal of analyzing and minimizing our environmental footprint. Conducted by SQ,
these assessments serve to ensure that our requirements are being met, with appropriate corrective measures
being implemented as needed. In our Group EHS audits, we assess our sites' performance on a five-tier scale
("excellent”, “good”, “fair”, “poor", and "critical”), which in turn determines how frequently audits are
conducted. If the findings are deemed to be good, we audit the facility less often, while incompliances can
increase the frequency. In 2023, we commissioned a total of 34 audits (2022: 41), one of them "excellent", 23
of them "good" and 10 of them "fair".
Assessing environmental impacts
105
Environmental Matters
Combined Management Report Non-Financial Statement
Efforts to prevent and monitor air, water and soil emissions entail significant expense on our part, as does proper
waste disposal. Moreover, we set up provisions for groundwater and soil remediation to ensure that we can
execute all the necessary measures. As of December 31, 2022, our provisions for environmental protection totaled
€ 149 million (2022: € 148 million), 96% (2022: 94%) of which was attributable to Merck KGaA, Darmstadt,
Germany. For details see Notes to the Consolidated Financial Statements under (27) "Other provisions".
Material investments in environmental impact mitigation
ISO 14001:2015 Group certificate
Roles and responsibilities
Corporate Sustainability, Quality and Trade Compliance is responsible for overseeing all climate action efforts
throughout the Group, with our individual sites and business sectors worldwide implementing the necessary
measures at the local level. More information can be found under “Environmental protection”.
Our commitment: Standards and legal frameworks
1,827
325
14
22
1,463
1,760
1,951
2,152
2023
Merck Group thereof: Merck KGaA
2022
2021
20203
2023
Biogenic CO2 emissions?
indirect CO2eq emissions (Scope 2)6
direct CO2eq emissions (Scope 1)5
thereof:
Total CO2eq³ emissions4
Total greenhouse gas emissions (Scope 1 and 2 of the GHG Protocol) 1,2
107
Environmental Matters
Combined Management Report Non-Financial Statement
The Greenhouse Gas Protocol defines 15 categories for Scope 3 emissions from upstream and downstream
activities. In 2023, these emissions totaled around 4,594,000 metric tons of CO2eq (2022: 6,680,000).
Categories 1 and 2 (Purchased Goods and Services and Capital Goods) accounted for 62% (2022: 69%) of our
total Scope 3 emissions in this period.
Our direct emissions (Scope 1) totaled 1,236,000 metric tons of CO2eq (2022: 1,518,000), with process-related
emissions accounting for 990.000 metric tons of CO2eq and fuel use accounting for the remainder. Indirect
emissions (Scope 2) totaled roughly 227,000 metric tons of CO2eq (2022: 242,000) calculated according to the
market-based method (approximately 381,000 metric tons of CO2eq according to the location-based method).
Greenhouse gas emission intensity (Scope 1 and 2) amounted to 0.07 Kg of CO2eq per € of net sales in this
period (2022: 0.08).
In 2023, we reduced our greenhouse gas emissions by nearly 17% compared with the previous year, emitting a
total of approximately 1,463,000 metric tons of CO2 equivalents (CO2eq) (2022: 1,760,000).
Emissions reduced further
We have three EHS standards in place to manage energy and process-related emissions consistently across the
Group, specifically "Energy Management", "Air Emissions" and "Emissions of Refrigerants". We use an internal
audit process to randomly check compliance with all EHS standards.
1,518
Merck Group thereof: Merck KGaA
2023
Environmental Matters
Combined Management Report Non-Financial Statement
14.33
15.02
not applicable
Asia-Pacific (APAC)
10.60
14.66
12.84
11.90
not applicable
Latin America
11.40
12.95
13.38
13.19
not applicable
Middle East and Africa (MEA)
11.80
16.57
13.04
15.63
not applicable
Total number of leavers
4,721
6,354
6,358
6,336
152
by gender
9.79
North America
3.48
5.52
Women
8.22
11.00
9.93
9.76
3.87
Turnover rate by age group
Up to 29 years old
11.30
16.64
15.91
14.39
5.79
30 to 49 years old
Men
7.74
9.55
9.48
3.41
50 or older
7.52
9.22
8.05
8.49
2.62
Turnover rate by region
Europe
5.64
6.00
5.91
10.05
3.24
2,697
3,673
152
1,281
2,078
2,182
2,305
not applicable
Asia-Pacific (APAC)
Latin America
Middle East and Africa (MEA)
1,394
2,015
1,905
1,824
not applicable
398
449
467
460
not applicable
158
211
164
187
not applicable
1 The table contains unadjusted turnover rates. The rate excludes employees who pause due to parental leave or a long-term illness, as well as
employees who are transitioning to the non-working phase of partial retirement.
2 The employee turnover rate is calculated as follows: Total number of leavers from the past 12 months divided by the average employee headcount
multiplied by 100.
3 The figures do not reflect the approximately 500 Allergopharma employees, who were not included in the employee turnover rate due to the divestment
of the business.
In 2023, the average length of service for employees Group-wide was 9.7 years (2022: 9.2 years), with 15.2
years (2022: 15.4 years) for Merck KGaA employees.
Roles and responsibilities
1,560
1,640
1,601
1,490
3,639
87
2,024
2,779
2,685
2,697
65
Women
by age group
Up to 29 years old
974
1,451
1,542
1,358
3,575
32
2,677
3,545
3,569
3,624
82
50 or older
1,070
1,358
1,247
1,354
38
by region
Europe
North America
30 to 49 years old
Group Human Resources (HR) supports and advises all business sectors and Group functions within our
organization regarding our human capital, especially topics related to recruiting, vocational training and
advanced training. Across all our sites, HR employees work with leaders from various functions and business
sectors to employ strategies that engage our people in line with Group-wide HR guidelines and requirements,
including attractive compensation models and benefits. In accordance with the audit plan, we conduct internal
audits every two to three years to ensure that we implement our guidelines effectively.
10.11
10.69
118
156
165
126
not applicable
Rate of new employee hires¹ (%)
11
15
17
9
6
by age group²
up to 29 years old
30 to 49 years old
479
43
41
40
39
77
50
51
51
54
21
7
8
7
2
Middle East and Africa (MEA)
not applicable
445
460
3,016
4,101
4,569
2,493
3,653
4,859
6,113
2,997
89
131
2,160
2,567
3,015
2,028
50 or older
220
1,789
2,855
3,971
1,181
not applicable
Asia-Pacific (APAC)
2,206
2,803
3,071
1,710
not applicable
Latin America
396
579
North America
10.40
by gender²
Men
8
not applicable
2
2
2
2
not applicable
1 Formula for calculating the rate of new employee hires: Total number of new employee hires divided by number of employees at the end of the fiscal
year.
2 Formula for calculating the rate of new employee hires by age/gender/region: New employee hires of the focus group divided by the total number of
new employee hires.
Staff turnover 1,2
Combined Management Report
Non-Financial Statement
Employee-Related Matters
116
2023
2023
20203
2021
2022
Merck Group thereof: Merck KGaA
Total turnover rate
8.22
10.82
10.16
9.96
3.48
Turnover rate by gender
Men
8.22
4
6
6
not applicable
by region²
Europe
North America
Asia-Pacific (APAC)
Latin America
Middle East and Africa (MEA)
45
46
43
45
40
55
54
57
Women
55
32
29
28
37
100
27
32
37
22
not applicable
33
31
29
31
60
The Chair of the Executive Board and CEO is responsible for Group Human Resources. Our Chief HR Officer,
who leads the HR function and oversees all our HR activities, reports directly to the Chair of the Executive
Board and CEO. Our Business Services unit oversees the operational tasks of HR work, such as drafting
contracts and payroll accounting. The Chief Financial Officer is responsible for this unit.
Combined Management Report Non-Financial Statement
Employee-Related Matters
60
60
60
53
thereof: number of employees in senior
management (Role 6+)
68
63
58
65
19
thereof: number of employees in middle
management (Role 4 & 5)
2,032
2,172
2,235
2,283
367
thereof: number of employees in low
management (Role 3)
6,926
7,298
8,007
7,963
805
thereof: number of employees in "other
employees (below Role 3)"
25,948
26,624
60
30 to 49 years old (%)
494
8,484
15
15
15
14
14
thereof: number of employees in senior
management (Role 6+)
0
0
0
0
0
thereof: number of employees in middle
management (Role 4 & 5)
28,124
6
12
8
2
thereof: number of employees in low
management (Role 3)
199
241
263
249
39
thereof: number of employees in "other
employees (below Role 3)"
8,365
8,880
9,651
8
Up to 29 years old (%)
27,697
50 years or older (%)
Roles and responsibilities
613
The Chief Diversity, Equity and Inclusion Officer is responsible for our global DE&I strategy and for steering its
related activities. In this role, she reports directly to the Chair of the Executive Board, whose Board
responsibilities include Group Human Resources. In addition, we have established a centralized Diversity
Council comprising high-ranking executives from all our business sectors and selected Group functions.
Our commitment: Industry-wide initiatives and regulations
Our Social and Labor Standards Policy categorically states that our company does not tolerate any form of
discrimination, physical or verbal harassment, or intolerance. To underscore our commitment to equality,
fairness, inclusion, and tolerance in the workplace, we also participate in industry-wide initiatives:
•
Women's Empowerment Principles
•
Inclusion Action Plan of the German Mining, Chemical and Energy Industrial Union (IG BCE)
•
Equal Opportunity Charter
German Diversity Charter association (signatory of the Charter and member of the association)
CEO Letter on Disability Inclusion
Strategy implementation
In 2023, we continued driving our global DE&I strategy. We accelerated the impact of our national DE&I
advocates in our 18 major countries and developed tailored roadmaps for each market. We also published our
Premier DE&I Report, providing detailed evidence of our strategy implementation and initiatives.
In 2021, we pledged to our people, partners, patients, and industry to intensify our DE&I efforts and set robust
aspirations. In 2023, we demonstrated that we are on track to meeting our 2030 goals.
Combined Management Report Non-Financial Statement Employee-Related Matters
120
Gender equity
We developed measures to achieve a more balanced gender structure at various hierarchical levels of our
business. We are making consistent progress and have increased the share of women in leadership (roles 4+)
to 39% (2022: 38%) and senior management positions (roles 6+) to 29% (2022: 27%) while maintaining a
44% proportion of women in our global workforce (2022: 43%). This means our share of women in leadership
has increased by 12 percentage points since 2015. Building on these efforts, we aim to achieve gender parity in
leadership positions by 2030. Moreover, we are committed to fair and equitable pay for all employees. Our
Executive Board comprises two female members (our CEO and CFO) and three male members, bringing the
share of women to 40% (2022: 20%).
Culture and ethnicity
With 23% (2022: 24%) of our employees based in the United States and 27% (2022: 27%) of net sales coming
from the United States it is crucial that we become an employer of choice among underrepresented racial and
ethnic groups in this market. Therefore, we plan to increase the share of employees in U.S. leadership (roles
4+) who are members of underrepresented racial and ethnic groups from 23% (2022: 21%) to 30% by 2030.
Additionally, due to our current performance in Asia, Latin America and the Middle East and Africa (MEA),
accounting for 39% (2022: 40%) of our Group sales, we aim to increase the global share of nationals from
Asia, Latin America and MEA in leadership positions (roles 4+) from 17% (2022: 16%) to 30% by 2030.
In 2023, we developed an Action Plan on Culture, Nationality and Ethnicity as well as a toolkit for leaders and
HR to accelerate our progress as regards these aspects.
Inclusion
Beyond our aspiration to foster specific types of diversity and equity, we are accelerating our efforts to create a
genuinely inclusive culture for all employees. To achieve this, we rolled out training courses to help leaders
reflect on how they can lead more inclusively. All leaders will be encouraged to complete these courses over the
coming years. At the end of 2023, 92% (2022: 64%) of our leaders had participated in this training program.
Committed to fair and equitable pay
Our commitment to pay equity is a crucial aspect of our DE&I strategy. To create transparency around
unexplained pay gaps and identify their underlying root causes, we started a gender pay equity analysis in 2021.
In the first step, we analyzed ten of our largest countries, covering approximately 80% of our total workforce. In
2023, we extended the analysis to all countries, except North America which is planned in 2024. The identified
adjusted gender pay gap continues to be less than 1.5%, which is below benchmarks in the industry. We have
developed a plan for a recurring analysis to continuously monitor pay data and to take effective actions as needed.
These include individual adjustments based on the results of the analysis, as well as educating our HR community
on the topic and taking other steps to ensure we make equitable and unbiased pay decisions.
Ensuring fair treatment for all
We do not tolerate any form of discrimination in our company, as stipulated with binding effect in our Code of
Conduct and Social and Labor Standards Policy. In January 2024, we published a new position paper on
disability inclusion to complement our existing papers on DE&I, non-discrimination and non-
harassment. In addition, we have established various reporting channels to ensure employees have a clear
point of contact should they experience harassment or discrimination in the workplace or any other violations of
our standards. Their first points of contact are their supervisors, HR or compliance teams, and they can also
make anonymous calls to our compliance hotline. In the reporting year, our HR Business Partners involved in
HR-related compliance case investigations participated in a training and upskilling program to equip them with
enhanced employee relations and investigation skills. In 2023, 30 (2022: 20) alleged cases of discrimination or
harassment were reported via the compliance hotline and other channels, seven (2022: seven) of which were
confirmed on our global reporting platform and appropriate action was taken.
2 The sharp decline in comparison with the previous year (8,485 employees) is attributable to the fact that in addition to Healthcare KGaA, which was
hived off in 2019, the two other business sectors, namely Life Science und Electronics, have now also been transferred to separate legal entities.
1 Merck also employs people at sites of subsidiaries that are not fully consolidated. For the 2023 reporting year, we have aligned the scope of
consolidation also for the employee data in the non-financial reporting with the financial reporting. As of now, the figures relate to all employees who
are employed in fully consolidated subsidiaries that manage personnel.
10,481
10,382
25
25
25
26
33
thereof: number of employees in senior
management (Role 6+)
125
131
133
135
29
thereof: number of employees in middle
management (Role 4 & 5)
894
1,599
1,771
1,848
231
thereof: number of employees in low
management (Role 3)
3,161
3,341
3,607
3,695
431
thereof: number of employees in "other
employees (below Role 3)"
9,698
9,939
1,651
by age group
Merck Group¹ thereof: Merck KGaA
2023
200
48
Middle management (Role 4 & 5)
3,637
3,831
4,018
4,139
600
Low management (Role 3)
10,286
10,880
11,877
11,907
1,275
Other employees (below Role 3)
44,011
45,443
48,157
46,662
2,001
% of women (total)
43
43
43
44
39
thereof: number of women in senior
management (Role 6+)
42
191
194
193
Senior management (Role 6+)
117
Our commitment: Group-wide policies and guidelines
As set down in our Social and Labor Standards Policy, we will respect our employees' legal rights to form
and join worker organizations of their own choosing, including labor organizations and trade unions, and will not
discriminate based on an employee's decision to join or not join a labor organization.
Our High-Impact Culture is founded on six behaviors: obsessed with customers and patients; act as the owner;
be curious and innovate boldly; simplify and act with urgency; raise the bar; disagree openly, decide and
deliver. We regularly inform managers and employees about these behaviors through global campaigns.
Our People Development and Learning Policy provides a Group-wide framework that guides employees in
managing their professional growth. It defines requirements for our development opportunities, roles and
responsibilities.
A competitive compensation structure
We reward the performance of our employees in order to maintain a competitive edge in attracting and
retaining the best talent. Within our Group, we base compensation on the requirements of each position and
each employee's respective performance. We make no distinctions based on gender or any other diversity
criteria. To ensure we maintain a competitive compensation structure, we regularly review our compensation
policy based on data analyses and industry benchmarks. This enables us to compare internal factors and
market requirements in equal measure. Before making changes to our compensation structure, we consult with
key stakeholders such as employee representatives, as applicable.
In addition to individual performance, our annual incentive plan also measures company performance based on
financial and non-financial key indicators in our scorecard. The non-financial key indicators focus on the
company's priorities and are designed to support our High-Impact Culture as well as our sustainability strategy
and progress in terms of diversity, equality and inclusion. Furthermore, since 2022, we have included a
sustainability factor in our Long-Term Incentive Plan (LTIP). More information on the LTIP can be found in the
Notes of our Annual Report.
Strengthening our sustainability culture
Since 2021, e-Learnings on our sustainability strategy are a mandatory training component for existing and
new employees. While this was the first step of our upskilling journey, we have extended our offer with
function- and hierarchy-specific educational activities. Furthermore, from 2023 on, we use the sustainability
questions from our annual employee engagement survey to measure the impact of our activities. The survey
results are only used internally. They help us to understand the maturity of a sustainability mindset in the
company and to detect and address functional, regional or hierarchical differences. The corresponding key
indicator "Result of the employee engagement survey on sustainability culture" replaces the previous year's
achieved key indicator "Percentage of employees trained on sustainability".
Combined Management Report Non-Financial Statement
Employee-Related Matters
118
Diversity, equity and inclusion
49
We are committed to promoting a strong sense of inclusion and belonging among our employees. Therefore, we
approach diversity, equity and inclusion (DE&I) with the same purpose as our other global business objectives
and aspirations. While we have always been a diverse organization we currently span 65 countries and have
about 63,000 employees from 141 nationalities - we recognize that our success depends on our ability to foster
equity and inclusion. In addition, our DE&I approach fuels our efforts to make positive impacts in the
communities where we live and work. We expect our leaders and managers to be mindful and considerate in
how they attract, hire, retain, and promote their people. We aim to help every employee maximize their
potential, regardless of their gender identity, culture, ethnicity, race, religion or creed, sexual orientation,
nationality, socioeconomic and family status, language, disability status, age, mindset, faiths, military service,
or political conviction.
Number of employees by hierarchical level
2023
2023
As of Dec. 31
2020
2021
2022
Merck Group¹ thereof: Merck KGaA
Total employees
58,127
60,348
64,243
62,908
3,924
We strive to create equitable outcomes and identify and eliminate any barriers that may hinder our employees'
contributions or their access to opportunities or career advancement. Ultimately, we believe diversity inspires
progress and strengthens our ability to innovate in all areas of our business.
51
58
15
management (Role 4 & 5)
2,353
2,418
2,468
2,517
386
thereof: number of men in low management
(Role 3)
5,934
6,211
6,754
6,757
800
thereof: number of men in "other
thereof: number of men in middle
employees (below Role 3)"
25,500
27,090
26,083
1,168
Footnotes follow at the end of the table.
As of Dec. 31
Combined Management Report
Non-Financial Statement
Employee-Related Matters
119
2020
2021
2022
2023
24,766
Europe
33
140
thereof: number of women in middle
management (Role 4 & 5)
1,284
1,413
1,550
1,622
214
thereof: number of women in low
management (Role 3)
4,352
4,669
5,123
5,150
475
142
thereof: number of women in "other
19,245
19,943
% of men (total)
57
57
21,067
57
20,579
833
56
61
thereof: number of men in senior
management (Role 6+)
151
145
employees (below Role 3)"
by region
15.44
Number of nationalities
11,218
2,301
831
thereof: women
16,798
3,084
7,565
857
4,562
1,203
384
50 or older
16,159
5,133
2,085
8,706
1,407
717
196
thereof: women
6,461
2,034
3,595
467
472
266
94
Average age
41.5
43.5
1,304
42.9
16,304
38,006
Non-Financial Statement
Combined Management Report
Before commissioning a plant, we draft a safety concept, which is subject to continuous review throughout the
entire lifetime of the facility. It is updated as needed until the facility is decommissioned. This safety concept
contains an overview of potential risks and specifies corresponding protective measures. In the event that
alterations are made to a plant, we reassess the hazard and risk situation. Our Risk Management Process
guides all our sites in identifying and assessing risks and serves to devise further measures to minimize them.
We use internal EHS audits to complement the inspections conducted by our EHS and dangerous goods
managers in order to ensure that our sites comply with process, plant, transport, and storage safety
regulations. Normally, these audits are conducted every three years at production sites and every four years at
warehouse and distribution sites. If major shortcomings are identified, we re-audit the respective site the
following year. Conversely, we may decide to extend the period between audits at facilities where, based on the
findings from previous audits, we deem the potential risk to be low. Our sites are required to rectify any
deficiencies discovered during the audit, with the auditor subsequently checking whether the specified
corrective actions have been taken. In 2023, we conducted 34 EHS audits (2022: 41) in accordance with our
Group-wide EHS standards.
Assessing potential risks
Our Group Transport Safety Standard is based on the United Nations Recommendations on the Transport of
Dangerous Goods. This guideline is especially important for sites in countries with inadequate local regulations
covering the conveyance of hazardous materials.
Our Group-wide EHS standards stipulate the safety levels for the storage of hazardous materials at our sites.
Along with supplementary standard operating procedures and best practice documents, these EHS standards
describe the technology, equipment and organizational infrastructure needed to achieve the appropriate safety
levels. Contract warehouses must also adhere to our strict safety requirements. Before we sign a contract with
an operator, they must submit a statement detailing how they meet our prerequisites. Our Group-wide EHS
standards also define the technical and organizational requirements for such warehouses.
To ensure safe operation throughout the lifetime of a plant, our Group-wide EHS standards contain specific
rules for production plants and processes. These include specifications that determine how special risk analyses
and hazard assessments are to be carried out. We have also defined measures for the event of accidental
release of chemical substances and for fire protection.
Our commitment: Internal standards and international rules
Overriding responsibility for plant, process and transport safety lies with the Group function Corporate
Sustainability, Quality and Trade Compliance (SQ), which coordinates plant and process safety for the company
and defines Group-wide EHS standards and regulations.
Roles and responsibilities
Moreover, all our shipments are to reach our customers and sites safely, undamaged and with the required
safety information. Several of the materials we store and transport are classified as hazardous. The storage of
such dangerous goods and the transport thereof - whether by road, rail, air, or water - are governed by global
regulations. To minimize risks to people and the environment, we apply strict safety requirements across the
Group that also comply with applicable laws. We conduct regular reviews to ensure our own warehouses as well
as those of third parties comply with these regulations.
We seek to minimize manufacturing process hazards wherever possible in order to prevent workplace accidents,
production outages and chemical spills. To this end, we regularly review our approach to plant and process
safety and continuously gauge it using our EHS key indicators.
Plant, process and transport safety
111
7,352
8,743
3,294
535
2,634
440
142
thereof: women
4,150
995
1,521
213
1,323
224
87
30 to 49 years old
2,233
Environmental Matters
Total employees
14,718
66
66
New employees
77
30
66
66
12
2023
2023
As of Dec. 31
2020
2021
2022
66
Merck Group thereof: Merck KGaA
6,669
8,960
10,682
5,490
220
by age group
up to 29 years old
2,889
3,679
4,314
2,156
170
30 to 49 years old
3,347
Total number of new employee hires
62,908
(Role 4 or above)
78
28,304
43.0
3,924
37.4
40.8
40.5
15,259
3,458
1,169
Combined Management Report
Non-Financial Statement
Employee-Related Matters
115
Internationality of employees
As of Dec. 31
% of non-Germans in management positions
2023
2020
2021
2022
Merck Group thereof: Merck KGaA
141
142
139
141
70
Combined Management Report
Number of nationalities in management
positions (Role 4 or above)
75
79
2023
4,610
112
We track EHS performance indicators at all production and warehouse facilities, as well as at major research
sites, including both accidents and near misses. We investigate each individual incident and then devise
appropriate countermeasures in an effort to reduce the likelihood of such events reoccurring in the future. EHS
performance indicator data are reported once a month within each business sector, with the Executive Board
receiving reports on the topic once per year. Four indicators are particularly important to us:
As of Dec. 31
Number of employees
Worldwide
North America
Europe
Merck KGaA
Asia-Pacific
(APAC)
Middle East and
Latin America
Africa (MEA)
2022
Up to 29 years old
9,926
2,753
Employee age by region
3,530
2,999
476
168
thereof: women
4,637
1,178
1,655
441
1,441
264
99
30 to 49 years old
38,423
7,811
1,181
16,216
2 The sharp decline in comparison with the previous year (8,485 employees) is attributable to the fact that in addition to Healthcare KGaA, which was
hived off in 2019, the two other business sectors, namely Life Science und Electronics, have now also been transferred to separate legal entities.
1,537
Non-Financial Statement
Employee-Related Matters
114
Employee-Related Matters
Attracting and retaining talent
To ensure our ongoing success, we are focusing on the future by creating meaningful impacts and building needed
capabilities. At the same time, we must respond to changing demographics and adapt to the behaviors and
expectations of the highly competitive talent market. Therefore, in 2023, we continued to enhance our talent
acquisition strategy with a more personal, employee-focused approach. Our talent sourcing approach aims to build
inclusive pipelines and effectively recruit diverse talent with the needed competencies and capabilities to our
organization. In addition, our talent retention approach is inclusive in targeting various employee groups. In 2023,
we intensified our efforts to support internal mobility. For example, we launched a dedicated project to improve
organizational agility, up-skilling and re-skilling, retention, and engagement. Specific modules went live in 2023,
and we will roll out the complete platform with all functionalities during the course of 2024.
We have designed our compensation structure to provide valuable benefits to our employees and their families.
Our benefits offerings recognize the diversity and uniqueness of our employees while providing flexibility
wherever possible. Additionally, our international employee mobility programs create an environment suited to
the needs of a rapidly evolving workforce.
Total number of employees
As of Dec. 31
Total number of employees
Men
Women
2023
2023
1 Our company also employs people at sites of subsidiaries that are not fully consolidated. For the 2023 reporting year, we have aligned the scope of
consolidation also for the employee data in the non-financial reporting with the financial reporting. As of now, the figures relate to all employees who
are employed in fully consolidated subsidiaries that manage personnel.
thereof:
2021
2022
Merck Group¹
Merck KGaA²
58,127
60,348
64,243
33,204
24,923
34,274
26,074
36,452
27,791
62,908
35,499
3,924
2,387
27,409
2020
Keeping a close eye on safety
4,549
2,333
64,243
15,847
28,244
8,485
15,412
3,490
1,250
Chemical product safety is all about protecting human health and the environment from adverse impacts
resulting from the use of chemical products throughout their life cycle. To achieve this, we provide relevant
information to our customers and the public, which helps to raise awareness of the hazards and build a greater
understanding of how to mitigate risks and use the products safely.
Up to 29 years old
Product safety information
Safe and sustainable by design implies that product safety starts during development. Therefore, at an early
stage of our product development process, we analyze innovations in terms of their impacts on human health
and the environment. We continuously evaluate the intrinsic hazards of both our existing and new products to
create relevant product safety information in line with applicable rules.
Safety analysis of our products
In 2023, there was one incident of non-compliance with regulations concerning potential health and safety
impacts and the labeling of our chemical products. Some information and the REACH registration number was
missing on a safety data sheet which resulted in a fine in Italy. In this regard, to the best of our knowledge,
there were no negative impacts on human health or the environment.
Using the Globally Harmonized System for Classification and Labelling of Chemicals (GHS) for hazard
communication enables us to streamline our internal processes and provide consistent, harmonized and high-
quality information to our customers.
Total employees
Our internal standard defines the roles, responsibilities and basic processes required to comply with national
and international regulations. In addition, we have also endorsed voluntary commitments of the chemical
industry such as the Responsible Care® Global Charter.
113
Environmental Matters
Non-Financial Statement
Combined Management Report
This approach also applies to innovative fields of development such as nanomaterials, which we use with the
greatest of care in line with the precautionary principle. Furthermore, our Group-wide Policy for Use and
Handling of Nanomaterials provides the necessary guidance on the use of these materials.
Our Group standard provides a framework for governing the setup of effective operational processes for product
safety, hazard communication and chemical regulatory compliance throughout our business sectors. In
addition, the Group Chemicals Regulations Council fosters cross-sectoral alignment of strategic regulatory
activities required for existing and emerging chemicals regulations as well as sustainability and identifies
potential impacts for our company.
Our Life Science, Healthcare and Electronics business sectors have organizational structures in place to
implement our product safety strategy in line with their respective business requirements and customer needs.
This approach includes registering chemicals, classifying hazardous substances and highlighting risks using
safety data sheets, labels and digital communication tools.
Roles and responsibilities
Product safety is one of our top priorities. During the product development phase, we investigate the potential
adverse impacts of chemical substances. Along the entire value chain of our products - from raw materials to
manufacture and commercialization – we provide relevant information on their hazardous properties and how to deal
with them. These instructions facilitate the safe handling and use of our products in line with pertinent regulatory
requirements. We publish this information primarily on the relevant digital channels. As paper safety data sheets are
still common in some countries, we can also provide these upon request through our customer service.
Chemical product safety
For the Lost Time Injury Rate (LTIR) we set ourselves the goal of lowering our Group-wide LTIR to
under 1.0 by 2025 (number of accidents Group-wide resulting in at least one missed day of work per
million hours worked). In 2023, our LTIR was 1.3 (2022: 1.2).
The EHS Leading Rate (EHS LR) reflects the number and the results of the analyses of near misses and
hazardous conditions or behaviors, as well as other proactive safety activities such as risk assessments.
The EHS IR also contains our Loss of Primary Containment (LoPC) indicator. In 2023, we did not record any
significant incident-related releases of substances (2022: two).
Under our EHS Incident Rate (EHS IR), we track and evaluate all major and minor accidents and incidents
as well as further EHS-relevant incidents. The EHS IR covers both our own employees as well as those of
contractors. To calculate it, we state the number of incidents and the severity of the event in relation to the
number of hours worked. The lower the EHS Incident Rate, the safer the site is. In 2023, the ratio was 2.4
(2022: 2.8).
Legal requirements and internal guidelines
11,174
40.3
37.3
890
thereof: women
16,909
3,278
7,528
1,664
4,498
1,196
409
50 or older
15,894
5,283
8,498
2,755
41.1
1,239
192
thereof: women
6,245
2,045
3,437
870
412
255
96
Average age
41.6
43.3
43.1
43.1
681
5,397
To obtain the relevant information on hazard profiles, we employ industry-standard digital tools through which
we gather information available on the substances we use.
45
Men
Women
by gender
50 or older
2,944
390
971
671
433
5
0
not applicable
Middle East and Africa (MEA)
0
0
0
0
by gender
Women
0
0
0
0
0
not applicable
0
Latin America
0
0
0
0
North America
0
0
0
0
not applicable
Asia-Pacific (APAC)
0
0
0
0
not applicable
0
0
0
0
Supplier Risk Assessments: to capture the overarching risks at the supplier level we consider multiple risk
domains.
Alert system: to notify our Procurement organization about risk events arising with any of our suppliers.
Material Risk Assessments: to identify and mitigate the risks of the materials used in our most significant
finished products. This element focuses on our business sector Life Science. In 2023 we conducted
assessments for more than 2,500 of our critical materials.
Risk Response Tracker: a system to create and monitor risk mitigation activities in inter-disciplinary teams.
We calculate risk factors for suppliers and raw materials by multiplying risk probability and risk impact
according to current human rights risk standards. We also include criteria for identifying supplier relationships
impacted by key sustainability risks, such as mineral sourcing and animal welfare.
Combined Management Report
Non-Financial Statement
Social Matters and Respect for Human Rights
124
Due diligence process for responsible sourcing of minerals
-
We source and sell products that contain minerals commonly referred to as "3TG" (tin, tungsten, tantalum,
gold collectively also known as conflict minerals). These minerals involve the risk of being extracted, traded,
handled, and exported from conflict-affected and high-risk areas (CAHRAS) where human rights are not always
respected and violations thereof need to be prevented.
Our aim is to source materials in a responsible and conflict-free manner and not to contribute to adverse
impacts through our activities. Therefore, we have a due diligence program that applies across all our business
sectors and takes into account applicable laws and international standards. Additionally, we have engaged an
external auditing firm to carry out an independent assessment in 2023 in order to verify our compliance with
regard to the requirements of the EU Conflict Minerals Regulation (EU) 2017/821.
As part of our continuous improvement efforts, we worked on the recommendations from the audit and refined
our procedures. Additionally, we established a supply chain traceability system that further increases our supply
chain transparency. For our tin imports, which make up the majority of our conflict minerals imports, additional
control mechanisms were implemented. These mechanisms include supply chain mapping, information on the
country of origin of the mineral, request of audit reports from smelters and refiners, and the revision of
agreements, including audit rights, with our suppliers. After careful analysis of the potential risks, no specific
risks could be identified that would have required the development of an action plan. We remain in constant
contact with our suppliers, industry colleagues and cross-company collaborations to improve the transparency
and effectiveness of the framework.
Roles and responsibilities
•
0
•
Risk management process
0
Men
1 Including supervised temporary staff.
Through the LTIR, we record work-related accidents that involve at least one day of missed work. A work-
related accident is an injury that results from the type of work, in the course of doing said work, and that has
no internal cause. Work-related accidents are considered relevant if they occur on the premises, on business
trips, during goods transport, as a result of external influences (e.g. natural disasters), or due to criminal acts
involving personal injury. Commuting accidents and accidents during company sporting activities are not
included. First-aid incidents are generally not included in the LTIR since these usually do not result in more than
one day of missed work.
Clear rules of conduct
Group-wide, all newly appointed site EHS managers must complete an EHS onboarding training that covers the
topics of occupational health and safety as well as our "BeSafe!" safety culture program. Through the "BeSafe!"
program, we raise employee awareness of occupational hazards and teach them rules for safe behavior. In
addition, we regularly provide occupational safety training at our sites covering both legal requirements and the
specific risks.
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Non-Financial Statement Social Matters and Respect for Human Rights
123
Social Matters and Respect for Human Rights
Responsible supply chain
With our supplier management endeavors, we aim for compliance with fundamental environmental and social
standards in addition to high quality, reliable delivery and competitive prices. Therefore, we have introduced
relevant strategies, processes and guidelines to prevent violations of supply chain standards and continuously
improving our sustainability performance. Unless stated otherwise, the approaches presented apply to tier-1
suppliers, i.e. direct suppliers. Furthermore, our supplier management activities include special measures
particularly for tier-n suppliers, i.e. indirect suppliers, working in the area of conflict minerals.
To achieve our sustainability goals, our Procurement team is working closely with our suppliers. We aim to
create transparency in all our sourcing regions and fully integrate sustainability into all our value chains. To this
end, we have defined two key indicators to measure our journey towards increasing this transparency by
reviewing the sustainability performance of our relevant suppliers based on valid sustainability assessments.
Our definition of valid sustainability assessment includes assessments carried out over the last three years and
performed by a reliable, approved source. In accordance with our risk management approach, we define
relevant suppliers as suppliers, which either indicate a specific country and/or industry risk or contribute to a
significant percentage of our supplier spend (at least 50%). For the country risk evaluation, we have developed
our own comprehensive country risk score.
In 2023, 66% (2022: 46%) of our relevant suppliers were covered by a valid sustainability assessment; 94%
(2022: 82%) of our spend attributable to these suppliers was covered by suppliers with a valid sustainability
assessment.
We consider all applicable legal requirements, such as the German Supply Chain Due Diligence Act, and initiate
corresponding measures where necessary. Among other things and in conjunction with the implementation of
the German Supply Chain Due Diligence Act, we have implemented a risk management approach focusing on
human rights and environmental risks along our supply chain. This risk assessment is conducted annually and
ad-hoc when required.
To ensure security of supply, we select our suppliers based on criteria such as country risk, material risk,
supplier risk, and their strategic importance to the business. This process helps our Category Sourcing teams to
identify potential mitigation actions with relevant suppliers and supports them in making improvements. Our
risk management approach comprises four main elements:
0
by region
Europe
Alongside this indicator, in the United States, we also use the Occupational Illness Rate to monitor work-
related illnesses and their long-term effects.
Work-related accidents¹
2023
2023
2020
2021
2022
Merck Group
thereof: Merck KGaA
Lost Time Injury Rate (LTIR = workplace
accidents resulting in missed days of work
per one million hours worked)
1.3
1.2
1.2
by region
We use our EHS Incident Rate (EHS IR) to document incidents.
1.3
The LTIR measures the accidents resulting in at least one day of missed work per one million hours worked.
In comparison with the previous year, our LTIR increased slightly to 1.3 (2022: 1.2). The majority of
incidents resulting in lost time were slips, trips and falls, along with contusions and lacerations from the
operation of machinery and equipment. Once more, in 2023, we recorded no fatal accidents.
Accident rates
Roles and responsibilities
In October 2023, we launched BeHealthy, our global employee health strategy, to our workforce. It is designed
to further strengthen the physical, mental, social, and workplace health of our employees. Moreover, in 2023,
we introduced a key indicator for health, planned to comprise our health index on the one hand and the
implementation status of the BeHealthy strategy on the other hand.
Generally, before starting any activity, we perform a hazard assessment to identify risks and do everything
possible to eliminate them before commencing the activity or commissioning a plant. If this is not feasible, we
put measures in place to minimize the likelihood of risks and their potential impacts. Hazard assessments are
the responsibility of our individual sites and are therefore conducted by them.
The lost time injury rate (LTIR) is an important indicator used to gauge the success of our occupational safety
efforts. It comprises all accidents worldwide that have resulted in at least one day of missed work per one
million hours worked. We determine the Group-wide LTIR both for our employees and supervised temporary
staff. Our objective is to lower the LTIR to below 1.0 by 2025.
We seek to promote the health of our employees and sustain their long-term performance ability, which in turn
necessitates a safe workplace. We are therefore constantly working to further strengthen our health and safety
culture.
Health and safety
121
Employee-Related Matters
Combined Management Report Non-Financial Statement
Our commitment: Standards and policies
Our Corporate EHS Policy (Corporate Environment, Health and Safety Policy) describes our fundamental
approach to occupational health and safety, among other things. It is part of our EHS management system and
undergoes an external ISO 45001 audit every year. As part of a Group certificate, our occupational health and
safety management system was ISO 45001-certified at 66 sites at the end of 2023.
Together with the Group-wide health strategy BeHealthy, we launched the newly developed Merck Group
Employee Health Standard in October 2023. It describes the fundamental requirements that a site must fulfill as
regards employee health. In addition, the standard specifies our approach to ensuring workplace safety for our
employees while also promoting their health and well-being. Furthermore, we set out our Group-wide approach to
health and safety management, which is aimed at preventing workplace accidents and occupational illnesses.
We expect our contractors to comply with environmental as well as health and safety requirements throughout
the entire process, from starting a job to completion. This objective is reflected in our Group-wide Contractor
EHS Management Standard.
Combined Management Report Non-Financial Statement
Employee-Related Matters
122
Our employees are required to immediately report any relevant occupational accidents to Corporate
Sustainability, Quality and Trade Compliance, where these accidents are assessed. If necessary, we then
implement additional safety measures. This procedure is common practice across all production facilities around
the world. We document the following occupational safety data across our sites worldwide:
0
1.6
2.4
0.6
0.6
not applicable
Middle East and Africa (MEA)
0.4
0.0
1.1
0.4
not applicable
Number of deaths
0
0
Procurement is responsible for integrating sustainability requirements into the relevant stages of our sourcing
and supplier management processes. Our Center of Excellence for Sustainability coordinates the relevant
measures, such as updating our guidelines where necessary, examining processes and coordinating our
participation in external initiatives.
0
0
0.4
Europe
0.8
not applicable
2.1
1.7
2.2
1.6
North America
0.8
1.2
1.7
1.4
not applicable
Asia-Pacific (APAC)
0.1
0.1
0.3
0.1
Latin America
0
Employees concerned about their health or safety are permitted to temporarily step back from their work until
the issue has been resolved. Globally, across the Group, they are encouraged to report such concerns via our
compliance hotline.
Our mica suppliers are informed of our standards and have confirmed that they adhere to the principles of our
Human Rights Charter as well as the requirements of our Supplier Code of Conduct. In the event of non-
compliance with our standards, we work with suppliers to ensure the appropriate implementation of corrective
We perform risk assessments to understand the potential impacts our operations and business relationships
could have on human rights. For instance, we investigate human rights risks at our sites as well as risks related
to product and service sourcing. These risk assessments enable us to derive the corresponding strategies and
measures. We track human rights risks through our strategic supplier risk process. More information on how we
engage with suppliers can be found under "Responsible supply chain".
Risk analyses to determine human rights and environmental risks
We conduct special analyses to identify human rights and certain environmental risks. This enables us to
identify potential risks, weight them appropriately and prioritize them. These risk analyses are carried out
annually and on an ad hoc basis for our own business operations.
Our Social and Labor Standards Policy defines the corresponding commitments and principles as they relate
to specific topics and sites. We regularly check compliance with the requirements using a risk-based approach.
Among other things, this takes into account risks that may arise if relevant laws and regulations change or if
there are violations of internationally recognized labor rights by governments and companies, as assessed by
Combined Management Report
Non-Financial Statement Social Matters and Respect for Human Rights
128
the International Trade Union Confederation and documented in the annual ITUC Global Rights Index. If
we identify a violation during the audit, we define remedial actions together with the responsible Managing
Director and/or local HR staff.
We also assess human rights aspects at our sites through security audits and as part of the risk analysis. The
audits are one control mechanism of our security governance framework. Through increased risk transparency
and central follow-up of corrective and preventive actions (CAPA) we help ensure that our sites comply with
safety-related human rights aspects. Through the Together for Sustainability (TFS) initiative, we determine
whether our strategically important suppliers comply with human rights standards.
Identifying actual and potential impacts on human rights
Creating awareness among our employees
Our reporting practices
We inform the public about our approaches and measures as well as the results of our human rights due
diligence. We provide information on this annually in our Sustainability Report. Under laws in Australia, the
United Kingdom and Norway, we are additionally required to publish information in these countries on our
measures to combat forced labor and human trafficking. Apart from the UK Modern Slavery Statement and
the Merck Australia Modern Slavery Statement, we also published the Norway Transparency Statement
for the first time in 2023.
Our complaint mechanisms
We have set up a Group-wide whistleblowing and complaints system that can be used to report potential
violations of human rights, legal provisions and environmental issues, among other things. Our compliance
hotline is a central element of this. Our employees as well as external stakeholders can report suspected cases
via this Group-wide whistleblowing system in their respective national language, free of charge and
anonymously, either by telephone or a web-based application. We are committed to thoroughly investigate all
complaints that we receive and take countermeasures if necessary. More information on the compliance hotline
can be found under "Compliance Management".
In addition, we published Rules of Procedure. These apply to tips or complaints that refer to human rights
and certain environmental risks or violations at our company and along the supply chain in line with the
German Supply Chain Due Diligence Act. In the reporting year, 184 violations of the Social and Labor
Standards Policy were reported to us in our own business operations, 60 of which were confirmed.
Furthermore, based on the complaint channels specified in the Rules of Procedure, there were no indications of
child or forced labor or violations of the right to collective bargaining or freedom of association in our own
business operations or in the supply chain in 2023.
Human rights violations
2020
2021
2022
An online course trains our Managing Directors and senior management in how to meet the requirements of our
Social and Labor Standards Policy in their area of responsibility.
2023
In 2023, our Executive Board approved our Group Policy Statement on Compliance with Human Rights and
Environmental Due Diligence Obligations in accordance with the German Supply Chain Due Diligence Act. It
applies to our own business operations, in other words to our entire workforces, as well as to our suppliers.
The statement describes how we undertake to comply with our human rights and environmental due diligence
obligations and provides information on the risks identified.
Our commitment: Guiding principles, charters and laws
Combined Management Report
Non-Financial Statement
Social Matters and Respect for Human Rights
126
Auditing our mica supply chain
We have implemented a series of oversight mechanisms using a system that monitors and audits conformity
with our social and environmental standards. In addition to visits by our company's employees, regular
inspections are conducted by third parties, who conduct comprehensive announced audits as well as frequent,
unannounced monitoring.
Environmental Resources Management (ERM), a leading global provider of environmental, health, safety, risk,
and social consulting services, conducts external audits of mines and processing plants, investigating working
conditions as well as environmental, health and safety issues. The audit reports document any identified
shortcomings in this respect and propose corrective actions. Findings concerning safety of electrical installations
and installing proper emergency exit signs were successfully addressed. Our employees in Kolkata, India, and
Darmstadt, Germany, take action to address any identified issues. If the corrective measures are not respected,
we may suspend or even terminate our business relationship.
Since 2013, IGEP Consult, an Indian non-governmental organization, has conducted regular unannounced
monitoring to review labor standards throughout our supply chain. During these visits, IGEP officials monitor
occupational safety and compliance with laws preventing child labor. In 2023, its inspections focused on
checking the availability of physical examinations for workers and conducting mock fire drills. Additionally, we
regularly optimize the escalation process together with IGEP, which holds bi-weekly review meetings with
representatives of our company to assess suppliers. These meetings help to identify any required actions, which
our sourcing teams then discuss and implement with our suppliers. As a result, our suppliers have successfully
improved the working conditions at these sites.
Evaluating and tracking mica sources
Our Human Rights Charter aligns with the UN Guiding Principles for Business and Human Rights. It is
our overarching human rights directive and defines the relevant requirements for our company. We expect our
employees as well as our suppliers and all companies with which we have business ties to comply with this
charter.
We use a tracking system to help ensure that the mica we purchase is derived from sources qualified by our
company. We also use this tracking system to monitor the productivity of our mica sources. Based on written
records of the daily extraction quantities, we review the volumes of mica reported and supplied to the
processing facilities. Furthermore, we use a digital traceability solution to increase transparency in the mica
supply chain.
Combined Management Report Non-Financial Statement Social Matters and Respect for Human Rights
127
Human rights
We are committed to upholding human rights, which is why we became a signatory to the UN Global Compact
back in 2005. We endeavor to prevent the risk of human rights violations as far as possible, not only at our own
sites but also along our entire supply chain. That is why we integrate human rights due diligence into our
business processes.
We view our human rights due diligence as a continuous process, which we constantly adapt and improve. This
also prompts us to continually review our approach. We closely monitor regulatory developments such as the
planned EU directive on human rights due diligence.
Roles and responsibilities
Our Executive Board has ultimate responsibility for human rights within our sphere of influence. The Executive
Board exercises this responsibility by requiring our Managing Directors to comply with human rights.
Our Human Rights Officer from the Group function Corporate Sustainability, Quality and Trade Compliance (SQ)
is responsible for monitoring due diligence obligations concerning human rights and environmental matters. The
Executive Board is informed at least once a year of the work of the Human Rights Officer and the
implementation status of risk management and of the due diligence processes.
Those responsible for the issue in the Group functions, business sectors and local units are tasked with
implementing our human rights due diligence processes in operations by integrating human rights due diligence
into existing processes, for instance.
To maintain accuracy, our processes undergo constant review and improvement. We are also evaluating other
mica sources in accordance with our quality, social and environmental standards, both in India and other
regions. For example, we source a considerable amount of mica from Brazil. To monitor our suppliers'
adherence to these standards, we have conducted an audit through a third party.
We do not tolerate child labor and contractually prohibit our suppliers from employing children. If one of our
suppliers were found to be using child labor, we would terminate the business relationship immediately. We are
driving initiatives and taking measures to improve the conditions of mica sourcing based on our high standards.
For example, we have contractually agreed with our suppliers to pay at least a living wage to mine workers and
workers in the processing units. Furthermore, we continuously review our monitoring processes to improve
their effectiveness.
Number of reported violations of Social and Labor Standards
Policy
121
Our Global Patient Safety unit hosts a Pharmacovigilance Intelligence Council that focuses on changes in
pharmacovigilance legislation and their impacts on our global and local pharmacovigilance systems. This council
enables us to make strategic decisions and govern changes in pharmacovigilance requirements, which fosters
our target to ensure continuous compliance with regulatory requirements.
Our Medical Safety and Ethics Board
Our Medical Safety and Ethics Board (MSEB) is the governance board that oversees the safety and benefit-risk
assessments of our medicinal products throughout their clinical development and commercialization. This
internal board is chaired by our Chief Medical Officer and comprises experienced physicians, scientists and
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Social Matters and Respect for Human Rights
130
experts from our company. Throughout a medicinal product's entire life cycle, the MSEB reviews and assesses
important medical safety risks and benefit-risk issues and endorses appropriate measures to minimize risks,
such as updates to product information. The MSEB also assess human-related bioethical matters as appropriate
and is accountable for the use of our medicinal products in early and post-study access.
Our commitment: Guidelines and statutory requirements
Our experts help to ensure that all information on the risks and adverse effects of our medical products are
properly documented, tracked and reported to the respective health authorities in accordance with regulatory
requirements. Our Global Patient Safety unit analyzes all data and reassesses the benefit-risk profile based on
these data, where required. We then inform regulatory authorities, healthcare professionals and patients about
new risks, additional risk mitigation measures and potential changes in the benefit-risk profile. We convey this
information through stipulated regulatory reports, safety communications (as applicable) and corresponding
product label updates.
We rigorously aim to follow international guidance and standard procedures. These include the International
Council for Harmonisation (ICH) guidelines, the Good Pharmacovigilance Practices (GVP) established by the
European Medicines Agency (EMA), Title 21 of the Code of Federal Regulations governed by the U.S. Food and
Drug Administration (FDA), and other pharmacovigilance regulations issued by national health authorities. We
also aim to comply with relevant new statutory pharmacovigilance regulations in the countries where we
market our products.
Regulatory authorities conduct periodic inspections to verify that we comply with statutory requirements as well
as our own internal pharmacovigilance standards. We follow up on the findings of health authority inspections
and take necessary actions to ensure the ongoing compliance of our pharmacovigilance system. In 2023, we
had five pharmacovigilance inspections (2022: four).
We also perform audits to our systems and processes to ensure that all our units and subsidiaries involved in
pharmacovigilance consistently meet all global requirements. In 2023, we conducted a total of seven
pharmacovigilance audits (2022: 19) and found no significant deviations in our pharmacovigilance systems
from these requirements and standards. We also conducted twelve external audits (2022: 16) at our vendors
and licensing partners involved in pharmacovigilance, helping us to improve our pharmacovigilance processes
and to comply with regulatory requirements.
Applying our proactive safety strategy to benefit-risk assessments
Regarding product safety risk assessments, we have successfully implemented in the past years an improved
benefit-risk management strategy to become a more proactive and benefit-risk-focused organization. This
strategy firmly establishes the concepts and principles for conducting benefit-risk assessments at each stage of
product development and post-marketing. In addition, our Benefit-Risk Action Team co-leadership model,
created in 2022, enables us to understand in even greater detail the benefit-risk profiles of our products and
enable early decision-making within our organization to protect patient safety. Ultimately, we aim to provide
the right medicine to the right patient at the right time.
Up-to-date labeling and product information
Our product information explains to healthcare professionals and patients how to correctly use the respective
product and make informed treatment decisions. We review and update product information documents, such
as package leaflets, thereby, we want to ensure our medicinal products contain the latest information on safety,
efficacy and pharmaceutical formulation. In accordance with regulatory requirements, we submit modifications
to our leaflets to the respective regulatory authorities for approval. In 2023, there were no reportable incidents
of non-compliance with regulations concerning the labeling of our medicinal products.
Internal and external training
Our pharmacovigilance experts are regularly trained so that they gain and maintain the required experience
and knowledge to carry out their activities. We manage our training via a global learning platform and verify
compliance with our training requirements by producing training completion reports.
Our approximately 25,000 internal and external Healthcare employees receive basic pharmacovigilance training
once a year that covers the procedure for reporting adverse effects or special circumstances associated with the
use of our medicinal products.
Inspections and audits for drug safety monitoring
108
Our Global Patient Safety unit is responsible for drug safety. It continuously collects current safety data from a
wide variety of sources across the globe, including clinical studies, early access programs, spontaneous reports on
adverse effects, patient support programs, and articles published in medical and scientific journals. Our vision is to
embed a deep knowledge of safety into early decision-making as we evolve to practice predictive safety.
By 2025, we aim to deliver product specific safety and benefit-risk strategies to support the execution of all key
priority programs in line with internal and external stakeholders' expectations. These strategies will enable us
to understand in greater detail the benefit-risk profiles at each stage of product development and post-
marketing. During the reporting year, we worked toward achieving this goal by providing high-level safety and
benefit-risk contributions for development programs with priority in oncology, neurology and immunology.
136
184
Number of confirmed Violations of Social and Labor Standards
Policy
29
41
68
60
thereof: number of incidents of discrimination
2
Roles and responsibilities
6
71
1 As of 2023, the incidents of discrimination also include cases of harassment as a specific form of discrimination.
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Patient safety
Through a rigorous benefit-risk management process, we help to ensure that the benefits of our medicinal
products always outweigh the risks for patients. Every new medicine goes through a series of precisely defined
development stages. Before any medicinal product is administered to human subjects, we conduct extensive
preclinical testing both in vitro and in vivo. During clinical development, we diligently use all the collected data
to continuously evaluate the medicinal product's benefit-risk profile. If we consider the medicinal product's
benefit-risk profile to be positive, we then submit an application for marketing authorization to the relevant
regulatory authorities.
Continual monitoring of product safety risk profiles
Once we launch a new medicinal product, the number of patients being treated with the product increases
significantly. In rare circumstances, there may be adverse and potentially serious effects that were not detected
during clinical development, which is why we continuously monitor risks and assess the benefit-risk profiles of the
products after their market launch. Pharmacovigilance includes the process of monitoring a medicinal product on
an ongoing basis to detect and assess safety signals as part of signal management activities. Our
pharmacovigilance system and our pharmacovigilance business continuity management help to ensure continuous
monitoring of adverse effects, allowing us to proactively and transparently minimize and communicate any risks.
Emergency response procedures for business continuity are managed in accordance with global and local business
continuity plans, tested in regular, defined intervals or with mock scenarios. In addition, we provide healthcare
professionals and patients with the latest information on the safety of our marketed medicinal products. The scope
of continuous safety monitoring covers the entire life cycle of a product, ranging from development, market launch
and commercialization to the expiration or cancellation of its marketing authorization.
7
measures.
Our Health and Safety management system is the responsibility of Corporate Sustainability, Quality and Trade
Compliance, which in turn reports to the Chair of the Executive Board. This Group function sets objectives,
oversees the respective initiatives globally and conducts internal EHS audits. Local EHS managers and their
teams ensure that our individual sites comply with all occupational health and safety laws and regulations. They
are also responsible for local projects, campaigns, and programs.
Mica is an important raw material for our effect pigments, which are used in automotive, cosmetic and
industrial coatings as well as plastics. We procure the majority of our mica from the Indian states of Jharkhand
and Bihar. We have special measures in place to comply with high social and environmental standards in our
mica supply chain.
Our commitment: Guidelines and standards
We expect all our suppliers and service providers to comply with our environmental and social standards, which
are primarily derived from the core labor standards of the International Labour Organization (ILO) and the
UN Global Compact. We expect our suppliers to ensure that their subcontractors respect the same rules. For
this purpose, our Supplier Code of Conduct details our expectations towards suppliers and business partners
regarding human rights, health and safety, business integrity, environmental protection, continuous
improvement, and management of their respective suppliers.
Our Responsible Minerals Sourcing Charter demonstrates our commitment to responsible sourcing of
minerals from conflict-affected and high-risk areas. It applies to all our legal entities and subsidiaries
worldwide. The charter complements the requirements set out in our Supplier Code of Conduct.
To ensure that we work on the basis of industry standards and can rely on comparable data analytics and
expert analysis, we collaborate with our peer companies in industry initiatives. For example, we are a member
of Together for Sustainability (TFS), the Pharma Supply Chain Initiative (PSCI), the Responsible Mica Initiative,
and the Responsible Minerals Initiative (RMI). We call on our suppliers to allow us or trusted partners to
conduct assessments or audits to increase the transparency of our supply chain and identify fields of activity to
improve sustainability performance or mitigate infringement risks.
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Combined Management Report
Through the TfS initiative, suppliers are assessed either based on information obtained during audits or based
on self-reported and publicly accessible information provided by EcoVadis, an independent rating agency.
EcoVadis assesses suppliers from more than 175 countries and more than 200 sectors across the four
categories of Environment, Labor and Human Rights, Ethics, and Sustainable Procurement. On top of the
assessments, suppliers are also monitored through a 360-degree news watch. The results are shared among
TfS member companies in compliance with all restrictions stipulated by antitrust law.
Through the TfS initiative alone, we have access to 1,860 valid scorecards on the assessment of our suppliers
(2022: 1,700), almost 1,790 of which completed a new assessment or re-assessment in 2023 (2022: 1,100).
In some cases, these were initiated by us and in other cases by other TFS members.
Supplier Decarbonization Program
Our Supplier Decarbonization Program is a key element of achieving our Science Based Target. Through this
ten-year program that was defined as part of the decarbonization strategy in 2021, we aim to reduce
greenhouse gas emissions associated with purchased goods and services as well as capital goods.
In order to manage the large quantities of data on the CO2 emissions of our suppliers, we have an automated
carbon accounting tool in place to which we continuously add new functionalities. We offer our suppliers access
to solutions to reduce their Scope 2 emissions. In addition, we joined the Energize program as a new
sponsor. Energize is a collective initiative by a group of industry-leading pharmaceutical and fine chemical
companies that have committed themselves to engaging their suppliers to support the adoption of renewable
energy and reduce greenhouse gas emissions within their common supply chains. We offer all our suppliers the
opportunity to join the program for free and to find out more about renewable electricity options leading to
reduced Scope 2 emissions.
Mica supply chain
Together for Sustainability supplier assessments and audits
Customer Privacy¹
0
0
0
0
received from outside parties
Total number of substantiated complaints
0
2022
4
3
3
Reported violations of Data Privacy Guidelines
thereof: Merck KGaA
Merck Group
0
7
Total number of complaints from regulatory
bodies
0
Total number of identified leaks, thefts, or
losses of customer data
As a global company, we have stringent requirements for effective compliance management. Importantly, we
seek to emphasize compliance by acting in line with our company values and believe that profitable business
operations should go hand in hand with the highest ethical standards.
Compliance management
Anti-Corruption and Anti-Bribery
139
Anti-Corruption and Anti-Bribery
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0
1
0
0
0
2021
0
0
To cover these topics, we have Group-wide policies, standards and procedures in place that ensure our business
activities comply with the relevant laws, regulations and international ethical standards. Other compliance-
related issues, including the respective internal regulations and guidelines, such as Pharmacovigilance, Export
and Import Controls, and Environment, Health, Safety, Security, Quality, are managed by the responsible
functions.
0
1 These data only reflect incidents classified as significant.
о
2020
•
Our Group Compliance function is responsible for our compliance portfolio, which consists of the following
elements:
Our compliance program builds on our company values and integrates these into our compliance framework,
which consists of Group-wide policies, standards and procedures for entrepreneurial conduct. The following are
mandatory for all our employees:
Merck Code of Conduct
Human Rights Charter
Anti-Corruption Standard
Anti-Money Laundering Group Standard
Conflict of Interest Policy
Antitrust and Competition Law Policy
Our commitment: Guidelines and standards
Whistleblowing and Investigations Standard
Risk assessment
Proper compliance risk management is crucial to identify undetected risks and ensure our company remains
protected. For this purpose, we have a compliance risk assessment process covering all of our business sectors.
The assessment is based on a comprehensive risk matrix that improves objectivity and enables a data-driven
risk approach. It focuses on bribery and corruption risks, illustrated through in-depth risk categorization and
risk scenarios. It also utilizes country risk segmentation, classifying countries where we actively operate in
terms of their risk exposure regarding bribery and corruption by applying objective and consistent criteria. We
use the outcome as a model to prioritize initiatives and intensify activities in countries with higher risk levels.
Conflicts of interest
We take all potential conflicts of interest seriously. Employees must avoid situations where their professional
judgment could come into conflict with their personal interests. They must also disclose every potential conflict
of interest to their supervisor and document the disclosure. Such issues are typically resolved directly between
the employee and the supervisor but can also be routed to Human Resources, Legal, Compliance or other
relevant functions.
Management and requirements of third parties
For compliance management to be effective, it must not be restricted to the boundaries of our own company.
While our supplier management processes focus on vendor compliance with our standards, our global Third
Party Risk Management process governs interactions with sales parties, such as commercial agents,
distributors, dealers, and high-risk vendors. We expect our third parties worldwide to adhere to our compliance
principles. We collaborate only with parties who pledge to comply with relevant laws, reject all forms of bribery,
and adhere to environmental, health and safety guidelines.
We apply a risk-based approach to select the third parties with whom we do business. The greater the
estimated risk regarding a particular country, region, or type of service, the more in-depth we examine the
third party before entering into a business relationship. We also explore background information from various
databases and information reported by third parties.
If we encounter compliance concerns, we further analyze and verify the relevant information. Based on the
outcome, we decide whether to reject the potential third party, impose conditions to mitigate identified risks or
terminate the existing relationship.
Supplier Code of Conduct
140
Anti-Corruption and Anti-Bribery
Non-Financial Statement
•
Risk Assessment: Identifying internal and external critical risks in regular business operations
•
•
•
Our Group Compliance function is responsible for the framework of the following core topics: the Merck Code of
Conduct, anti-corruption and anti-bribery (including healthcare compliance, third-party due diligence,
transparency reporting), anti-money laundering, and conflicts of interest.
Policies & Procedures: Global policies, procedures and standards to mitigate identified risks
Compliance Committee/Forums: Platform for compliance-related discussion and decision making, including
relevant key functions
Training & Awareness: Appropriate training and additional measures to educate and keep awareness high
Programs & Tools: Comprehensive compliance programs and supporting tools contributing to internal
controls and overall governance
Monitoring & Reporting: Tracking of compliance-related data; perform internal and external reporting
Case Management: Timely response to reports of misconduct and implementation of corrective actions
.
Continuous Improvement: Based on and applicable to all compliance program elements
Our Chief Compliance Officer reports on the status of our compliance activities, potential risks and serious
compliance violations to the Executive Board and Supervisory Board twice a year at a minimum. As part of our
regular reporting processes, we compile a comprehensive compliance and data privacy report annually for the
Executive Board. This includes the status of our compliance program, continuous improvement initiatives and
key figures on compliance and data privacy cases. Additionally, we prepare a mid-year update to highlight
ongoing developments and the status of relevant projects and initiatives.
Our Chief Compliance Officer oversees all Compliance departments and the subordinate Compliance Officers
and Compliance experts around the world. The Compliance Officers implement our compliance program within
their respective areas of responsibility (adapting to local regulations) and receive guidance from our Group
Compliance Center of Expertise. This is a centralized body that drives the design and evolution of our
compliance program across all business sectors and Group functions.
Combined Management Report
2023
Roles and responsibilities
The Research & Development Quality and Risk Management (RDQRM) unit applies a risk-based identification
strategy to determine areas that need to be audited. Quality assurance audits are performed internally within
Healthcare R&D (for example, process audits) and externally (e.g. investigator sites and vendor audits). We
respond immediately to observations made during audits by investigating their root causes and, according to
their criticality, defining and implementing corrective and preventive actions to improve processes, prevent
reoccurrence of irregularities and ensure compliance. As planned, in 2023, RDQRM concluded most of the audits
of the Annual Audit Plan.
2023
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Patient-focused drug development
We are improving our approach to research and development by committing to patient-focused drug
development that more actively involves patients, caregivers, and their advocates in our work. Their valuable
insights into disease and treatment management will help us make more informed decisions at each stage of
the medicine development process. We aim to make our studies easy for patients to understand while ensuring
all participants have positive experiences as they contribute to our understanding of the particular disease and
its treatment. At every level of our organization and based on the function, we are additionally either offering or
mandating to educate staff about the value of a close, more consistent patient interaction and the requirements
to protect our patients' independence and privacy.
Roles and responsibilities
Clinical development, including clinical studies and their related governance processes, are the responsibility of
our Global Development unit. The Head of Global Research & Development reports to the CEO Healthcare, who
is a member of the Executive Board.
We have established two internal committees to oversee our clinical studies. The Integrated Protocol Review
Committee is responsible for the studies performed by the company on products that are under clinical
development, while the Global Medical Decision Board is responsible for our own studies with approved
products as well as for all studies performed by independent investigators and supported by us (so-called
investigator-sponsored studies). Both bodies consist of medical-scientific experts and executives with long-
standing experience in clinical research.
Before administering a new product to humans, there must be sufficient evidence that it offers a potential
therapeutic benefit, is sufficiently safe for use in humans and has a positive benefit-risk ratio. We only take the
critical step of a first-in-human clinical trial after diligently conducting extensive preclinical testing. The decision
lies with a separate committee, the Human Exposure Group, chaired by our Global Chief Medical Officer.
We continuously analyze potential risks for study participants before and during our clinical studies. Our Medical
Safety and Ethics Board (MSEB) oversees the safety of the participants in our clinical studies and, as necessary,
reviews the benefit-risk profiles of investigational products.
Our commitment: International guidelines and requirements
Our Quality Policy defines the strategic framework that ensures our products, services and systems deliver high
quality, safety and efficacy to our patients. It details the most relevant laws and codes, criteria and guidance
(e.g. for product development and manufacturing), and our senior management's responsibility to ensure
quality is embedded in everything we do.
Our Standard on Human Research provides the framework for conducting clinical studies and helps ensure we
adhere to all applicable legal, ethical and scientific standards. Further quality documents detail for instance the
strategic direction of all quality related activities or disclose our position on data privacy. In addition to the
relevant national laws and regulations, these documents also include:
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•
The Declaration of Helsinki, published by the World Medical Association,
•
Good Pharmacovigilance/Laboratory/Manufacturing/Distribution Practices (GVP/GLP/GMP/GDP),
The International Ethical Guidelines for Health-related Research Involving Humans, published by
the Council for International Organizations of Medical Sciences (CIOMS),
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The Joint Position on the Disclosure of Clinical Trial Information via Clinical Trial Registries and
Databases and the Joint Position on the Publication of Clinical Trial Results in the Scientific
Literature, published by the International Federation of Pharmaceutical Manufacturers & Associations
(IFPMA), the European Federation of Pharmaceutical Industries and Associations (EFPIA), and the
Pharmaceutical Research and Manufacturers of America (PhRMA),
The Principles for Responsible Clinical Trial Data Sharing, published by EFPIA and PhRMA, and the
IFPMA Principles for Responsible Clinical Trial Data Sharing.
Regular supervision of clinical studies
Our clinical study processes and procedures are regularly inspected by relevant regulatory authorities to verify
their compliance with applicable laws and guidelines.
Conducting clinical studies responsibly
The Good Clinical Practice (GCP) guidelines of the International Council for Harmonisation of Technical
Requirements for Pharmaceuticals for Human Use (ICH),
Every clinical study follows defined procedures to ensure it is conducted to high quality standards in line with
good working practices (GXP) for the development and manufacturing of drugs, the ethical principles of the
Declaration of Helsinki and other international guidelines and regulations. As in the previous year, in 2023,
none of the regulatory inspections conducted on our clinical research activities resulted in regulatory action.
Based on our Standard on Human Research, we aim to conduct clinical studies that adequately represent the
diverse patient populations expected to use our products once they are approved. To ensure fair, balanced and
scientifically justified study representation, we cemented our commitment to Diversity, Equity and Inclusion in
clinical trials by collaborating with healthcare providers and community advocates to eliminate common barriers
to clinical trial participation.
Protecting the safety, well-being, dignity, and rights of the patients and healthy volunteers participating in our
clinical studies is of utmost importance to us. We do not intentionally expose study participants to undue risk or
irreversible harm. Data privacy is also very important to us, and we maintain a strong focus on data protection
and confidentiality in compliance with statutory regulations.
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Prices of medicines
The prices of our products reflect the value they deliver to patients as well as broader society. We price our
products responsibly and work to prevent costs from becoming a barrier to treatment. In doing so, we strive to
deliver on our steadfast commitment to providing the broadest possible patient access. We also continue to
invest in meaningful scientific innovation to address the high number of unmet medical needs still faced by
many patients and their caregivers. Therefore, we adapt the prices of our medicines in different geographic and
socioeconomic segments according to people's ability to pay.
We acknowledge the affordability challenges many healthcare systems face amid growing financial pressures.
We recognize the unique characteristics of each health system and adapt our pricing based on local market
considerations, including unmet medical and treatment needs, health system capacity, infrastructure,
socioeconomic standards as well as affordability within the respective healthcare system and the ability of
patients to pay. We apply intra-country and inter-country equitable pricing approaches to all our brands.
This approach involves working closely with governments and other stakeholders. In addition, we continuously
monitor dynamic healthcare environments and markets, pricing and reimbursement systems as well as legal
and regulatory guidelines, adjusting our prices as necessary. We conduct annual price analyses to validate price
thresholds and provide guidance on local pricing to our subsidiaries for the following year. We aim to ensure
that they meet patient access needs by taking a consistent, data-driven approach.
To increase the availability, accessibility and affordability of our medicines in Africa, Asia, Latin America, and
the Middle East, we have adopted a new systematic approach known as the SHAPE program. This will enable us
to address these access barriers for underserved patient populations in low- and middle-income countries.
Additionally, we support innovative risk-sharing agreements and are working to improve data efficiency in
health systems to help distribute funds and resources more optimally.
Roles and responsibilities
Our Global Value Demonstration, Market Access & Pricing (GVAP) unit, formerly called GMAP, reporting directly
to a member of our Healthcare Executive Committee, evaluates market launch prices in coordination with the
respective franchises. In addition, the GVAP unit systematically evaluates our medicine portfolios and applies
equal access initiatives to them. Our local affiliates are responsible for managing prices and adapting them to
evolving local conditions in compliance with our pricing governance and the defined price approval process.
Our commitment: Medicine price guidelines and principles
The affordability of our health solutions is part of our broader patient value proposition. Our medicine pricing
adheres to the stipulations of our overarching Charter on Access to Health in Developing Countries and is
defined in detail in an internal guideline. Additionally, our Patient Access Programs Policy sets out standards for
offering medicines at affordable prices.
Value-based contracting models
Diversity, equity and inclusion in clinical trials
We are committed to advancing value-based healthcare through pricing and contracting mechanisms that
comply with applicable local laws and regulations. In collaboration with payers, such as health insurance
companies, we have developed various product- and market-specific reimbursement and contracting models.
These help to provide patients with prompt access to our innovations.
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Programs for low- and middle-income countries
We have set ambitious goals for our SHAPE program to improve access to our medicines for underserved
patient populations in low- and middle-income countries. The program covers both existing and upcoming
products, focusing on therapeutic areas such as head and neck, colorectal and bladder cancers as well as
thyroid disorders.
In 2023 we served more than 57 million patients in low- and middle-income countries with our healthcare
portfolio. Boosted by our SHAPE program, we aim to reach 80 million patients per year by 2030. As of 2023, 15
pilots have been initiated in countries such as Argentina, Brazil, Egypt, Indonesia, and Mexico as well as several
countries of Central America.
Tenders constitute a significant percentage of our global sales and are a crucial growth driver for our
established portfolio. We participate in government tenders for products used in public hospitals serving low-
income patients, often in low- and middle-income countries.
Patient access programs (PAPs) are self-sustaining commercial programs that provide registered medicinal
products for underserved populations. They primarily seek to address affordability challenges. We operate PAPS
in several countries.
Clinical studies
Our aim is to conduct high-caliber clinical research that is in compliance with applicable laws and regulations.
We set Group-wide requirements that aim to ensure that high ethical and scientific standards are met when
conducting clinical trials.
We only conduct clinical studies to investigate issues relevant to patients, healthcare professionals or society,
and only when our established methodology finds the given medicines show significant therapeutic promise and
a positive benefit-risk ratio. Accordingly, to ensure patient safety and avoid interrupting the development of
promising products, we carefully select patients based on known risk factors. These include age and
comorbidities, which we reflect in the design of our clinical studies. Notably, we only enroll the specific number
of patients needed to answer the posed scientific and medical questions. We reconcile and review the safety
reports from our clinical studies and marketed products and immediately address any unforeseen risks. Senior
boards such as the Pharmacovigilance Advisory Board and the Medical Safety and Ethics Board maintain
oversight of any emerging safety concerns. In addition, cross-functional Benefit Risk Assessment teams adapt
the benefit-risk assessment and development strategy of each product to ensure it delivers maximum safety
and efficacy to our patients. In addition, a sound, established scientific methodology must be available to
investigate these scientific or medical questions.
In 2023, we continued to implement and maintain innovative risk-sharing agreements (RSAs) that provide
immediate access to MavencladⓇ for patients with multiple sclerosis (MS). We broadened access to this
medicine through specific agreements in eligible countries across Europe, Latin America and the Middle East
including Argentina, Hungary, Kuwait, South Africa and the United Arab Emirates.
Disclosure of clinical studies and publication of results
For some of our existing high-quality products, we offer second brands at affordable prices, particularly in
countries with a large percentage of low-income patients.
Enabling early access to new medicines
As a company, we want to position ourselves in the digital ethics sphere. We are therefore developing clear
ethical standards in this new field, primarily for critical areas, for instance handling health data. In this effort,
we collaborate with various stakeholders and experts.
Together with the DEAP, we apply our Code of Digital Ethics (CODE) in order to address questions pertaining to
the ethical use of data and algorithms. The CODE serves as a guideline for our digital business models, as a tool
for analyzing ethical challenges, and a basis for practical DEAP recommendations. As one of our overarching
governance documents, it applies to all employees and is publicly accessible as well.
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Developments in the field of generative AI, for instance ChatGPT, are growing in importance. All our business
sectors are developing applications based on generative AI. To apply these innovative technologies responsibly
and to the benefit of all, an ethical framework is currently being developed. The DEAP is intensively evaluating
the guidelines. The aim is to roll out this framework company-wide in 2024.
Ethical use of data and algorithms
In June 2023, online training on the CODE was assigned to approximately 12,000 managers with personnel
responsibility who can access the training in eight languages via our internal training platform. In addition, an
advanced training course is available specifically for employees working in the fields of data science, AI and
other digital areas of specialization. The course serves to illustrate the importance of the CODE and empowers
participants to make responsible decisions concerning the ethical aspects of data use and algorithms in digital
products and business models.
Since 2022, we have been looking at potential ethical risks that could result from projects by the Life Science
Data Intelligence and Analytics unit of our Life Science business sector with the aim of developing suitable
processes. The unit analyzes data from the business sector in order to obtain insights for our business.
Data privacy and cyber security
The mandate and goal of our Group Data Privacy unit is to mitigate risks and create a global framework for
data privacy-compliant business operations. This unit helps train our employees to handle data responsibly and
with clear accountability. It safeguards our company by providing data privacy risk assurance and ensuring
compliance with relevant data privacy laws globally. Group Data Privacy also contributes to creating value for
the development of digital business models.
It is of critical importance to our business to protect our information systems, their contents and our
communication channels against any criminal or unwanted activities. These include e-crime and cyberattacks,
such as unauthorized access, information leakage and misuse of data or systems.
Our commitment: Guidelines and standards
Roles and responsibilities
Our Cyber Security organization strengthens resilience against cyberattacks and data breaches. It defines
policies and standards for cyber security (including data security) while providing oversight, tools and systems
to manage and monitor our overall cyber security risk exposure. The organization is also responsible for
providing cyber security monitoring and incident response capabilities across the entire company. Additionally,
we train our employees on how to protect data properly.
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Our commitment: Guidelines and standards
Our Data Privacy Policy and the corresponding standards and procedures define our principles for processing
personal data. This approach allows us to achieve a high level of data protection for our employees, contract
partners, customers, and suppliers as well as patients and participants in clinical studies. Our Group-wide
understanding of data privacy is based on European legislation, in particular the European Union General Data
Protection Regulation (EU GDPR). We are also taking steps to meet local data privacy requirements, where
these are stricter than our Group-wide standards.
Our Group cyber security governance framework contains organizational, process-related and technical
information security countermeasures based on recognized international standards. In addition, we apply
harmonized electronic and physical security controls (e.g. access controls and security monitoring) to bolster
our ability to securely handle sensitive data, such as trade secrets.
Training and IT tools
In line with the EU GDPR and our global approach to data privacy, we regularly conduct e-learning training
courses in ten languages. In 2023, the completion rate for our e-learning courses was 99%.
We maintain a central IT tool to provide a single source for data privacy processes, such as registering data
processing activities and reporting potential data privacy incidents. In 2023, we reported seven cases of minor
personal data breaches to the supervisory authority. One of them related to identified data leaks, theft, or loss
of customer data. However, none of these cases were sanctioned.
We are obligated to disclose findings from our clinical studies. We strive to do this publicly in a complete,
accurate, balanced, transparent, and timely manner as laid out in our Standard on Clinical Trial Data
Transparency. We publish results from our clinical studies in medical journals in line with applicable laws and
industry codes. In particular, we adhere to the current version of the Good Publication Practice (GPP3) and
align with the recommendations of the International Committee of Medical Journal Editors (ICMJE). Our
Standard on Clinical Trial Data Transparency underscores our strong commitment in this area.
Data Privacy
Group Data Privacy is an independent function, organizationally integrated into Group Compliance and Data
Privacy. We have a Group Data Privacy Officer and a network of local Data Privacy Officers at various sites
Group-wide. In line with external regulations, the Data Privacy Officers and their respective teams act
independently and without receiving internal or external instructions. Group Data Privacy regularly prepares
data privacy updates and a comprehensive data privacy report. This report is submitted to the Executive Board
and the Supervisory Board.
The panel comprises external international science and industry experts from the fields of digital ethics, law, Big
Data technologies, digital health, medicine, and data governance. In addition, we involve bioethics experts as
well as representatives from patient organizations as needed. The DEAP has its mandate from the Executive
Board; our employees may submit topics for the panel to discuss. As in the previous year, the panel held four
meetings in 2023. These focused on issues concerning the use of generative AI. Summary minutes of the DEAP
meetings have been accessible on our intranet since 2023 insofar as they do not contain any business secrets.
They also document the recommendations issued.
Cyber security is part of our Group Corporate Security Office. In addition, we have a Group Chief Information
Security Officer and a network of Information Security Officers within the business sectors and Group functions
who hold risk ownership, act as our first line of cyber security defense and are supported by dedicated
networks. Our global Cyber Security function acts as a second line of defense and has responsibilities regarding
cyber security risk governance and oversight. Our third line of defense consists of internal audits.
Roles and responsibilities
Combined Management Report
Not all patients have the opportunity to take part in a clinical study and must therefore wait for a new
pharmaceutical product to be approved. Through our Early Access Program, we can, under specific
circumstances, enable patients to gain early access to new, potentially life-saving products. The offer is aimed
at people with serious conditions who have already received all available therapies without success. It allows
them to be treated with products that have already been clinically tested but have not yet been approved.
Furthermore, we offer patients who participated in one of our clinical studies post-study access to the
investigational product, provided that certain conditions are met. Here, too, we meet stringent statutory, ethical
and scientific standards. By performing a thorough assessment of all available data, we ensure that the
potential benefits outweigh the potential risks for patients.
One of the main tasks of the DEAP is to support us in developing digital applications responsibly while
addressing ethics questions that could result from collecting and processing data as well as from the use of
these innovative technologies. It issues recommendations for our entrepreneurial activities.
Non-Financial Statement
Social Matters and Respect for Human Rights
135
Bioethics
-
Roles and responsibilities
Since 2010, the Merck Ethics Advisory Panel for Science and Technology (MEAP) has been making clear
recommendations on ethical questions in science and technology as well as on questions extending beyond the
field of traditional bioethics, in line with our transformation into a science and technology company. The
recommendations of the MEAP guide our actions and business activities.
The members of the MEAP are renowned international experts from the fields of bioethics, medicine,
philosophy, law, and the natural sciences as well as technology and sustainability. The MEAP has its mandate
from the Executive Board and is chaired jointly by the two members of the Executive Board with responsibility
for the Healthcare and Life Science business sectors.
All employees may address their concerns to the Bioethics team via our compliance hotline and a dedicated
e-mail address (accessible via the intranet).
A further board, the Stem Cell Oversight Committee (SCROC), reviews and decides on all planned in-house
research activities involving the use of human embryonal or pluripotent stem cells, ensuring compliance with legal
requirements as well as our ethical guidelines. This also applies to joint projects with external partners. Up until
the end of 2022, the SCROC consisted of internal experts from our business sectors as well as external advisors
from the fields of bioethics, medicine, and law. In 2023 and in line with a resolution by the MEAP, we transformed
the SCROC into a primarily internal board. The reason for this is that research plans that call for separate
committee approval pursuant to the SCROC charter are currently not being carried out within the company.
Furthermore, for ethical questions arising for instance in the context of forward-looking business decisions,
targeted Ethics Foresight projects can be initiated. We specifically engage external experts to work on these
projects. No Ethics Foresight projects were commissioned in 2023.
Our goal is to conduct research in a responsible manner, which is why we develop ethical guidelines - also in
close collaboration with external experts in order to make well-founded decisions for responsible research.
Moreover, we discuss in our committees the ethical aspects of providing products such as organoids for both
academic research purposes and the biopharmaceutical industry. We carefully evaluate our position when it
comes to controversial topics. We always prioritize the well-being of and benefit for various groups of patients,
whether in clinical studies or during treatment with our medicines.
Our Genome Editing Principle provides a binding ethical and operational framework for our employees. Apart
from our position on genome editing, it includes information on human germline editing. It sets clear
boundaries for us both as a supplier of customized CRISPR/Cas nucleases and genetically modified cell lines and
as a company that uses genome editing technologies in our research.
We neither participate in clinical programs that utilize human embryonic stem cells or cloned human cells for
the treatment of diseases, nor do we pursue such approaches ourselves. However, we use human embryonic
stem cells in our research and offer our customers several select stem cell lines. In both applications, we allow
the use of human embryonic stem cells only if clearly defined conditions have been met. For instance, we only
utilize stem cells for research purposes if our SCROC has reviewed the respective project and given approval. In
fiscal 2023, no projects required the approval of the SCROC (2022: one project). We exclusively make use of
cell lines that have been approved by the United States National Institutes of Health (NIH) and are allowed
under the German Embryo Protection Act as well as the German Stem Cell Law.
Our commitment to policies and standards
Stem cell research
"In accordance with the German Embryo Protection Act, we do not support the use of genome editing in human
embryos and clinical applications of germline interventions in humans. We recognize that there may be value in
responsibly conducted related research."
As it is our aim is to develop and use new digital technologies responsibly, we evaluate ethical issues that may
arise from algorithms, artificial intelligence (AI) and data-based business models in an early stage. Since 2021,
the Merck Digital Ethics Advisory Panel (DEAP) has been focusing on complex ethical issues surrounding digital
technologies.
CRISPR/Cas opens up new possibilities in genetic engineering research that could bring about major advances
in the treatment of serious diseases. Laws in different countries allow for a varying degree of latitude in
applying this technique. Bioethical positions on germline editing have been evolving for years through academic
and social discourse. Our position on human germline editing is as follows:
Digital ethics
136
Non-Financial Statement Social Matters and Respect for Human Rights
Combined Management Report
This is complemented by further guidelines that form the ethical framework of our research and business
activities. Our Stem Cell Principle sets the ethical boundaries for the use of human stem cells in our research.
Our Fertility Principle regulates our fertility treatment and in-vitro fertilization research activities.
Using genome-editing techniques
Sustainable innovation and technology
Today, our products are already having positive impact on human progress and global health, namely our
medicines and our biological and chemical innovations that utilize the latest technologies. We want to
continuously improve the way we measure our progress by adapting to upcoming regulations and integrating
quantitative sustainability criteria into our product development processes across all business sectors.
In 2023, we continued our partnership with the patent information platform LexisNexis® PatentSightⓇ and
evaluated the sustainability impact of our intellectual property. In the reporting year, 29% (2022: 40%) of our
patent families published had a positive sustainability impact. However, this key indicator is not comparable
with the previous year's figure as LexisNexis® PatentSight® updated the underlying evaluation methodology.
Roles and responsibilities
The organizational set-up of our R&D activities reflects the overall structure of our company. All three of our
business sectors operate in independent R&D units that pursue their own innovation strategies. Group
Corporate Sustainability supports our business sectors and Group functions to advance sustainability within the
R&D and innovation processes. This includes the coordination and alignment of common core sustainability
criteria in line with our shared goals as well as quality and quantification requirements. In 2022, we created a
Group-wide dashboard, showing the potential contribution of our R&D portfolio to sustainable solutions. In
2023, we integrated a procedure describing the global sustainability evaluation in our R&D process.
Other Topics
The sustainable innovation that we envision and drive forward must align with and support the three goals of
our sustainability strategy. We define sustainable innovation as new or improved products, services,
technologies, or processes that generate economic benefits and have positive environmental and social
impacts. Therefore, we develop long-term solutions for our innovation and research activities that consider the
entire value chain and evaluate each product's impact over its lifecycle.
Combined Management Report Non-Financial Statement Other Topics
Our venture capital fund, M Ventures, prioritizes sustainable innovations through equity investments. The
fund's mandate is to invest in innovative technologies and products that have the potential to significantly
impact our core business areas. In addition, the fund focuses on investments in two areas of high strategic
relevance to our company: digital technology and sustainability.
M Ventures' sustainability investment strategy follows two fundamental approaches. First, it invests in
sustainable solutions relevant to our three business sectors, such as novel solutions for reducing emissions and
waste, green life science technologies and green electronics technologies. These solutions may be more energy-
or resource-efficient or may create products designed for circularity or with a lower carbon footprint. As many
of these technologies are still in their early stages, M Ventures is partnering with SEMI.org along with the
leading corporate venture capital funds to help accelerate the innovation and adoption of potential sustainable
semiconductor solutions. The second approach involves making investments that leverage our core
competencies to drive sustainability in other markets. These may include start-ups addressing sustainable
foods, bio-manufacturing or carbon capture and utilization.
145
Our commitment: Aiming for circularity
We have dedicated corporate resources for our circular economy strategy and we are driving several circular
economy pilots and initiatives throughout the organization. In addition, we held a global circular economy
summit to provide a platform for best practice sharing with internal and external participants.
144
Within our R&D processes, we are committed to continuously improving and integrating sustainability and
circular economy criteria to assess the sustainability performance of our products and portfolio, enabling us to
create more sustainable products for our customers and society. We have integrated and tailored Design for
Sustainability (DFS) across all business sectors and use our overarching dashboard to monitor progress on key
sustainability criteria. In 2023, we assessed almost all relevant R&D projects and thus enhanced transparency
around the sustainability performance of our global R&D portfolio. We integrated a sustainability in R&D key
indicator to track progress and continued advancing the use of evaluation tools such as DOZN™ and
GreenSpeed. We aim to combine the insights from the R&D dashboard with those gained from our commercial
portfolio evaluation to steer our future R&D activities.
Our Group Science & Technology Office leads the implementation of our combined strategy for innovation as
well as data and digital, enabling innovation across our business sectors while harnessing the power of
advanced data and digital capacities. It aims to identify and integrate transformative and strategically relevant
technology trends into our business sectors while maintaining a Group-wide overview of our technology
roadmap and innovation portfolio. Fostering data and digital capacities is key to accelerating sustainable
innovation and enabling rapid action and personalized offerings. Innovation projects are incubated either
through our corporate innovation teams or in the business sectors.
Other Topics
Healthcare Ethical Guiding Principles
Combined Management Report
In addition to applicable laws and our own internal standards, we also strive to comply with the codes of
conduct of various international industry organizations, such as the Code of Practice published by the
International Federation of Pharmaceutical Manufacturers & Associations (IFPMA) and the Code of Practice of
the European Federation of Pharmaceutical Industries and Associations (EFPIA) or the regulations of the U.S.
Pharmaceutical Research and Manufacturers of America (PhRMA).
Combined Management Report
Moreover, we apply various specific internal rules and regulations:
•
Pharma Code for Conducting Pharmaceutical Business and Pharmaceutical Operations (Pharma Code)
•
•
Non-Financial Statement
Standard on Medical Activities
•
Policy on Interactions with Patients, Patient Opinion Leaders, and Patient Organizations
Guideline Good Practice and Process Guidance: Engagement with Patients, Patient Opinion Leaders, and
Patient Organizations
Transparent reporting
We publish the financial and non-financial contributions we make to healthcare stakeholders in the healthcare
industry, such as healthcare professionals and healthcare organizations, as appropriate and in accordance with
local laws and codes. The published information includes the names of individual recipients, their addresses, the
purpose, and the contributed amount or value as required by the applicable laws and codes. In addition, before
publishing, we secure all necessary informed consent forms, as required by the applicable data privacy
regulations.
Regular employee training
In 2023, we continued our Code of Conduct training curriculum on managing dilemmas in sector-specific
situations. Moreover, employees who are responsible for the promotion of our pharmaceutical products receive
regular training on current guidelines. Depending on their roles and responsibilities, new employees participate
in onboarding training dealing with the review and approval of promotional materials. Based on their roles and
responsibilities and in order to remain up-to-date, employees participate in mandatory e-learning courses and
classroom training on our policies and guidelines as well as important changes to the reporting requirements for
transfers of value.
For the collaboration with patient organizations:
Non-Financial Statement Other Topics
Transport by motorbikes, passenger cars and light commercial vehicles (activity 6.5 of the Delegated Act on
the "climate change mitigation" environmental objective), and
Reporting in accordance with the EU Taxonomy
Regulation
Capital expenditure that relates to assets or processes associated with taxonomy-aligned economic
activities (category A),
Capital expenditure that is part of a plan to expand taxonomy-aligned economic activities or to transform
taxonomy-eligible economic activities into taxonomy-aligned economic activities (category B), and
Capital expenditure related to the acquisition of products from taxonomy-eligible economic activities and
individual measures that carry out the target activities in a low-carbon manner or reduce greenhouse gas
emissions (category C).
As Merck, owing to its business model, only engages in taxonomy-eligible economic activities in conjunction
with the manufacture of active pharmaceutical ingredients, manufacture of medical products, the manufacture
of electrical and electronic equipment and, to a small extent, the manufacture of energy-efficient building
equipment, it has only limited taxonomy-eligible capital expenditure in category A. There is no capital
expenditure in category B to date as Merck does not prepare any capital spending plans to transform
taxonomy-eligible economic activities into taxonomy-aligned economic activities. Furthermore, Merck has
capital expenditure resulting from the acquisition of products classified as taxonomy-eligible economic activities
or attributable to qualifying individual measures (category C). In order to be taxonomy-eligible, this capital
expenditure must correspond to one of the economic activities named in the Delegated Acts and be
implemented and operational within 18 months.
At Merck, such capital expenditure exists especially in connection with the environmental objective of climate
change mitigation in the following areas:
Electricity generation using solar photovoltaic technology (activity 4.1 of the Delegated Act on the "climate
change mitigation" environmental objective),
Renovation of existing buildings (activity 7.2 of the Delegated Act on the "climate change mitigation"
environmental objective and activity 3.2 of the Delegated Act on the "circular economy" environmental
objective).
Combined Management Report
Non-Financial Statement
Other Topics
148
Determination of taxonomy alignment
Technical screening criteria
In order to check the taxonomy alignment of the taxonomy-eligible economic activities, the relevant regulations
for the technical screening criteria under which certain economic activities qualify as contributing substantially
to the environmental objective as well as for determining whether the activity causes no significant harm to any
of the other environmental objectives were systematically analyzed. The basis for this was the Delegated Acts
on the EU Taxonomy, which were used for the identification of taxonomy-eligible economic activities. In these,
corresponding requirements are defined for the respective economic activities, which must be fulfilled for a
classification as taxonomy-aligned. For this purpose, interviews were conducted with business and project
managers and the physical climate risks at the sites were analyzed. Furthermore, operating permits, product
data sheets, environmental product declarations, energy performance certificates and internal training
documents were inspected, among other things.
Our commitment: Group-wide guidelines and industry standards
•
With respect to capital expenditure, the EU Taxonomy Regulation differentiates between three categories of
capital expenditure:
Manufacture of electrical and electronic equipment in the Life Science business sector (environmental
objective "transition to a circular economy").
Manufacture of medical products in the Healthcare business sector (environmental objective "pollution
prevention and control"), and
Fundamentals
The EU taxonomy for sustainable activities (hereinafter "EU Taxonomy") is a classification system that translates
the climate and environmental objectives of the European Union (EU) into criteria for sustainable economic
activities. For this purpose, the EU Taxonomy defines various key performance indicators and qualitative
information that Merck must disclose. The introduction of the disclosure obligation under Article 8 of Regulation
(EU) 2020/852 of the European Parliament and of the European Council dated June 18, 2020 on establishing a
framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 (hereinafter "EU
Taxonomy Regulation") and the Delegated Acts adopted in this regard is being carried out in multiple phases:
For the 2021 reporting period, key performance indicators were stated only for so-called taxonomy-eligible
economic activities and were limited to those that make a substantial contribution to climate change
mitigation or climate change adaptation as defined by the EU Taxonomy Regulation. An economic activity
qualifies as taxonomy-eligible if it is within the scope of the EU Taxonomy.
For the 2022 reporting period, apart from the degree of taxonomy-eligible economic activities making a
substantial contribution to climate change mitigation or climate change adaptation within the meaning of
the EU Taxonomy Regulation, it is also necessary to report the taxonomy-aligned share of the identified
economic activities. According to the EU Taxonomy, an economic activity qualifies as taxonomy-aligned if it
is taxonomy-eligible and makes a substantial contribution to one or more of the environmental objectives
without doing significant harm to the other objectives or failing to fulfill minimum social standards.
As well as the aforementioned information, the degree of taxonomy-eligible economic activities making a
substantial contribution to the following four additional environmental objectives of the EU will be included in
the disclosure obligation from the 2023 reporting period: 1) sustainable use and protection of water and
marine resources, 2) transition to a circular economy, 3) pollution prevention and control, and 4) protection
and restoration of biodiversity and ecosystems. Furthermore, new economic activities for the environmental
objectives of climate change mitigation and climate change adaptation have been added for which the degree
of taxonomy eligibility will be required to be disclosed in the 2023 reporting year. Reporting on the degree of
taxonomy alignment for the newly added environmental objectives is not planned for the time being.
From the 2024 reporting year, the degree of taxonomy eligibility and the degree of taxonomy alignment
will have to be reported for all six environmental objectives.
Approach
146
To ensure the legally compliant fulfillment of its disclosure obligations, Merck has established an interdisciplinary
project team that is continuously analyzing the existence of taxonomy-eligible and taxonomy-aligned activities in
close coordination with the representatives of the business sectors and various Group functions.
Combined Management Report
Non-Financial Statement Other Topics
147
As a result of this process, taxonomy-eligible activities generating net sales were identified only in conjunction
with the following economic activities:
•
Manufacture of energy-efficient building equipment in the Electronics business sector (environmental
objective "climate change mitigation"),
Manufacture of active pharmaceutical ingredients in the Healthcare and Life Science business sectors
(environmental objective "pollution prevention and control"),
In the course of implementing the EU Taxonomy requirements, the business model of Merck underwent a
comprehensive analysis. Taxonomy-eligible economic activities were identified in line with a top-down approach
using structured inquiries submitted to the relevant specialist departments. For the environmental objectives of
climate change mitigation and climate change adaptation, the results of this analysis were supplemented by big
data-supported analyses as part of a bottom-up approach. Among other things, information was used that can
also be found in connection with the requirements of the REACH regulation as well as in the context of customs
declarations. The economic activities for the other four environmental objectives were also identified by
reference to existing reporting structures and hierarchies.
143
2020
Combined Management Report
Merck
Group
2023
thereof:
Merck KGaA
Total number of reported compliance violations
Number of reported compliance incidents
Number of confirmed cases
81
79
79
106
9
41
42
28
32
1
2022
2021
Net sales, capital expenditure and operating expenditure in connection with the "climate change mitigation"
environmental objective were identified as taxonomy-aligned economic activities to a very small extent only. No
additional taxonomy-eligible and taxonomy-aligned net sales, capital expenditure or operating expenditure
were identified for the "climate change adaptation" environmental objective. From 2024, the degree of
taxonomy alignment will have to be reported for the other four environmental objectives in addition to the
degree of taxonomy eligibility. Based on the information currently available, the degree of taxonomy alignment
for the other four environmental objectives will also be very low. A more accurate statement is not yet possible
owing to the uncertain questions regarding the interpretation of the regulations and the current progress of the
project.
2023
141
Combined Management Report
Non-Financial Statement Anti-Corruption and Anti-Bribery
Compliance training
We provide regular compliance training (both classroom and online) on our Code of Conduct and critical
compliance topics such as anti-corruption, conflict of interest, antitrust, data privacy, anti-money laundering
and healthcare compliance standards. We require employees to take these courses based on their exposure to
risk. Some courses also apply to independent contractors and supervised workers, such as temporary
employees. In 2023, we launched a new Anti-Corruption, Anti-Bribery and Anti-Money Laundering e-learning
course based on the updated Global Anti-Corruption and Anti-Money Laundering standards introduced in 2022.
Anti-money laundering
We have implemented a global anti-money laundering (AML) program consisting of a global Anti-Money
Laundering Group Standard, training and a dedicated process to report and investigate red flags and any high-
risk transactions. Suspicious transactions are reported to the German Financial Intelligence Unit or other
authorities as required. We continuously work to improve our AML program. Following in-depth AML risk
assessments of jurisdictions with stricter regulatory frameworks than our AML program, we implemented
additional local AML programs where required.
Reporting potential compliance violations
Confirmed cases by category
We encourage all employees worldwide to report potential compliance violations. Depending on the type of
misconduct and the reporting person's preference, they can choose from various reporting channels. We
recommend using one of our central channels that are directly received and reviewed by a dedicated,
independent and qualified team within Group Compliance. Depending on the nature, content and type of report,
Compliance may investigate a submission directly or assign it to another responsible function for further
investigation. One central reporting channel is our global whistleblowing compliance hotline, which can be used
free of charge and anonymously to report violations. It is available in several languages by telephone or as a
web-based application. The compliance hotline is also available to external stakeholders. The relevant
information can be found in the "contact us" and the Compliance and Ethics section of our website.
In all Compliance-relevant cases, based on the investigation outcome and recommendations from Compliance
or the Compliance Case Committee, we aim to take appropriate remediation measures. These can include
disciplinary actions against employees who have committed a compliance violation. If the investigation
identifies a root cause that could lead to the risk of further compliance violations, we take additional preventive
and corrective actions.
Both the number of new Compliance-relevant cases and the number of cases with confirmed compliance
violations increased compared with the previous year. In 2023, 106 Compliance-relevant new cases with
reports via the compliance hotline and other channels were created. In 32 concluded cases, it was confirmed
that the principles of the Code of Conduct or other internal or external guidelines had been violated.
Combined Management Report
Non-Financial Statement
Anti-Corruption and Anti-Bribery
142
Reported compliance violations
Compliance-relevant cases with a particular risk profile are presented to the Compliance Case Committee,
comprising senior members of our Compliance, Legal, Data Privacy, Internal Auditing, and Human Resources
departments. The Committee's duties include assessing and classifying specific compliance issues and
addressing identified issues using appropriate measures.
Non-Financial Statement Anti-Corruption and Anti-Bribery
Bribery and corruption
1
Other violations of Merck values, internal guidelines or
legal requirements
24
35
12
25
1
Compliance audits
Compliance is ensured by Group Compliance and Group Internal Auditing as the second and third lines of
defense. As part of the audits, Group Internal Auditing regularly reviews functions, processes and legal entities
worldwide. These reviews include an assessment of the effectiveness of the respective compliance guidelines,
processes and structures in place. The units also check for violations of our Code of Conduct, Anti-Corruption
Standard, Anti-Money Laundering Group Standard, and Antitrust and Competition Law Policy.
Our audit planning aims to provide comprehensive risk assurance through the best possible audit coverage of
our processes, countries and projects. We take a risk-based approach to our annual audit planning process,
considering factors such as sales, employee headcount, systematic stakeholder feedback and the Corruption
Perceptions Index (CPI) published by the non-governmental organization Transparency International. If an
internal audit gives rise to recommendations, Group Internal Auditing performs a systematic follow-up and
monitors the implementation of the recommended corrective actions. In 2023, Group Internal Auditing
conducted 80 internal audits involving bribery and corruption-related risks (2022: 79), including 52 operational
and 27 IT audits and 1 special audit which may be conducted to meet legal requirements.
Interactions with health systems
We support health systems by collaborating with our healthcare stakeholders, such as professional medical
associations, patient and carer organizations, university clinics and other institutions that provide healthcare.
We follow clearly defined internal approval requirements and procedures for each type of interaction, in line
with applicable laws and codes. In countries with statutory or industry obligations on the disclosure of transfers
of value to healthcare stakeholders, we aim to comply with these obligations.
In some countries we inform consumers directly. For example, in the United States direct-to-consumer (DTC)
advertising for prescription medicines is permitted. In line with applicable local laws, we use DTC advertising in
these countries to help increase people's awareness of certain diseases and the available therapies.
Roles and responsibilities
For all interactions with healthcare stakeholders, we have established internal policies and review processes and
tools, such as record-keeping systems. Thereby, we want to ensure adherence to statutory requirements and
transparency obligations.
Our Global Regulatory Affairs unit has established a dedicated standard and corresponding process document
on the review and approval of our promotional materials for our Healthcare business sector. At the operational
level, the relevant business and all employees involved in our sales and marketing activities must adhere to our
internal policies, standards and procedures. To ensure that all promotional materials meet our standards as well
as local regulations end-to-end, we apply a harmonized Group-wide review and approval system.
0
3
2
0
2
1
0
Violation of cartel laws and fair competition rules
0
0
1
6
0
Fraudulent actions against Merck
11
6
11
0
Other violations of the Merck Compliance Principles for
the relations with business partners
0
0
Minimum safeguards
Identification of taxonomy-eligible economic activities
149
Operating expenditure
In order to exclude double counting, capital expenditure on products from taxonomy-aligned economic activities
and individual measures that have already been checked under category A (i.e. capital expenditure that relates
to assets or processes associated with taxonomy-aligned economic activities) are included under this category
only. Against this background, capital expenditure for production buildings, for example, is subject to a
taxonomy-eligibility check under category A only, while capital expenditure for administrative buildings is
included under category C.
changes in property, plant and equipment and intangible assets disclosed in the consolidated financial
statements (see Note (20) "Property, Plant and Equipment” and Note (19) "Other Intangible Assets" in
the Notes to the Consolidated Financial Statements).
150
Non-Financial Statement Other Topics
Combined Management Report
The share of capital expenditure on assets or processes associated with economic activities classified as
taxonomy-eligible or taxonomy-aligned is determined as follows: Share of total capital expenditure that is
taxonomy-eligible or taxonomy-aligned divided by total capital expenditure according to the EU Taxonomy
Regulation. At Merck and within the meaning of the EU Taxonomy Regulation, capital expenditure in the
reporting period comprises additions to property, plant and equipment (IAS 16), rights of use from leases
(IFRS 16), and intangible assets (IAS 38) with the exception of goodwill. Apart from the additions, advance
payments for the named assets are also included. The denominator also includes additions to property, plant
and equipment and intangible assets resulting from business combinations. The additions can be seen in the
Capital expenditure
The net sales KPI represents the ratio of net sales from taxonomy-eligible or taxonomy-aligned economic
activities in a fiscal year to the total net sales of the same fiscal year. The definition of relevant net sales for the
purposes of the EU Taxonomy Regulation corresponds to the definition of net sales in the consolidated financial
statements (see Note (9) "Net sales” in the Notes to the Consolidated Financial Statements).
Net sales
In the area of fossil gas, Merck operates a gas turbine and a co-generation facility to generate electricity and
heat from fossil gaseous fuels. The facilities serve to generate our own power and heat. These activities in the
area of electricity generation from fossil gaseous fuels as well as the operation of co-generation units with fossil
gaseous fuels have been classified as not material. Additional activities in the field of nuclear energy and fossil
gas are not performed or are performed to an insignificant extent only.
The purchase or performance of contract manufacturing services for active pharmaceutical ingredients or
medical products in the Healthcare and Life Science business sectors typically does not give rise to a taxonomy-
eligible economic activity, as Merck does not control the circumstances under which the contract manufacturing
is performed in many cases.
To check the taxonomy eligibility of an economic activity, Merck applies an end-product oriented approach for
manufacturing-related activities. This means that the end product must result from one of the economic
activities specified in the Delegated Act in order to qualify as being taxonomy-eligible. In the case of organic
basic chemicals, the corresponding economic activities qualify as taxonomy-eligible in the interpretation of
Merck only if the manufacturing activities of the named chemical products involve a significant transformation
process. In our interpretation, products that are merely passed on for sale, repackaged or mixed do not qualify
as taxonomy-eligible within the meaning of the EU Taxonomy Regulation.
Ancillary activities that are operationally necessary for our core business do not qualify as independent
taxonomy-eligible economic activities. This applies, for example, to the transport of our products to our
customers, research and development activities, and the acquisition or construction of production buildings in
areas that cannot be allocated to a taxonomy-eligible target activity.
Taxonomy eligibility
The EU Taxonomy Regulation and the corresponding Delegated Acts contain wording and requirements which,
even taking into account the supplementary publications of the EU Commission and the "EU Platform on
Sustainable Finance", are subject to interpretation and/or for which clarifications have not yet been published in
every case. The most significant interpretive issues and Merck's approach are presented below.
The minimum safeguard frameworks include the OECD Guidelines for Multinational Enterprises, the United
Nations Guiding Principles on Business and Human Rights, the fundamental conventions of the International
Labour Organization, and the International Bill of Human Rights. The requirements profile of the frameworks
was systematized and compared with internal documents. This included an analysis of the Code of Conduct,
work instructions, guidelines and training documents. Compliance with the due diligence process required by
the framework in the area of human rights is ensured with respect to the individual business activities. Risk
analyses are carried out with regard to the minimum safeguard requirements and appropriate measures are
derived from these.
Combined Management Report
Non-Financial Statement
Other Topics
Accounting and measurement policies
The share of operating expenditure for assets or processes associated with economic activities classified as
taxonomy-eligible or taxonomy-aligned is determined as follows: Share of total operating expenditure that is
taxonomy-eligible or taxonomy-aligned divided by total operating expenditure according to the EU Taxonomy
Regulation. Operating expenditure relevant within the scope of reporting under the EU Taxonomy Regulation
includes direct, non-capitalized research and development costs, low-value leases, building renovations,
maintenance and repair, and all other direct internal and external expenses related to the day-to-day
maintenance of property, plant and equipment that are necessary to ensure the continuous and effective
functioning of these assets. During the clinical and preclinical development phases in the Healthcare business
sector, it is unclear as to whether the activities will ever lead to regulatory approval and hence to marketable
products. Accordingly, the corresponding research and development activities have not been included as
taxonomy-eligible operating expenditure in the numerator for the economic activities of pharmaceutical
ingredients and medical products.
Taxonomy KPIS
The following tables present the share of sales, capital expenditure and operating expenditure attributable to
taxonomy-eligible and taxonomy-aligned economic activities in respect of the environmental objective "climate
change mitigation". The tables also contain information on the share of taxonomy-eligible economic activities
for the four additional environmental objectives:
The three key performance indicators (KPIs), namely net sales, capital expenditure and operating expenditure,
were mainly derived from existing financial reporting systems; for capital expenditure inquiries were made to
the Investment Controlling unit in some instances. The principle of materiality was applied.
Determination of the taxonomy KPIS
Climate change
Water
Pollution
Circular
economy
Biodiversity
Minimum
safeguards
activity activity
al
Criteria for a substantial contribution
CapEx
2022
eligible
aligned or
taxonomy
of
Proportion
Non-Financial Statement _ Other Topics
Combined Management Report
("Do no significant harm")
DNSH criteria
enabling
Category
Category transition-
Of which transitional
Economic activities
for buildings (A1)
Manufacture of energy efficiency equipment
A. TAXONOMY-ELIGIBLE ACTIVITIES
A.1. Environmentally sustainable activities
(taxonomy-aligned)
CCM 3.5
1881 33 3 3 3 28
28.49 0.03
- 27.99 0.47
0.47 N/EL N/EL N/EL N/EL EL N/EL
Turnover of environmentally sustainable
N/EL N/EL N/EL N/EL N/EL N/EL
EL;
0.03 0.03
Y N/EL N/EL N/EL N/EL N/EL
།་།་༄༅༅།།
151
Non-Financial Statement _ Other Topics
Combined Management Report_
T
EL; EL; EL; EL;
activities (taxonomy-aligned) (A.1)
Of which enabling
Of which transitional
Total (A + B)
20,993 100.00
Turnover of taxonomy-non-eligible
activities (B)
B. TAXONOMY-NON-ELIGIBLE ACTIVITIES
A. Turnover of taxonomy eligible activities
(A.1 + A.2)
- 27.99 0.47
but not environmentally sustainable activities
(not taxonomy-aligned activities) (A.2)
Turnover of taxonomy-eligible
CE 1.2
EL N/EL N/EL
EL N/EL N/EL
0.47 N/EL N/EL N/EL
27.52 N/EL N/EL N/EL
PPC 1.1
PPC 1.2
Manufacture of medicinal products
Manufacture of electrical and electronic
equipment
Manufacture of active pharmaceutical
ingredients (API) or active substances
(not taxonomy-aligned activities)
sustainable activities
environmentally
A.2 Taxonomy-eligible, but not
adaptation
Climate change
mitigation
Biodiversity
548
-43.2
Personnel expenses
-581
-1,256
675
-53.7
Depreciation, amortization, and write-downs
-132
-1,269
-142
-7.5
Other operating expenses
-821
-1,150
329
-28.6
Investment result
2,203
2,015
11
188
-721
-43.0
158
Business development and results of operations
Merck KGaA's net sales decreased to € 1,628 million in fiscal 2023. The € 1,552 million reduction was mainly
due to the transfer of operating activities of the Life Science and Electronics business sectors into separate legal
entities with effect from January 1, 2023 (see "Effects of material company agreements on the net
assets, financial position, and results of operations"). Following the transfer, Merck KGaA no longer
generates any income from operating product and service business (2022: € 1,813 million).
In the past fiscal year, Merck KGaA's net sales exclusively comprised income from the intragroup on-charging
of services. This primarily related to site management services, IT services, strategic management costs and
license fees for the "Merck" umbrella brand. All in all, the intragroup on-charging of services was higher than in
the previous year due to the increase in on-charged site and administrative services in particular.
Results of operations
Change
€ million
Net sales
2023
Cost of materials
2022
%
1,628
3,180
-1,552
-48.8
Other income
105
184
-79
€ million
9.3
Other financial result
-685
The reduction in other income primarily resulted from the fact that the prior-year figure included changes
relating to certain inventory items that were transferred as of January 1, 2023, as well as from the lower level
of insurance compensation payments.
The transfer of operating activities meant the total cost of materials decreased in line with net sales. By
contrast, the cost of materials in relation to sales increased to 44.3% (2022: 39.9%), as net sales in the past
fiscal year resulted solely from the intragroup oncharging of services whose performance involves a
proportionally higher level of material costs (see “Effects of material company agreements on the net
assets, financial position, and results of operations”).
Combined Management Report_
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
159
The lower level of personnel expenses was due in particular to the transfer of around 4,400 employees to
different legal entities as the result of the transfer of operating activities (see "Effects of material company
agreements on the net assets, financial position, and results of operations"). The level of additions to
pension provisions was also lower. This was offset by salary increases for employees covered by and exempt
from collective agreements, as well as the collectively agreed inflation allowance.
Depreciation, amortization, and adjustments remained essentially unchanged as against the previous year.
The transfer of operating activities did not have a material impact on the amount of fixed assets (see “Effects
of material company agreements on the net assets, financial position, and results of operations").
The reduction in other operating expenses was due to the transfer of operating activities (see "Effects of
material company agreements on the net assets, financial position, and results of operations") and
mainly resulted from the lower level of external services for sales and advertising as well as other external
services and procurements.
Following the transfer of operating activities, the relevance of investment income as the largest income item is
increasing. It increased by € 188 million to € 2,203 million (2022: € 2,015 million) on the back of higher
income from profit and loss transfer agreements with subsidiaries in the Healthcare business sector. The
general rise in interest rates also led to an increase in the profit transfer from the Group financing company,
Merck Financial Services GmbH, Darmstadt. This was offset by lower dividends from other subsidiaries and
higher expenses from profit and loss transfer agreements.
In addition to the effects of the transfer of operating activities, higher profit transfers from subsidiaries and
lower tax expense in particular more than offset the higher level of other financial expenses, resulting in an
increase in total profit after taxes and profit transfers.
The increased interest expense in the other financial result was primarily due to higher interest expenses in
respect of the Group financing company, Merck Financial Services GmbH, Darmstadt, as a result of rising
interest rates; this was offset by positive adjustments to the fair value of the plan assets in connection with
pension provisions.
CapEx 2023
Proportion of
CapEx 2023
Climate change
mitigation
Climate change
adaptation
Water
Pollution
Circular
Economy
Additions to provisions for uncertain tax obligations in particular led to a higher tax expense in the previous
year, whereas these did not occur to the same extent in 2023.
The year-on-year change in individual items of Merck KGaA's income statement was substantially impacted by
the transfer of operating activities. These effects are discussed below and above in the "Effects of material
company agreements on the net assets, financial position, and results of operations” section. As a
result, the income statement for fiscal 2023 mainly saw a decline in expense and income items relating to
operating activities, such as net sales, material costs, personnel expenses and other operating expenses.
17.7
43
-414
-272
65.7
Profit before profit transfers and taxes
996
1,148
-152
-13.2
Profit transfers
-696
-677
-18
2.7
Taxes
-16
-228
213
-93.1
Profit after profit transfers and taxes
285
242
E
Code
Y
Proportion of
649
67.1
0
0
78
74
4
968
5.5
25,680
171
0.7
Change
Dec. 31, 2023
5,481
Dec. 31, 2022
5,479
25,851
1,617
-50.9
-64
969
107
11.0
22,808
22,804
3
0.0
1,708
1,641
68
4.1
29
546
-517
-94.7
62
126
€ million
%
2
0.0
308
-156
-50.5
14,848
686
4.6
10
25,851
11
-1
-12.1
25,680
171
0.7
The year-on-year change in individual items of Merck KGaA's balance sheet was substantially impacted by the
transfer of operating activities. These effects are discussed below and above in the "Effects of material
company agreements on the net assets, financial position, and results of operations" section. In terms
of the balance sheet for fiscal 2023, this primarily resulted in a reduction in inventories and trade accounts
receivable on the asset side of the balance sheet and in trade payables on the equity and liabilities side, while
other receivables increased.
Largely irrespective of the transfer of operating assets, one notable increase on the asset side of the balance
sheet related to fixed assets (€ +99 million). This was mainly due to the investments in property, plant and
equipment at the Darmstadt site.
The higher level of income from profit and loss transfers meant that other receivables and other assets also
increased (€ +649 million). On the equity and liabilities side, the biggest increase related to other liabilities
(€ +686 million), whereas financial liabilities decreased (€ -275 million). All in all, net assets rose slightly by
0.7%.
Inventories declined as a result of the transfer of operating activities (see “Effects of material company
agreements on the net assets, financial position, and results of operations"). At the balance sheet date,
they comprised the consumables and supplies required for site operations.
152
15,534
1,076
-10.0
2,751
2,198
2,283
-85
-3.7
1,415
1,509
-94
-6.2
783
774
9
1.2
18,162
17,907
256
1.4
2,476
-275
-5.6
-11
192
Circular
Economy
Biodiversity
Climate change
adaptation
Climate change
mitigation
Water
Pollution
Circular
Economy
Biodiversity
Minimum
safeguards
Category
enabling transition-
activity al activity
eligible
turnover
2022
Category
-aligned or
Taxonomy
Pollution
of
Criteria for a substantial contribution
E
Turnover 2023
Climate change
adaptation
Climate change Z
mitigation
Water
(b) (b) (b) (b) (b) (b) Y/N Y/N Y/N Y/N Y/N Y/N Y/N
N/EL N/EL N/EL N/EL N/EL N/EL
Y; N; Y; N; Y; N; Y; N; Y; N; Y; N;
%
E
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
Y
Y
Y
Y
T
%
Turnover 2023
Proportion
DNSH criteria
Provisions for pensions and other post-employment benefits
Other provisions
Liabilities
Financial liabilities
Trade accounts payable
Other liabilities
Deferred income
Change
Dec. 31, 2023
Dec. 31, 2022
€ million
%
24,065
23,965
99
0.4
181
Provisions
("Do no significant harm")
Net equity
Equity and liabilities
Economic activities
Combined Management Report_
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
160
Net assets and financial position
Assets
€ million
Fixed assets
Intangible assets
Tangible assets
Financial assets
Current assets
Inventories
Trade accounts receivable
Other receivables and other assets
Cash and cash equivalents
Prepaid expenses
€ million
Combined Management Report_
Y
-195
Climate
change Z
OpEx 2023
Proportion of
OpEx 2023
Code
Economic activities
%
Climate z
CCM 3.5
Y N/EL N/EL N/EL N/EL N/EL
Y
Y
Y
Y
Y
Y
0.00
0.02
change
Water
Pollution
Minimum
Biodiversity
economy
Circular
Pollution
Water
Climate
change
change
Climate
Biodiversity
%
E
T
Y; N; Y; N; Y; N; Y; N; Y; N; Y; N;
N/EL N/EL N/EL N/EL N/EL N/EL
(b) (b) (b) (b) (b) (b) Y/N Y/N Y/N Y/N Y/N Y/N Y/N
Circular Z
Economy
E
safeguards
CCM 7.2
Y N/EL N/EL N/EL N N/EL
Manufacture of active pharmaceutical
ingredients (API) or active substances
PPC 1.1
Manufacture of medicinal products
Manufacture of electrical and electronic
equipment
PPC 1.2
0.11 N/EL N/EL N/EL
1.73 N/EL N/EL N/EL
EL N/EL N/EL
0.00
EL N/EL N/EL
EL; EL; EL; EL; EL;
N/EL N/EL N/EL N/EL N/EL
0.00
0.16 N/EL N/EL N/EL N/EL EL N/EL
0.00
OpEx of taxonomy-eligible
but not environmentally sustainable activities
(not taxonomy-aligned activities) (A.2)
A. OpEx of taxonomy eligible activities (A.1
+ A.2)
2.02 0.02 0.00 0.00 1.83 0.16 0.00
97.98
2,817 100.00
CE 1.2
EL;
N/EL
(not taxonomy-aligned activities)
sustainable activities
Y
Y
Y
Y
Y
Y
0.00
T
0.02 0.02 0.00 0.00 0.00 0.00 0.00
0.00
0.00
E
0.00
T
0.02 0.02
0.00 0.00
1.99 0.00 0.00 0.00 1.83 0.16 0.00
0.00
A.2 Taxonomy-eligible, but not
0.00
"60 7-0-869
eligible
OpEx 2022
of
Y N/EL N/EL N/EL N N/EL
Y N/EL N/EL N/EL N/EL N/EL
Y N/EL N/EL N/EL N/EL N/EL
T
E
0.58
T
0.51
0.66 0.66 0.00 0.00 0.00 0.00 0.00
0.23 0.23 0.00 0.00 0.00 0.00 0.00
0.43 0.43
Y
Y
Y
Y
Y
E
0.00
Y
Y
Y
EL;
1,26
0.04 N/EL N/EL N/EL EL N/EL N/EL
activities (taxonomy aligned) (A.1)
CapEx of environmentally sustainable
Renovation of existing buildings
Electricity generation using solar photovoltaic
technology
Manufacture of energy efficiency equipment
for buildings
A. TAXONOMY-ELIGIBLE ACTIVITIES
A.1 Environemtally sustainable activities
(taxonomy-aligned)
Code
༄༅། ། ། ། སྐ་༄་། ༞ རླ
2,377 100.00
ཟླ་
-0.8%
6.33 2.02 0.00 0.00 4.31 0.00 0.00
5.67 1.35 0.00 0.00 4.31 0.00 0.00
1,26
EL N/EL N/EL N/EL N/EL N/EL
N/EL N/EL N/EL N/EL N/EL N/EL
0.00
4.27 N/EL N/EL N/EL EL N/EL N/EL
0.00
Y
taxonomy
aligned or
Y
Y
sustainable activities
(not taxonomy-aligned activities) (A.2)
A. CapEx of taxonomy eligible activities
(A.1 + A.2)
B. TAXONOMY-NON-ELIGIBLE ACTIVITIES
CapEx of taxonomy-non-eligible activities
(B)
Total (A + B)
152
Criteria for a substantial contribution
DNSH criteria
Manufacture of medicinal products
CapEx of taxonomy-eligible but not
environmentally
("Do no significant harm")
Non-Financial Statement _ Other Topics
153
Proportion
Category
Category transition-
enabling
al
activity activity
Combined Management Report.
Manufacture of active pharmaceutical
ingredients (API) or active substances
Transport by motorbikes, passenger cars and
light commercial vehicles (A.2)
but not environmentally sustainable activities
(not taxonomy-aligned activities)
E
0.06
Y
Y
Y
Y
Y
Y
%
O
≥
≥
(b) (b) (b) (b) (b) (b) Y/N Y/N Y/N Y/N Y/N Y/N Y/N
N/EL N/EL N/EL N/EL N/EL N/EL
Y; N; Y; N; Y; N; Y; N; Y; N; Y; N;
T
E
%
A.2 Taxonomy-eligible,
Y
A. TAXONOMY-ELIGIBLE ACTIVITIES
A.1 Environemtally sustainable activities
(taxonomy-aligned)
ཟླ་བ་སྐརྒྱལ་་ཞུ།།
Renovation of existing buildings
Total assets
Equity and liabilities
A. Net equity
Subscribed capital
General partner's equity
Capital reserves
Retained earnings
Profit carried forward E. Merck KG
Net retained profit: shareholders
-0.8%
168
397
397
3,814
3,814
702
702
80
80
318
168
-195
25,680
25,485
76
126
-50
-39.8%
Other receivables and other assets
1,347
968
379
39.2%
Cash and cash equivalents
0
0
0.0%
1,448
1,641
-192
-11.7%
C. Prepaid expenses
74
74
0.0%
318
Trade accounts receivable
5,479
0.0%
Total equity and liabilities
2,751
2,751
222
308
-86
0.0%
-28.0%
14,847
17,819
D. Deferred income
14,848
17,907
0.0%
-87
-0.5%
11
11
-1.7%
25,485
25,680
Manufacture of energy efficiency equipment
for buildings
-1
Other liabilities
Trade accounts payable
Financial liabilities
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
B. Provisions
Provisions for pensions and other post-employment benefits
1,487
1,509
-22
-1.5%
Other provisions
688
2,175
774
2,283
-86
-11.1%
-108
-4.7%
C. Liabilities
5,479
-95.4%
Of which enabling
546
Merck KGaA in
Accordance
with the
German commercial
code (HGB)
The Management Report of Merck KGaA has been combined with the Group Management Report. The Annual
Financial Statements and the Combined Management Report of the Group and Merck KGaA for fiscal 2023 are
filed with the electronic German company register and are available on its website.
Merck KGaA, headquartered in Darmstadt, Germany, is the parent company of the Group.
Following the transfer of the Life Science, Healthcare and Electronics business sectors into separate legal
entities, Merck KGaA primarily performs a holding company function for the Merck Group. As part of the
strategic management of the Group, this function makes strategically important decisions and ensures that
compliance provisions are observed by the central enabling Group Functions on a Group-wide basis. It also
performs Group-wide services for Group companies in the areas of information technology, strategic
management and site management, especially at the Darmstadt site. Merck KGaA employs around 4,000 of the
more than 11,000 employees at the Darmstadt site.
The financial statements of Merck KGaA have been prepared in accordance with the provisions of the German
Commercial Code (HGB), the German Stock Corporation Act (AktG), and the supplementary requirements of
the Articles of Association. The full version of the Annual Financial Statements of Merck KGaA together with the
unqualified auditor's opinion has been submitted to the electronic company register and published there.
Effects of material company agreements on the net assets, financial
position, and results of operations
Additional Information on
Hive-down of the operating activities of the business sectors
Since the technical system requirements for the rollout of the business sector-specific enterprise resource
planning systems (hereinafter "ERP") were not in place at the OpCos at the time of the hive-down, the business
activities hived down to the OpCos have been temporarily leased back by the relevant OpCos to Merck KGaA.
Under the terms of a business lease agreement, Merck KGaA leased the entire operations from each of the
three OpCos with economic effect from January 1, 2018. In this context, it also leased all fixed assets and
acquired the current assets as well as certain liabilities and provisions at their carrying amounts under German
commercial law.
Combined Management Report_ Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
156
The business lease agreement under which the Healthcare business sector was leased back to Merck KGaA was
terminated with economic effect from March 31, 2019. Merck Healthcare KGaA (formerly the Healthcare OpCo)
assumed the power of operational management for the Healthcare business sector from Merck KGaA with effect
from April 1, 2019. As a result of the termination of the business lease agreement, the leased objects allocated
to the Healthcare business sector at the end of the lease were transferred to Merck Healthcare KGaA.
The business lease agreement for the Electronics business sector (EL business lease agreement) was
terminated with economic effect from December 31, 2019 for the part of the distribution and sales function
belonging to the Electronics business sector. Accordingly, these functions were transferred from Merck KGaA to
the EL OpCo (then Merck Performance Materials Germany GmbH) with economic effect from January 1, 2020.
The contractual, process, procedural, and working relationships and leased objects allocated to the function
were transferred to the EL OpCo as a result. The EL business lease agreement for the other functions of the
Electronics business sector remained in place until December 31, 2022.
To facilitate the implementation and operation of the new ERP systems for the LS OpCo (then Merck
Life Science Germany GmbH) and the EL OpCo, the EL OpCo transferred the Darmstadt-based "Organics" and
"OLED" production operations, including the production-related Electronics shared functions (EL Production,
hereinafter: "ELP"), to the LS OpCo by way of a chain transformation in multiple steps on August 31, 2022. The
function that was spun off from the EL business lease agreement via EL Production (the ELP business lease
agreement) had been in place between Merck KGaA as the lessee and the LS OpCo as the lessor since this date.
By way of entries in the commercial register on November 1, 2022 (LS OpCo) and December 29, 2022
(EL OpCo), the LS OpCo and the EL OpCo changed their legal form to that of a German corporation with general
partners (Kommanditgesellschaft auf Aktien) and have since been operating under the names Merck
Life Science KGaA, Darmstadt, and Merck Electronics KGaA, Darmstadt.
As a result of the aforementioned hive-down and restructuring measures and the existing EL and ELP business
lease agreements, Merck KGaA continued to manage the operating business of the Electronics business sector
with the exception of part of the distribution and sales function until December 31, 2022. Furthermore, as a
result of the Life Science business lease agreement, Merck KGaA also ran the operating business of the
Life Science business sector.
Termination of the temporary business lease of the Life Science and Electronics
business sectors
Merck Life Science KGaA went live on January 1, 2023. It assumed the power of operational management for
the Life Science operating business and ELP from Merck KGaA at this date. Merck KGaA therefore terminated
the LS and ELP business lease agreements with effect from January 1, 2023.
As part of the strategic further development of Merck KGaA, the existing operating activities of the Life Science,
Healthcare, and Electronics business sectors within Merck KGaA, together with the relevant assets and liabilities
(hereinafter: "operating units"), were hived down at their carrying amounts into three separate legal entities
(hereinafter: "OpCo" or plural "OpCos") with the legal form of a GmbH or German limited liability corporation
and with economic effect from January 1, 2018 (operating hive-down).
- were
155
Combined Management Report_
OpEx of environmentally sustainable
activities (taxonomy aligned) (A.1)
Of which enabling
Of which transitional
environmentally
B. TAXONOMY-NON-ELIGIBLE ACTIVITIES
OpEx of taxonomy-non-eligible activities
(B)
Total (A + B)
(a)
(b)
Combined Management Report.
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
Non-Financial Statement
154
The Code constitutes the abbreviation of the relevant objective to which the economic activity is eligible to make a substantial contribution, as well
as the section number of the activity in the relevant Annex covering the objective, i.e.:
Climate Change Mitigation: CCM
Climate Change Adaptation: CCA
Circular Economy: CE
Pollution Prevention and Control: PPC
Biodiversity and ecosystems: BIO
Y - Yes, Taxonomy-eligible and Taxonomy-aligned activity with the relevant environmental objective
N-No, Taxonomy-eligible but not Taxonomy-aligned activity with the relevant environmental objective
N/EL - not eligible, Taxonomy-non-eligible activity for the relevant environmental objective.
Research and development expenses accounted for 2,445 Mio. € (2022:2,521 Mio. €) of the reported operating
expenditure, with 1,657 Mio. € (2022: 1,694 Mio. €) of this being attributable to the Healthcare business
sector.
Other Topics
Merck KGaA also terminated the EL business lease agreement with effect from January 1, 2023. The power of
operational management for the Electronics business sector, with the exception of EL Production, was therefore
transferred from Merck KGaA to Merck Electronics KGaA at this date. As a result of the termination of the
business lease agreements, the leased objects allocated to the Life Science and Electronics business sectors and
EL Production - comprising current and non-current assets as well as certain liabilities and provisions
transferred to Merck Life Science KGaA and Merck Electronics KGaA respectively. In exchange, Merck
Life Science KGaA and Merck Electronics KGaA paid compensation in the amount of the balance of the
transferred carrying amounts under German commercial law. In addition, around 3,400 employees were
transferred from Merck KGaA to Merck Life Science KGaA and around 1,000 employees were transferred to
Merck Electronics KGaA. The remaining around 4,000 employees in Group functions remained with Merck KGaA.
Water and Marine Resources: WTR
By way of a contribution agreement dated December 2, 2022, Merck KGaA also transferred the assets and
liabilities allocated to the Life Science business sector that were not previously included in the operating hive-
down of the Life Science business sector or the LS business lease agreement to Merck Life Science KGaA with
effect from January 1, 2023. This related to the "Packaging & Container" functional unit and the assets and
€ million
%
192
192
0.0%
961
969
-8
22,809
Merck KGaA
31.12.2022
22,804
0.0%
23,962
23,965
-3
0.0%
B. Current assets
Inventories
25
Additional transfers involving the Life Science business sector
5
Merck KGaA
01.01.2023
-0.8%
Combined Management Report_ Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB) 157
Change
liabilities of the Hohenbrunn site. The assets and liabilities mainly included property, plant, and equipment, cash
and cash equivalents, pension provisions and other provisions and were contributed at their carrying amounts
under German commercial law in exchange for the grant of new shares in Merck Life Science KGaA.
Due to the hive-downs and transfers described above in connection with the termination of the business lease
agreements (collectively referred to hereinafter as the "transfer of operating activities"), some balance sheet
items for 2023 are only comparable with the prior-year figures to a limited extent. To improve comparability,
additional information on the impact of the transfer of operating activities to Merck Life Science KGaA and
Merck Electronics KGaA on individual balance sheet items of Merck KGaA is provided. The following table shows
the balance sheet of Merck KGaA before (December 31, 2022) and after (January 1, 2023) the transfer of
operating activities. In terms of Merck KGaA's income statement for fiscal 2023, the transfer of operating
activities resulted in lower net sales, material costs, personnel expenses and other operating expenses in
particular (for details see the disclosures on the income statement in the “Business development and
results of operations" section.
€ million
Assets
A. Fixed assets
Intangible assets
Tangible assets
Financial assets
-521
2023
Compensation for fiscal 2023¹ - Chronological overview
1 The average calculation includes the compensation of Kai Beckmann, Peter Guenter and Matthias Heinzel. Peter Guenter's compensation payment is not
illustrated. Since Marcus Kuhnert left the Executive Board and Helene von Roeder became a member of the Executive Board during the year, their pro-rated
compensation would distort the illustration and have therefore not been considered.
⚫ 1/3 of profit sharing 2023 (to be held in shares for 4 years)
2/3 of profit sharing 2023 (free disposal)
• Service cost
• Additional benefits
• Base salary
23%
5,245
5,359
46%
0.3% 8.4%
23%
2023 -
Non-performance-related
Base salary
2021
Service cost
2024
2025
2026
2027
Three years performance cycle
2022
1/3 of net payout to be held in
Merck shares for at least four years
1 In 2021, the revised LTIP with a performance cycle of four years (previously three years) was introduced which resulted in a one-time payout gap without
bridging payments. The LTIP tranche 2021 runs until December 31, 2024, and will be paid out in April 2025 due to the one-year holding period. That is the
reason why the LTIP tranche 2021 is not included in the chronological overview.
Corporate Governance Compensation Report
1,659
167
Determining the compensation of the Executive
Board
Profit sharing 2023
Performance-related
Additional benefits
Max -
Summary
Ø further EB members¹
To provide a complete overview of the compensation system, we continue to describe the most important
components of the Compensation Report in detail and at the same time have improved the presentation.
In addition, we have further clarified the description of the maximum compensation, illustrating how the
different compensation components are limited.
As in the previous year, we are following suggestions from our investors, we are publishing the target corridor
of the respective key performance indicators of the sustainability factor for the second time at the beginning of
the performance cycle of the Long-Term Incentive Plan (LTIP).
At our company, unlike at publicly listed German stock corporations, it is not the Supervisory Board but the
Board of Partners of E. Merck KG, Darmstadt, Germany, that is responsible for designing and reviewing the
compensation system and deciding on the amount and composition of compensation paid to Executive Board
members. The Board of Partners has assigned this task to its Personnel Committee. As a result, the Personnel
Committee is responsible for the development and regular review of the compensation system, i.e. structuring
and examining of the performance-independent and performance-related compensation elements. The
Personnel Committee also takes into account the compensation system for managers and employees below
Executive Board level to ensure consistency and a uniform steering effect between the compensation systems.
Furthermore, the Personnel Committee is responsible for defining the annual targets and thresholds of the key
performance indicators for the performance-related compensation elements.
The legislation and regulations relating to the Compensation Report are geared toward the situation at a
German stock corporation ("Aktiengesellschaft" or "AG") and do not take into consideration the special
characteristics of a corporation with general partners ("Kommanditgesellschaft auf Aktien" or "KGaA"), such as
our company. Major differences between the two legal forms exist in terms of liability and management. In the
case of an AG, only the AG is liable as a legal entity, whereas the general partners of a KGaA also have
unlimited personal liability for the company's obligations (section 278 (1) AktG). Unlike the management board
members of an AG, the members of the Executive Board of our company are personally liable partners of both
Merck KGaA, Darmstadt, Germany, and the general partner E. Merck KG, Darmstadt, Germany, and not merely
employed members of a corporate board. Given the structural differences between an AG and a KGaA, several
recommendations of the German Corporate Governance Code apply to a KGaA only in a modified form.
Review of fiscal 2023
Fiscal 2023 was a challenging year, which ended with a satisfactory business result despite difficult
macroeconomic conditions. These challenging conditions were also evident in the share price development.
Ultimately, the diversified business model had a positive impact on our business results. The Life Science
business sector faced a noticeable decline in demand for products and services related to the Covid-19
pandemic and the destocking of our Process Solutions customers, which lasted longer than expected. At the
same time, the Electronics business sector was impacted by a prolonged downcycle in Semiconductor Solutions
and low customer utilization in Display Solutions. The Healthcare business sector made a positive contribution
to the company's success in fiscal 2023. Our new healthcare products led to robust growth. In particular, sales
of multiple sclerosis drugs and oncology drugs achieved good sales in our opinion.
In fiscal 2023, we continued to focus on achieving our three core sustainability targets. In the long term, we
want to fully integrate sustainability into our value chains, contribute to human progress for more than one
billion people through sustainable science and technology, continue to reduce our resource consumption, and
achieve climate neutrality. To encourage the implementation of our long-term sustainability targets,
corresponding key sustainability indicators and targets were also integrated in the sustainability factor of the
Long-term Incentive Plan granted in 2023 (LTIP 2023).
For the members of the Executive Board, the contractually agreed compensation remained unchanged and
there were no increases in fiscal 2023. In 2021, the LTIP was revised with a term of four years (previously
three years). This extension of the performance cycle results in a one-time payout gap. As a consequence, the
members of the Executive Board will not receive any payout from the Long-Term Incentive Plan for fiscal 2023
and there will also be no other payment to bridge the gap. We will report on the target achievement and payout
of the LTIP tranche 2021, which runs until December 31, 2024, in the next Compensation Report.
Corporate Governance Compensation Report
165
The profit sharing ensures that the Members of the Executive Board act in line with the interests of both the
shareholders and owners. It is based on the average of the profit after tax of E. Merck Group, Darmstadt,
Germany, of the current year and the two previous years, to ensure a long-term orientation. Thus, the profit
sharing for the 2023 financial year considers the very successful years 2021, 2022 as well as the current
challenging year 2023.
In fiscal 2023, Marcus Kuhnert stepped down as Chief Financial Officer and Member of the Executive Board of
Merck as of June 30, 2023. On July 1, 2023, Helene von Roeder took over the position of Chief Financial Officer.
Since 2019, she had been a member of both the Supervisory Board of Merck KGaA, Darmstadt, Germany, and
the Board of Partners of E. Merck KG, Darmstadt, Germany. During that time, she was also Chair of the Audit
and Finance Committee. She has resigned from these mandates and left the Supervisory Board effective
April 17, 2023. Barbara Lambert was appointed to the Supervisory Board with effect from August 11, 2023.
Approval of the Compensation Report 2022
At the Annual General Meeting 2023, the Compensation Report 2022 was approved with a voting result of
84.63% in accordance with section 120a (4) AktG. Only shareholders of Merck KGaA are entitled to vote at the
Annual General Meeting.
In the course of the Annual General Meeting 2023 and in numerous discussions thereafter, Merck received
feedback from investors, all relevant shareholder associations and proxy advisors on the compensation of the
Executive Board as well as the presentation of the Compensation Report.
Some discussions with investors focused on the level of the compensation of the Executive Board compared
with other companies. In this context, it should be noted that the position of the members of the Executive
Board as personally liable partners does explain a different level and structure of compensation. On a regular
basis, we initiate a compensation benchmark to assess the level of our compensation. To consider, the criteria
of country, size and industry as well as Merck's global business activities and the various business sectors, two
peer groups were used for comparison: the DAX® companies and a peer group of international competitors. The
latter peer group of international competitors represents our three business sectors (Life Science, Healthcare
and Electronics) and includes companies which are headquartered in Europe as well as in the USA.
In addition, we have again decided to follow the presentation and interpretation of section 162 (1) of the
German Stock Corporation Act (AktG) chosen last year for the compensation tables. In this context, we also
monitor the practices of other companies to align with common market practice where necessary.
The exchange with our investors is an important and continuous process. During the Annual General Meeting 2024
and also as part of the review of the compensation system for the Annual General Meeting 2025, we will regularly
continue to obtain feedback and stay in dialogue with investors. In this way, we can ensure that we receive
constructive and valuable feedback, which can be considered in the upcoming review and potential adjustment to
the compensation system and decisions of the Personnel Committee. Accordingly, we will report on the feedback
received in the next compensation report.
Corporate Governance Compensation Report
22%
45%
1.3% 9.4%
22%
6,814
2023-
7,037
Min
Max
Min -
Belén Garijo
Summary of the compensation for the Executive Board members' performance up to December 31,
2023 (see page 8 below “Executive Board Compensation for 2023")
For fiscal 2023, no payment will be made from the LTIP. In 2021, an LTIP was introduced, with a performance
period of four years in total (previously three years). As a result, there is a one-time payout gap without
bridging payments. The LTIP is therefore not considered in the following graphics below. As a result, the
maximum values represent the sum of the base salary, additional benefits and service costs for fiscal 2023 as
well as the maximum amount of profit sharing.
166
-
Compensation for fiscal 2023
2,227
In addition to structuring the Executive Board compensation system, the Personnel Committee is responsible
for defining the specific amounts of compensation paid to the members of the Executive Board. The
compensation paid to the members of the Executive Board considers the responsibilities and duties of the
individual Executive Board members and in particular, their status as personally liable partners, their individual
performance and the economic situation as well as the performance and future prospects of the company.
Furthermore, Executive Board compensation is oriented toward the external peer environment of our company,
which comprises the DAX® companies as well as a group of selected international competitors:
Base salary
International peer group
• Four-year performance period with three-year achievement period and
subsequent one-year holding period
• Absolute capped amount totaling 250% of the individual grant
goals "Dedicated to human progress", "Partnering for sustainable business
impact" and "Reducing our ecological footprint"
Sustainability factor ranging from 0.8 to 1.2 based on the sustainability
•
• Key performance indicators: share price performance relative to the DAX®
(50%), EBITDA pre margin (25%), organic sales growth (25%)
• Performance Share Plan based on virtual shares (Merck Share Units)
Merck Long-Term Incentive Plan
• Individual, absolute capped amount
• Consideration of individual performance and individual contribution to
achieving the sustainability goals via the adjustment factor in a range from
0.8 to 1.2 based on the defined criteria set
• Key performance indicator: Three-year average of the profit after tax
of the E. Merck Group
Profit sharing
Performance-
related
compensation
Pension entitlement
compensation
Other
components
Malus & Clawback
Potential applications:
• Violation of internal regulations and guidelines (Merck Code of Conduct),
laws or other binding external specifications in the area of responsibility or
considerable violations of due diligence within the meaning of section 93 of
the German Stock Corporation Act
In addition, as compensation for the loss of entitlements to variable compensation from his previous
employment relationship, Peter Guenter received upon the initial appointment in fiscal 2021 a commitment to
compensation totaling € 1,500,000.00. The entitlement has been verified in the context of his initial
appointment based on supporting documents and the amount has been determined accordingly. The
compensation is to be paid in cash in four equal installments. The first installment was paid on July 1, 2021, the
second installment was paid on July 1, 2022, and the third installment was paid on July 1, 2023. The final
installment will be paid out on July 1, 2024, provided the employment relationship continues.
The additional benefits mainly include company cars for personal use, contributions to insurance policies and
expenses for personal protection.
Additional benefits
As base salary, the members of the Executive Board receive contractually fixed performance-independent
amounts that are paid in the form of 12 equal monthly installments. There was no increase of the base salary in
fiscal 2023.
Base salary
Performance-independent compensation
In addition, the compensation for which the members of the Executive Board have provided the underlying
service in full by December 31, 2023, but whose payment will be made in the following year, is disclosed on a
voluntary basis. This enables transparent information and ensures the link between performance and
compensation in the fiscal year. This year, the voluntary reporting only concerns profit sharing for 2023. The
Personnel Committee has provisionally determined the payout amounts of the profit-sharing by resolution and
informed the members of the Executive Board accordingly. The final amount will be paid to the members of the
Executive Board after the consolidated financial statements of E. Merck KG have been released. After amending
the compensation system of the Executive Board effective January 1, 2021, an additional one-year holding
period was introduced for the LTIP, which applies for the first time to the LTIP Tranche 2021. Therefore, the
performance period of the LTIP tranche 2021 will run until the end of fiscal 2024 and payout will be made in
April 2025. The LTIP tranche 2020, however, ran until the end of fiscal 2022 and was paid out in April 2023. As
a result, payout of the LTIP tranche 2021 can only be reported on a voluntary basis in the Compensation Report
2024. The obligation to report on the LTIP tranche 2021 applies for the first time in the Compensation Report
2025.
Additional benefits
The following section reports on the compensation awarded or due in accordance with section 162 (1) AktG.
Accordingly, the following sections contain all amounts paid to individual members of the Executive Board
(active and former members) in fiscal 2023 (compensation awarded) as well as all amounts legally due but not
yet received (compensation due).
Executive Board compensation for 2023
170
Corporate Governance Compensation Report
• Four-year holding period
• Mandatory personal investment amounting to one third of the net payment
of the profit sharing in Merck shares
Share Ownership Guidelines
• In the event of other grossly non-compliant or unethical behavior or behavior
or actions that are contrary to our corporate values.
The performance-related and performance-independent components of the compensation system for the
Executive Board in fiscal 2023 are fully consistent with the Executive Board compensation system approved by
the Annual General Meeting 2021 with a voting result of 87.08%. The compensation system for the Executive
Board is published on our Website and applies to all members of the Executive Board since January 1, 2021.
The Personnel Committee ensures compliance with the compensation system by deciding by resolution on the
parameters of the compensation elements (e.g. target setting, determination of target achievement, etc.) as
well as on the amounts to be paid out.
German
peer group
This Compensation Report describes the structure and application of the compensation system for the Executive
Board of Merck KGaA, Darmstadt, Germany, in fiscal 2023. It provides a transparent overview of the
relationship between compensation and performance, and presents the compensation awarded or due to the
members of the Executive Board and the Supervisory Board in fiscal 2023. Both, the Supervisory Board and the
Executive Board have jointly prepared the Compensation Report in accordance with section 162 of the German
Stock Corporation Act (AktG) as well as the German Corporate Governance Code in the version dated April
28, 2022. It is formally audited in accordance with section 162 (3) AktG as well as materially audited by
Deloitte Wirtschaftsprüfungsgesellschaft GmbH. The Compensation Report and the corresponding audit opinion
can be found on our website.
Non-
• Bayer
• Sartorius
• MSD
• DuPont
• AstraZeneca
• Sanofi
• Lonza
• Danaher
• Air Liquide
+
DAX®
• Roche
• Infineon
• Bio-Rad
⚫ Agilent
⚫ Entegris
• Biogen
• GlaxoSmithKline
• Novartis
• Philips
The following diagram provides an overview of all the elements of the compensation system for Executive Board
members:
169
Corporate Governance Compensation Report
The performance-related compensation elements - profit sharing and the Long-Term Incentive Plan
on a multi-year performance period and as such are fully oriented toward the company's long-term
development. In addition, there is a strong reference to the company's share price, to provide for special focus
on our shareholders' interests. The key performance indicators selected for variable compensation are derived
from the corporate strategy and form part of our central controlling system. In this way, the variable
compensation of the Executive Board members is used as a strong steering tool to ensure a focus on our
objective of long-term profitable growth accompanied by strong cost discipline.
are based
-
Executive Board compensation includes three main components: base salary, profit sharing and the Long-Term
Incentive Plan. It is complemented by contributions to the company pension plan as well as additional benefits.
Additional compensation arrangements also exist for the members of the Executive Board, in particular malus
and clawback provisions and a Share Ownership Guideline.
performance-
related
Compensation components
168
Corporate Governance Compensation Report
The Personnel Committee regularly reviews the amount and structure of the Executive Board compensation by
referring to the peer groups described and with the assistance of an independent compensation consultant.
Moreover, for the determination of the specific compensation amounts, the relations between Executive Board
compensation, top management compensation and workforce compensation will be considered also based on a
multi-year assessment. Top management is defined as senior levels of management below the Executive Board
in Germany. The average compensation of an employee in full-time employment in Germany is considered in
the determination of the compensation of the remaining staff.
The international peer group was defined considering the size, business area and geographic location of the
headquarters of the respective competitors. Overall, the peer group offers an appropriate ratio of companies
headquartered in Europe and the United States as well as a balanced coverage of the Life Science, Healthcare
and Electronics business sectors. Based on the size criteria of sales, number of employees and market
capitalization, Merck positions itself around the median of this international peer group.
• UCB
Thermo Fisher
Overview of the structure of the compensation
system
Compensation Report
Following the transfer of operating activities, net sales are becoming less relevant for Merck KGaA, while the
relevance of investment income as the largest income item is increasing. With this in mind, investment income
is replacing net sales as a key financial performance indicator starting from fiscal 2023, and a forecast for the
next fiscal year is provided below.
Corporate Governance Compensation Report
3,085
2,615
2022
2023
Risks and opportunities
Total
Other
Marketing and sales
Logistics
Research
Production and site operations
Administration
Average number of employees during the year
Personnel
The average number of employees by functional area:
Personnel
For fiscal 2023, we are proposing to the Annual General Meeting the payment of a dividend of € 2.20 per share.
Dividend
Research and development (R&D) expenditure declined to € 69 million in fiscal 2023 (2022: € 289 million),
largely as a result of the transfer of operating activities (see “Effects of material company agreements on
the net assets, financial position, and results of operations"). Merck KGaA continues to recognize
expenses for global R&D services.
Research and development
The reduction in provisions was due in particular to the lower level of pension provisions, which primarily resulted
from pension payments and employees being transferred to other legal entities within the Merck Group.
Merck KGaA is also financed via the Group financing company, Merck Financial Services GmbH, Darmstadt, which
provides Merck KGaA with sufficient financial resources and hence ensures liquidity. Other liabilities rose by
€ 686 million and primarily relate to current loans and clearing account liabilities in respect of Merck Financial
Services GmbH, Darmstadt, in the amount of € 14,476 million (2022: € 13,963 million). Financial liabilities of
€ 2,476 million relate to bonds issued in previous years to finance the acquisitions of Sigma-Aldrich and Versum
Materials, Inc., United States, in particular. The € -275 million reduction in financial liabilities was attributable to
the repayment of bonds, which resulted in an increase in other liabilities from intragroup financing. Additional
information on the financing conditions and maturity structure of the bonds can be found in Note (21) "Financial
liabilities" of the Notes to the Financial Statements in accordance with HGB.
Merck KGaA was financed by equity in the amount of € 5,481 million (2022: € 5,479 million). This corresponds to
an equity ratio of 21.2% (2022: 21.3%). Equity increased in particular as a result of the net income generated in
fiscal 2023, which offset the dividend payments made during the year.
161
Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
Combined Management Report_
164
869
2,940
Merck KGaA had 3,924 employees as of December 31, 2023 (2022: 8,485). The year-on-year decline of 4,561
employees was largely attributable to the transfer of operating activities (see "Effects of material company
agreements on the net assets, financial position, and results of operations”).
1,091
Skills and Expertise, and Qualification Matrix
341
224 Objectives of the Supervisory Board with Respect to its Composition, Profile of
218 Report of the Supervisory Board
197 Statement on Corporate Governance
196 Capital Structure and Corporate Bodies of Merck KGaA
164 Compensation Report
No risks that could jeopardize the continued existence of the company have been identified.
Merck Financial Services GmbH, Darmstadt, will provide the company with sufficient financial resources as
needed and thus ensure liquidity.
In line with the Group's development, we expect investment income to see moderate growth compared with the
figure recorded in fiscal 2023. Accordingly, net income is forecast to be slightly higher than in 2023 overall.
Forecast for 2024
Net income was above the forecast level due to higher investment income and lower taxes in particular. Taken
together, these more than offset the higher level of other financial expenses.
Net sales declined from € 3,180 million in the previous year to € 1,628 million, largely as a result of the
€ 1,813 million in sales from operating product and service business that were no longer recognized as
anticipated following the transfer of operating activities. Sales in the reporting year relate solely to the
intragroup on-charging of services. The increase in on-charged site and administrative services in particular
meant that these were higher than the prior-year forecast of € 1,366 million.
corporate Governance
Deviations of actual business development in fiscal 2022 from the previously
reported guidance
614
The Combined Management Report for 2022 initially forecast a downturn in net sales in fiscal 2023 due to the
transfer of operating activities and the fact that the product-related sales of the transferred business sectors
are no longer recognized. The remaining business sector was expected to see a similar level of sales to 2022.
Net income was forecast to be slightly higher than in 2022.
43
523
122
4,008
74
8,375
As the parent of the Merck KGaA Group, Merck KGaA is largely subject to the same opportunities and risks as
the Group. Merck KGaA participates in these risks and opportunities via its equity investments and subsidiaries.
This can have consequences for its investment income or the valuation of shares in subsidiaries. More
information can be found in the Group "Report on Risks and Opportunities”.
Combined Management Report_ Additional Information on Merck KGaA in Accordance with the German Commercial Code (HGB)
162
Forecast for Merck KGaA
66
0
is immediately available
An average profit after tax of at least € 0.75 billion must be generated for the profit-sharing payment to be made.
This minimum threshold reflects the "pay-for-performance" approach of the compensation system. If the profit
exceeds this threshold, the individual profit-sharing rates are staggered as illustrated in the following graphic:
x performance and
sustainability goals
(0.8 - 1.2)
Profit sharing
Maximum limit
2/3
The three-year average that is relevant for fiscal 2023 was based on the profit after tax generated by the
E. Merck Group in 2021, 2022 and 2023 as illustrated in the following graphic and table:
1.75
Three-year average of the profit
after tax of the E. Merck Group
(in € billion)
The maximum profit-sharing payment is capped individually. It amounts to € 4,810 thousand for Belén Garijo,
€ 3,500 thousand for Kai Beckmann, € 3,900 thousand for Peter Guenter, € 3,900 thousand for Matthias
Heinzel and € 3,300 thousand for both Marcus Kuhnert and Helene von Roeder. In fiscal 2023, the maximum
payout for Marcus Kuhnert is € 1,650 thousand due to leaving the Executive Board on June 30, 2023, and for
Helene von Roeder it amounts also to € 1,650 thousand due to her entry on July 1, 2023.
(€ million)
for individual
2021
0.75
Adjustment factor
Corporate Governance Compensation Report
Belén Garijo
3,003
Contribution level
Peter Guenter
Kai Beckmann
171
As part of the initial appointment as a member of the Executive Board, compensation commitments were
agreed with Helene von Roeder to compensate for the loss of entitlements to both short-term and long-term
variable compensation from her previous position on the Management Board at Vonovia SE. The loss of variable
compensation claims against Vonovia SE were proven on the basis of corresponding supporting documents. The
compensation for the loss of the short-term incentive for the year 2023 covers the period until her appointment
to the Executive Board of Merck KGaA (January 1, 2023 to June 30, 2023) and amounts to € 257,125. The
amount will be paid out in fiscal 2024. The compensation for the loss of long-term incentive fiscal 2023 covers
the period until her appointment to the Executive Board of Merck KGaA (January 1, 2023 to June 30, 2023) and
is based on the Long-Term Incentive Plan Rules of Vonovia SE for the year 2023, whose performance period
runs from the beginning of 2023 to the end of 2026. As a corresponding compensation payment, 50% of the
gross amount that would have resulted from Helene von Roeder's complete entitlement to the long-term
incentive for the year 2023 is to be reimbursed. However, the maximum payout amount according to Vonovia's
Long-Term Incentive Plan Rules will be considered. Therefore, the amount can only be calculated after the
publication of the 2026 annual financial statements of Vonovia SE and will be paid out in 2027. Should it not be
possible to calculate the payout amount, 50% of the allocation value of Vonovia's long-term incentive for 2023
will be paid out (€ 618,750). In this way, it is ensured that Helene von Roeder is only compensated for the
actual loss of long-term incentive. The entitlement to the compensation payment has arisen in full. In fiscal
2023, provisions of € 695,549 were made regarding this compensation.
Pension entitlement
The members of the Executive Board are granted a pension obligation as a direct commitment. A fixed amount
is paid into a benefit account every year and interest is paid at the applicable statutory maximum technical
interest rate for the life insurance industry in accordance with section 2 (1) of the German Regulation on the
Principles Underlying the Calculation of the Premium Reserve (DeckRV). Once the pension event occurs, the
amount in the benefit account is paid out either in ten annual installments or as a one-time payment. The
pension event occurs upon retirement, in the event of occupational disability or death.
After leaving the Executive Board, Marcus Kuhnert retains a vested entitlement to the pension account, which
will be granted to him upon the occurrence of the pension event. In fiscal 2023, no pension contributions were
increased.
Pension obligations
IAS 19
Present value of the pension obligation
Service cost
as of December 31
€ thousand
Payout in €
2022
Helene von Roeder (since July 1, 2023)4
2023
Considering the relevant three-year average of the E. Merck Group's profit after tax, the individual sharing rates
and the performance factor, the profit sharing and the shareholding obligation for fiscal 2023 are as follows:
Profit sharing 2023 summary
Belén Garijo
Kai Beckmann
Peter Guenter
Matthias Heinzel
Marcus Kuhnert (until June 30, 2023)³
2023
Three-year
average profit
after tax of the
Average
individual profit-
E. Merck Group sharing rate 2023
(€ million)
(in per mill)1
1.52
Performance
factor for
individual
performance
Payout amount
(€ thousand)
The Personnel Committee has set the adjustment factor at 1.0 for all members of the Executive Board, taking into
account individual performance and contribution to the sustainability targets against the background of the agreed
criteria. This is in recognition of the achievements of the members of the Executive Board for fiscal 2023. The
Executive Board faced many challenges as a result of difficult macroeconomic conditions, headwinds from
competitors, and the fact that studies with Evobrutinib did not achieve the desired success in a late test phase. The
Personnel Committee acknowledges that, thanks to the commitment of the members of the Executive Board, fiscal
2023 could be closed satisfactorily under the given conditions. In addition to the economic aspect, the members of
the Executive Board continued to focus on our three key sustainability targets. Sustainable leadership and well-
thought-out decisions by the Executive Board have ensured that the Merck Group remains focused on long-term
growth.
3,288
3,017
2,735
2,760
3,017
Three-year average
Corporate Governance Compensation Report
174
Profit after tax of the E. Merck Group
€ million
Profit after tax of the E. Merck Group
2020
1,915
2021
3,003
2022
3,288
2023
2,760
Three-year average profit after tax of the E. Merck Group
(2020-2022)
Three-year average profit after tax of the E. Merck Group
(2021-2023)
2022
Helene von Roeder (Entry: July 1, 2023)
2022
• Significantly failing to meet the sustainability goals and
performance criteria "Dedicated to human progress",
"Partnering for sustainable business impact" and "Reducing
our ecological footprint" (e.g. CO2 reduction, employee
satisfaction, customer satisfaction, Corporate Social
Responsibility, diversity)
Malus criteria for decreasing profit sharing
• 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
• Extraordinary contributions to the sustainability goals and
performance criteria "Dedicated to human progress",
"Partnering for sustainable business impact" and "Reducing
our ecological footprint" (e.g. CO₂ reduction, employee
satisfaction, customer satisfaction, Corporate Social
Responsibility, diversity)
Bonus criteria for increasing profit sharing
To appropriately consider the individual performance of the Executive Board members, the Personnel
Committee may modify the payment by applying a factor ranging from 0.8 to 1.2. In determining the level of
this factor, the Personnel Committee applies the following criteria, which also include sustainability goals.
The use of profit after tax as the key performance indicator, which also serves as the basis for dividend
payments, ensures very close alignment with shareholder interests.
As regards profit sharing, an individual profit-sharing rate is contractually defined for the members of the
Executive Board as a per mille rate of the three-year average of the consolidated profit after tax of
E. Merck KG, Darmstadt, Germany. Fiscal 2023 and the two preceding fiscal years are included in the
calculation.
Profit sharing
Performance-related compensation comprises profit sharing as well as the Long-Term Incentive Plan (LTIP).
Performance-related compensation
Corporate Governance Compensation Report
• Violations of internal rules and regulations (for instance the
Merck Code of Conduct), laws or other binding external
requirements in the area of responsibility
172
⚫ Significant breaches of duty of care within the meaning of
section 93 of the German Stock Corporation Act or other
grossly non-compliant or unethical behavior
⚫ Failure to execute especially important projects or failing to
achieve other exceptionally important objectives in the area of
responsibility
4,587
FY 2022
Three-year average of the profit
after tax of the E. Merck Group
for at least four years
to be held in Merck shares
1/3
FY 2021
in %
Individual rate
The following illustration shows the profit sharing for fiscal 2023:
Corporate Governance Compensation Report
173
The members of the Executive Board are obligated to hold one-third of the payout of the profit sharing in
shares of Merck KGaA, Darmstadt, Germany, for at least four years. Further details are provided under the
heading "Share Ownership Guideline".
The performance factor makes it possible to recognize outstanding performance by a member of the Executive
Board by multiplying profit sharing by a value greater than 1.0 up to 1.2. Similarly, multiplying by a value less
than 1.0 down to 0.8 can reduce profit sharing if the circumstances call for it.
⚫ Clear failure to achieve targets for relevant key performance
indicators in the area of responsibility
Behaviors or actions that are contradictory to our company
values
2023
1 The pension contribution for 2023 has been fully paid out into the pension account.
22,960
893
1,357
437
435
450
6,309
6,875
439
435
450
7,057
7,858
638
638
650
Matthias Heinzel
19,808
450
462
2,377
2,626
2,625
Total
268
268
225
4,717
5,197
401
396
400
Marcus Kuhnert (Left: June 30, 2023)¹
832
1,405
454
FY 2023
thereof
shareholding
obligation (1/3)
(€ thousand)²
$1111
value
Actual achieved
Upper target
corridor limit
Target
Lower target
corridor limit
LTIP 2020 target achievement
The targets and thresholds, the actual amounts, and the resulting target achievement for the LTI tranche 2020
are as follows:
The LTIP tranche 2020 was structured according to the former model without a one-year holding period and
without a sustainability factor. Consequently, the LTIP tranche 2020 has been paid out in April 2023.
The LTIP tranche allocated in fiscal 2021 was still without a sustainability factor but already included the one-
year holding period. Accordingly, the performance cycle is four years, consisting of the target achievement
cycle of three years and the one-year holding period which will continue to be influenced by the share price
development. Consequently, the target achievement cycle started on January 1, 2021, and was running until
December 31, 2023. The final payout amounts of the LTIP Tranche 2021 will be determined after calculating the
base price following the holding period and will be paid out in April 2025. The payout amounts will be published
in the next compensation report.
Target Achievement Long-Term Incentive Plan
179
Corporate Governance Compensation Report
On our path to climate neutrality, we have already joined the Science Based Targets Initiative and aim to
reduce both direct (Scope 1) and indirect emissions (Scope 2) by 50% by 2030 compared with 2020. This
target is to be achieved through the reduction of process-related emissions, energy efficiency measures,
and increased purchase of electricity from renewable sources. Particularly in the case of process emissions
(Scope 1), we aim to significantly reduce emissions by using new technologies.
"Reducing our ecological footprint"
We measure our progress in embedding sustainability in our supply chains. We achieve this by increasing
the transparency of our supply chains and subjecting more suppliers to a sustainability assessment. We are
focusing particularly on suppliers for which we see a sustainability risks in the supply chain and those
suppliers who cover a relevant share of our supplier spend. In connection with this sustainability
assessment, it is important for us to increase the number of suppliers with a valid sustainability
assessment.
"Partnering for sustainable business impact"
We are convinced that with the help of science and technology, we can contribute to solving many global
challenges. In this context, our Healthcare business sector measures how many people worldwide will be
treated with our company's medical products. On the one hand, we look at the number of people treated
with products from the Healthcare business sector and, on the other hand we consider patients who are
offered treatment with our praziquantel tablets as part of the schistosomiasis control program. For the LTIP
tranche 2023, an additional sustainability key indicator has been introduced that relates to our Life Science
business sector. It covers people who are treated with drugs and medical products which are that are
manufactured using key Merck Life Science technologies and products. We intend to continuously increase
this sustainability goal and thus contribute to a significant improvement in medical care and the health
status of as many people as possible.
Target
achievement¹
"Dedicated to human progress"
Share price performance relative to the DAX®
EBITDA pre margin
11.1%
8.1%
131.7%
30.5%
31.6%
28.6%
25.6%
150.0%
58.6%
50.0%
0.0%
-20.0%
Total target achievement
5.1%
(weighting: 25%)
Organic sales growth
(weighting: 25%)
(weighting: 50%)
8.7%
805.0
965.0
The following table shows the target corridor ex ante for the respective sustainability key indicators of the three
overarching goals for the 2023 LTI tranche.
178
Corporate Governance Compensation Report
Greenhouse gas emissions Scope 1+2
Percentage of relevant suppliers (in terms of number and supplier spend)
that are covered by a valid sustainability assessment
People treated with our Healthcare products (including schistosomiasis
30% control program) and pharma products enabled by our Life Science business
sector
Sustainability Key Indicator
40%
Reducing our ecological footprint
30%
Partnering for sustainable business
impact
Dedicated to human progress
Weighting
Sustainability Goal
The Personnel Committee has defined the following sustainability key indicators and weightings for the 2023
tranche of the LTIP:
In addition, the Personnel Committee determines the weighting of the individual sustainability goal for each
tranche of the LTIP to emphasize priorities.
Sustained impact to support long-term solutions and not incentivize short-term actions
Sustainability Goal/Key Indicator
875.0
Dedicated to human progress
Minimum
Greenhouse gas emissions in Scope 1+2 worldwide (in kt)
100%
92%
85%
Relevant suppliers with a valid sustainability assessment (% of supplier spend)
Reducing our ecological footprint
80%
73%
65%
Relevant suppliers with a valid sustainability assessment (% of all relevant
suppliers)
Partnering for sustainable business impact
Number of people treated with pharmaceutical products of Merck Life Science
(in million)
650
609
555
Number of people treated as part of the schistosomiasis control program (in
million)
Maximum
Target
Number of people treated with Merck Healthcare products (in million)
110.0%
135.4%
1 Cap of 150% for the performance indicator "Share price performance relative to the DAX®" was reached.
From profit
sharing 2021
1,224
1,529
Share holding obligation based on SOG (in € thousand)¹
Helene von Roeder
Marcus Kuhnert
Matthias Heinzel
Peter Guenter
Belén Garijo
Kai Beckmann
Share Ownership Guideline
The following table illustrates the investment volume of the members of the Executive Board in accordance with
the SOG. The numbers show the shareholding obligation arising from the profit-sharing. No conclusions can be
drawn as to the individual shareholdings.
The Share Ownership Guideline promotes an even stronger alignment of the interests of the members of the
Executive Board with the sustainable interests of our shareholders and additionally increases the corporate
responsibility of the members of the Executive Board in addition to their status as general partners.
Since 2017, the members of the Executive Board are obliged to invest in and hold shares of Merck KGaA,
Darmstadt, Germany, as part of the Share Ownership Guideline (SOG) valid until fiscal 2021. Since the
introduction of the new compensation system at the beginning of fiscal 2021, the share ownership obligation
has been linked to the variable compensation element of profit sharing. Under the revised SOG, members of
the Executive Board are required to hold one-third of the net profit-sharing payout in shares for at least four
years. The shareholding obligation thus builds up gradually over the first four fiscal years after the introduction
of the new compensation system. The aim is that the Chairperson holds 200% of the base salary and the
members of the Executive Board to hold 100% of the base salary in shares of Merck KGaA. A corresponding
investment was made after payout of the profit sharing 2022 in fiscal 2023 as part of an automated purchase
via an external provider.
Share Ownership Guideline
180
Corporate Governance Compensation Report
The performance cycle of the LTIP tranche 2022 is still running until December 31, 2025, and will be paid out in
April 2026.
1 Payout capped at 250% of the grant value. A pro-rata payout has been made for Stefan Oschmann and Udit Batra. The payout for Belén Garijo was
reduced to ensure compliance with the cap on direct compensation.
From profit
sharing 2022
2,939
From profit
sharing 2023
1,463
1,529
1,111
Neither the malus provision nor the clawback provision were exercised in fiscal 2023.
Through their status as personally liable general partners of Merck KGaA, Darmstadt, Germany, and
E. Merck KG, Darmstadt, Germany, the Executive Board members bear a unique entrepreneurial responsibility.
This is also reflected by the malus criteria set forth in profit sharing and by the German statutory regulations on
liability for damages stipulated in section 93 of the German Stock Corporation Act (AktG). In order to take even
greater account of the prominent position of entrepreneurial responsibility in compensation, a clawback
provision is implemented for the LTIP. Cases in which the clawback provision may be applied include violations
of internal rules and regulations (Code of Conduct), legislation, other binding external requirements in
responsibility, significant breaches of duty of care within the meaning of section 93 AktG, and other grossly
non-compliant or unethical behavior or actions that are contradictory to our company values. In these cases,
amounts that have already been allocated under the Long-Term Incentive Plan may be retained. The Personnel
Committee is entitled to demand the repayment of profit sharing and LTIP payouts from a member of the
Executive Board if it subsequently transpires that the payout was made wrongfully, either in full or in part. For
example, this is the case when targets are not actually met or are not met to the extent assumed when the
payout was calculated due to incorrect information being applied. The extent of these claims for restitution is
based on section 818 of the German Civil Code (BGB). The Personnel Committee may agree deadlines for the
assertion of claims for restitution with the members of the Executive Board.
Malus and clawback provisions
1 Gross amounts from profit sharing. Shareholding obligation is calculated on the respective net amounts.
Total
4,216
3,126
3,476
3,216
2,405
2024
sharing for
fiscal year
1,055
111 11
In % of Annual
Base Salary
Investment is
made after
1,111
1,237
1,237 payout of profit
1,184
1,064
From profit
sharing 2024
16,942
12,510
1,320
28,942
21,371
2,255
(until April 30, 2021)
Stefan Oschmann
Payout amount
(€ thousand)¹
Reference
Merck share
price at the end
(in €)
MSUS
Total target Final number of
achievement
Number of
provisionally
granted MSUS
(in €)
(€ thousand)
beginning
Grant amount
Reference
Merck share
price at the
LTIP 2020 summary
The resulting final number of MSUs and the payout amounts of the LTIP tranche 2020 are shown in the
following table.
2,226
Udit Batra
(until July 13, 2020)
1,705
(until June 30, 2023)
Marcus Kuhnert
3,910
25,284
18,670
1,970
Belén Garijo
3,406
•
19,637
1,530
Kai Beckmann
173.46
135.4%
105.53
633
21,883
16,159
14,500
Good measurability and operationalization
1,184
Internal and external influence of the sustainability key indicators by management
The Long-Term Incentive Plan is designed as a virtual performance share plan. It is based on a four-year
future-oriented performance cycle that is composed of a three-year target achievement cycle and, since the
2021 tranche, a subsequent one-year holding period. In addition to three financial performance indicators, the
LTIP has taken sustainability targets into account since fiscal 2022. These targets are linked to a sustainability
factor. The sustainability factor has a range of 0.8 to 1.2 and can increase or reduce the target achievement
resulting from the financial key performance indicators by up to 20%. The following graphic illustrates the
calculation of the Merck Share Units (MSUs) as well as the functionality of the sustainability factor.
Long-Term Incentive tranche for fiscal 2023
Long-Term Incentive Plan (LTIP)
175
Corporate Governance Compensation Report
1 Payout amount of profit sharing in relation to the three-year average after tax.
2 Gross amount investment is based on net amount.
998
2,993
1.0
1.09
Marcus Kuhnert
1,184
3,552
1.0
1.30
1,184
3,552
Grant in €
Reference
Merck share
1.0
price at the
beginning
FY 2024
50%
share price
the Merck
Performance of
Financial targets
(0% - 150%)
MSUS
provisionally
granted
Number of
Reference
Merck
share price
at the end
0% - 200%
actually
achieved
(0% - 180%)
Number of
MSUS
Sustainability factor
(0.8 - 1.2)
Holding period
Target achievement cycle
Performance cycle
FY 2026
FY 2025
FY 2023
1.30
2,735
1,064
522
1,567
1.0
0.52
1,237
522
3,712
1,567
1.0
0.52
1.0
3,017
1,237
3,712
1.23
3,333
1.0
.
1.10
1 Payout amount of profit sharing in relation to the three-year average after tax.
2 Gross amount investment is based on net amount.
3 Pro-rated for January 1, 2023 until June 30, 2023.
4 Pro-rated for July 1, 2023 until December 31, 2023.
3,193
1.0
1.17
1,463
4,390
1.0
1.60
Matthias Heinzel
"Dedicated to
human progress"
Belén Garijo
Kai Beckmann
Peter Guenter
Payout amount (€
thousand)
Performance
factor for
individual
performance
Average
individual profit-
sharing rate 2022
(in per mill)1
average profit
after tax of the
E. Merck Group
(€ million)
Three-year
Profit sharing 2022 summary
In fiscal 2023, the profit sharing for fiscal 2022 already explained in detail in the Compensation Report 2022
was paid out, which is thus reported as compensation awarded or due in fiscal 2023 in accordance with
section 162 of the German Stock Corporation Act (AktG). Further details can be found in the following table
from the previous year:
The profit-sharing 2023 will be paid out in April 2024, while one-third must be held in shares of Merck KGaA,
Darmstadt, Germany, for at least four years. Further details of the investment obligation can be found under
"Share Ownership Guideline”.
thereof share
holding obligation
(1/3)
(€ thousand)²
vs. the DAX®
1.23
sustainable
The organic sales growth of the Merck Group as a proportion of a predefined target value with a weighting
of 25%.
•
The EBITDA pre margin as a proportion of a defined target value with a weighting of 25%, and
•
The performance of the share price of Merck KGaA, Darmstadt, Germany, compared with the performance
of the DAX® with a weighting of 50%,
The relevant financial key performance indicators are:
Financial key performance indicators
The target achievement cycle is followed by a one-year holding period. The final payout amount may be
between 0% and a maximum of 250% of the amount originally granted and depends on the number of MSUS
actually allocated and the reference share price at the end of the performance cycle.
The sustainability factor target achievement can range between 0.8 and 1.2 and is determined by the
predefined sustainability key indicators. Thus, the total number of MSUs actually allocated can amount to a
maximum of 180% of the provisionally granted MSUs.
Based on the three financial performance indicators, the number of MSUs allocated may be between 0% and
150% of the provisionally granted MSUs. The resulting number of MSUs is then multiplied by the sustainability
factor.
The number of MSUs actually allocated to the Executive Board members after the end of the target
achievement cycle depends on the development of the financial performance indicators and the sustainability
factor during the three-year target achievement cycle.
1,750
4,036
700
3,500
8,071
1,400
The number of MSUs actually allocated after the end of the target achievement cycle is based on the following
target achievement curves. The targets and thresholds for the key performance indicators of the EBITDA pre
margin and organic sales growth are defined by the Personnel Committee at the start of the performance cycle
and subsequently published in the Compensation Report.
4,750
Achievement
100%
Relevance and influence of the sustainability key indicators on the three overarching sustainability goals of
the sustainability strategy
•
"Partnering for
With the introduction of the sustainability factor in fiscal 2022, our sustainability strategy also becomes
incorporated into the LTIP. On the basis of the sustainability goals ("Dedicated to human progress", "Partnering
for sustainable business impact" and "Reducing our ecological footprint"), the Personnel Committee defines
corresponding specific and measurable sustainability key indicators as well as associated target and threshold
values at the beginning of each tranche of the LTIP. These values are used to calculate target achievement at
the end of the relevant target achievement cycle. The following sustainability criteria were defined for the
selection of the sustainability key indicators:
Non-financial key indicators of the sustainability factor
177
Target value
Performance of the Merck
share price vs. the DAX®
50%
0%
-20%
0%
0%
100%
150%
Achievement
Corporate Governance Compensation Report
150%
10,954
-x% points
+x% points
Actual value of EBITDA pre margin
or organic sales growth
173.46
Peter Guenter
Kai Beckmann
Belén Garijo
LTIP Tranche 2023 allocation
In fiscal 2023, the allocation of the LTIP tranche 2023 was made on the basis of the following parameters:
Corporate Governance Compensation Report
As part of the LTIP, members of the Executive Board are provisionally granted a certain number of virtual
shares, so-called share units of Merck KGaA, Darmstadt, Germany ("MSUs"). The number of MSUS is calculated
as follows: An individual grant in Euros is set for each Executive Board member. Every year, this grant is
divided by the definitive reference share price at the beginning of the performance cycle, resulting in the
number of MSUs that the respective member is provisionally entitled to receive.
Calculation of the MSUS
Amount paid
out in €
(0% - 250%
of the grant
in €)
target value
relation to
25%
EBITDA pre
margin in
relation to
target value
Organic sales
"Reducing our
ecological footprint"
1,900
business impact"
Matthias Heinzel
Marcus Kuhnert (until June 30, 2023)¹
growth in
1 Payout will be pro-rated based on the termination agreement.
4,750
10,954
Helene von Roeder (since July 1, 2023)
1,900
4,288
9,887
1,715
5,750
13,260
-25%
(€ thousand)
2,300
Grant amount
176
(€ thousand)
Reference Merck
share price at the
Number of
provisionally
granted MSUS
beginning
(in €)
Maximum payout
396
44.8%
2,939
2,939
Others
Compensation awarded or due pursuant to
section 162 AktG
Service cost
6,558
100.0%
3,300
Compensation for the fiscal year
2,193
7,158
Total compensation
7,180
1,044
522
LTI 2019 (2019 to 2021)
600
6,954
€ thousand
26
€ thousand
1,200
26
1,769
885
Profit sharing 2022
LTI 2020 (2020 to 2022)
Payout in cash
Investment (in shares; 4-year holding period)
998
1,995
998
Profit sharing 2023
Payout in cash
Investment (in shares; 4-year holding period)
Merck LTIP
1,995
30.4%
15.2%
Member of the Executive Board
396
2,589
2023
2022
2023
€ thousand
600
in %
98.5%
€ thousand
For the fiscal year
(voluntary disclosure)
€ thousand
1.5%
600
9
1,044
522
2022
€ thousand
1,200
26
€ thousand
LTI 2020 (2020 to 2022)
9
401
7,581
(pursuant to section 162 AktG)
In the fiscal year
401
7,559
Base salary
Additional benefits
Profit sharing
Profit sharing 2021
Payout in cash
Investment (in shares; 4-year holding period)
(since July 1, 2023)
Profit sharing 2022
Investment (in shares; 4-year holding period)
Profit sharing 2023
Payout in cash
Investment (in shares; 4-year holding period)
Merck LTIP
LTI 2019 (2019 to 2021)
Helene von Roeder
Payout in cash
0.4%
1,590
795
in %
9.1%
Payout in cash
Investment (in shares; 4-year holding period)
Profit sharing 2022
Payout in cash
2,368
Investment (in shares; 4-year holding period)
Profit sharing 2023
1,184
49.7%
24.8%
Payout in cash
Investment (in shares; 4-year holding period)
Merck LTIP
LTI 2019 (2019 to 2021)
LTI 2020 (2020 to 2022)
Others
Compensation awarded or due pursuant to
section 162 AktG
Compensation for the fiscal year
Profit sharing 2021
Profit sharing
Additional benefits
€ thousand
1,200
12
5,304
435
5,739
Others¹
5,148
437
5,585
Matthias Heinzel
Member of the Executive Board
Service cost
In the fiscal year
(pursuant to section 162 AktG)
2023
2022
€ thousand
1,200
16
in %
25.2%
0.3%
(since April 1, 2021)
26
Total compensation
2023
Payout in cash
Corporate Governance Compensation Report
Investment (in shares; 4-year holding period)
186
In the fiscal year
(pursuant to section 162 AktG)
Marcus Kuhnert
Member of the Executive Board
(until June 30, 2023)
For the fiscal year
(voluntary disclosure)
2023
2022
2023
2022
€ thousand
600
Profit sharing 2021
Profit sharing
Additional benefits
Base salary
€ thousand
1,200
16
2,475
1,237
2022
€ thousand
1,200
12
2,368
1,184
For the fiscal year
(voluntary disclosure)
4,768
3,597
4,928
4,764
454
5,222
462
4,059
454
5,382
462
5,226
100.0%
953
2,131
609
Pension payments
€ thousand
Karl-Ludwig Kley
Bernd Reckmann
2023
2022
756
695
443
443
Payments to former members of the Executive Board and their
surviving dependents
Payments to former members of the Executive Board and their surviving dependents are made in the form of
pension payments, as a temporary continuation of the basic salary in the event of death, as part of the profit-
sharing and the LTIP, as well as compensation for a post-contractual non-compete clause. In the 2023 financial
year, they amounted to € 14.4 million (previous year: € 21.7 million). Provisions for defined benefit pension
commitments in accordance with IAS 19 amounted to € 123.8 million as of December 31, 2023
(December 31, 2022: € 123.1 million).
Corporate Governance Compensation Report
189
Former members of the Executive Board who only received pension payments in fiscal 2023 are shown in the
following table. The compensation awarded or due in fiscal 2023 in accordance with section 162 (1) AktG
consists entirely of non-performance-related compensation elements.
695
334
100.0%
100.0%
633
100.0%
Merck LTIP
LTI 2019 (2019 to 2021)
Others
Pension
Compensation awarded or due pursuant to section 162 AKtG
Compliance with the defined maximum compensation
Walter Galinat
2023
€ thousand
2022
in %
€ thousand
361
154
154
Member of the Executive Board
(until September 30, 2018)
Compensation awarded or due pursuant to section 162 AKtG
The maximum compensation limits the compensation awarded or due in the fiscal year, i.e. the total of all non-
performance-related and performance-related compensation elements awarded or due in a fiscal year. Pension
payments are not included in the maximum compensation.
€ 9,500,000 each for ordinary members of the Executive Board. The sum of the compensation awarded or due
in accordance with section 162 AktG less any pension payments and plus pension expenses is below the defined
maximum compensation in accordance with section 87a AktG for all members of the Executive Board.
9,500
Marcus Kuhnert (until June 30, 2023)
8,000
9,500
Helene von Roeder (since July 1, 2023)
8,000
9,500
Corporate Governance Compensation Report
190
Compensation for the Supervisory Board
members in fiscal 2023
The compensation of the Supervisory Board members is defined in Article 20 of the Articles of Association of
Merck KGaA, Darmstadt, Germany, and corresponds to the compensation system for the Supervisory Board
that was adopted by the 2023 Annual General Meeting with 99.64% of the votes cast.
Accordingly, the members of the Supervisory Board receive fixed compensation of € 47,000 per year, which is
due and paid out in the reporting year. The Chair receives double, and the Vice Chair receives one and a half
times this amount. In addition to their fixed compensation, Supervisory Board members who are also members
of the Audit Committee, which was established in the meeting of the Supervisory Board on February 26, 2021,
receive annual compensation of € 15,000. The Chair of the Audit Committee receives additional annual
compensation of € 30,000. Moreover, the members receive additional compensation of € 750 per meeting they
attend. There are no variable compensation components.
The compensation awarded or due and the respective relative share of the total compensation for the current
members of the Supervisory Board is presented in the following table. The compensation components are allocated
to the year in which the service was rendered, regardless of the actual time of payment or its legal due date.
In fiscal 2023, Helene von Roeder resigned from the Supervisory Board effective April 17, 2023, and Barbara
Lambert joined the Supervisory Board effective August 11, 2023. There were no payments to former members
of the Supervisory Board in the fiscal year.
5,198
8,000
Matthias Heinzel
9,500
8,000
In addition to the maximum compensation, there is a separate contractually agreed payment cap for each of
the performance-related compensation elements. A maximum amount has been set for the amount of profit
sharing for all members of the Executive Board (please find more details in the paragraph “profit sharing”). The
payout from the Long-Term Incentive Plan cannot exceed 2.5 times the individual award value, even in cases of
exceptional performance.
In addition, there is a contractually agreed maximum limit on the direct compensation, i.e. the sum of base
salary, profit-sharing, and LTIP. In this context, it is stipulated that capping, if necessary, shall be applied first
to the LTIP and then to profit sharing. To ensure compliance with this cap, the 2020 LTIP payment for Belén
Garijo was reduced accordingly by € 476,514 thousand.
Compliance with the defined maximum compensation is ensured by the Personnel Committee setting the
amounts of the variable compensation components by resolution. The defined maximum compensation and the
maximum limit for the direct compensation of the members of the Executive Board are shown in the following
table.
Overall compensation limit
Maximum limit
for Direct
Maximum
compensation
pursuant to
section 87a
€ thousand
The maximum compensation for the fiscal year is € 11,500,000 for the Chair of the Executive Board and
Belén Garijo
Peter Guenter
Compensation
AktG
9,800
11,500
8,000
9,500
Kai Beckmann
Compensation awarded or due pursuant to
section 162 AktG
2,131
100.0%
Payout in cash
Investment (in shares; 4-year holding period)
LTIP
LTI 2019 (2019 bis 2021)
Marcus Kuhnert
Member of the Executive Board
(until June 30, 2023)
2023
2022
in Tsd. €
600
600
in %
100.0%
100.0%
in Tsd. €
Stefan Oschmann
Chair of the Executive Board
Profit sharing 2021
Profit sharing
Compensation awarded or due pursuant to section 162 AKtG
Others (waiting allowance)
100.0%
Compensation for the fiscal year
3,128
Service cost
268
268
Total compensation
(until April 30, 2021)
877
1 Compensation payment for short-term variable remuneration (€ 257 thousand) and long-term variable remuneration (provision of € 696 thousand; final
calculation and payment in 2027).
Corporate Governance Compensation Report
187
Compensation awarded or due to former members of the Executive
Board in the fiscal year
The compensation awarded or due to former members of the Executive Board during the fiscal year is also
presented below. Tranches of the LTIP already allocated before a member of the Executive Board left the
company continue to run until the end of the originally contractually agreed term and are settled and paid out
after the end of the performance period. In addition, some members who have already left the Executive Board
receive fixed payments from pension plans.
The following tables show the compensation awarded or due to former members of the Executive Board in fiscal
2023 in accordance with section 162 (1) AktG and the respective relative share of total compensation.
Compensation awarded or due includes all amounts received by the former members of the Executive Board in
the fiscal year (compensation awarded) or all amounts legally due but not yet received (compensation due). For
former members of the Executive Board who left the Executive Board in the last ten years, the information is
indicated by name. In accordance with the provisions of section 162 (5) AktG, no personal information is
provided on former members of the Executive Board who left the Executive Board more than ten years ago, i.e.
before December 31, 2012.
Compensation awarded or due
3,396
633
2023
2022
Merck LTIP
LTI 2019 (2019 to 2021)
LTI 2020 (2020 to 2022)
Others
Pension
Corporate Governance Compensation Report
Udit Batra
Member of the Executive Board
(until July 13, 2020)
2023
€ thousand
188
2022
in %
€ thousand
10,189
100.0%
4,011
Compensation awarded or due pursuant to section 162 AktG
in %
€ thousand
858
429
4,377
55.5%
LTI 2020 (2020 bis 2022)
€ thousand
2,226
1,166
29.1%
3,953
Pensions
619
15.4%
572
Others
437
7.3%
In fiscal 2023, a termination agreement was reached with Marcus Kuhnert regarding the early termination of
his membership in the Executive Board with effect from June 30, 2023. Initially, the term of his contract would
have ended on July 31, 2024. In accordance with the contract as well as with the compensation system, the
termination agreement regulates the continued payment of the fixed compensation of € 100,000 per month as
well as the payment of profit-sharing and LTI for the initial contract term until July 31, 2024. Furthermore, the
additional benefits will be paid out. It was stipulated that the variable compensation elements shall be
calculated and paid out according to the initial contractual terms and conditions. As a consequence, Marcus
Kuhnert shall receive the pro-rated amount of € 1,566,732 from profit-sharing for the time period from July 1,
2023, until December 31, 2023. According to the Share Ownership Guideline the amount of one third must be
invested in Merck shares and must be held for four years. Regarding fiscal 2024 the respective payout amounts
will be calculated at the end of the year and will be published in the Compensation Report 2024.
2,222
1,111
3,825
43.6%
3,406
3,406
Others
Compensation awarded or due pursuant to
section 162 AktG
7,820
100.0%
7,895
2,128
1,064
Compensation for the fiscal year
Total compensation
435
8,255
439
8,334
4,555
435
4,990
7,814
439
8,253
Base salary
Additional benefits
Service cost
LTI 2020 (2020 to 2022)
LTI 2019 (2019 to 2021)
Merck LTIP
€ thousand
in %
1,200
22
15%
0.3%
€ thousand
1,200
16
€ thousand
€ thousand
1,200
22
Base salary
Additional benefits
1,200
16
Profit sharing
Profit sharing 2021
Payout in cash
Investment (in shares; 4-year holding period)
Profit sharing 2022
1,903
951
Payout in cash
2,128
Investment (in shares; 4-year holding period)
Profit sharing 2023
1,064
27.2%
13.6%
Payout in cash
Investment (in shares; 4-year holding period)
Corporate Governance Compensation Report
Peter Guenter
Member of the Executive Board
(since January 1, 2021)
In the fiscal year
LTI 2020 (2020 to 2022)
Others
Compensation awarded or due pursuant to
section 162 AktG
Compensation for the fiscal year
Service cost
Total compensation
Base salary
2,110
1,055
2,475
1,237
185
2022
€ thousand
1,200
21
2,368
1,184
375
375
375
375
5,144
100.0%
4,761
435
5,579
LTI 2019 (2019 to 2021)
2022
Merck LTIP
Payout in cash
(pursuant to section 162 AktG)
For the fiscal year
(voluntary disclosure)
2023
2022
2023
€ thousand
1,200
in %
23.3%
17
0.3%
€ thousand
1,200
21
€ thousand
1,200
17
Profit sharing
Profit sharing 2021
Payout in cash
Investment (in shares; 4-year holding period)
Profit sharing 2022
Payout in cash
2,368
Investment (in shares; 4-year holding period)
Profit sharing 2023
1,184
46.0%
23.0%
Investment (in shares; 4-year holding period)
2022
2023
For the fiscal year
(voluntary disclosure)
In fiscal year 2023 pursuant to section 162 AktG
Base salary
Additional benefits
For fiscal year 2023 as voluntary disclosure
Profit sharing for fiscal year 2022, payout in fiscal year 2023:
- Payout in cash
- Investment (in shares; 4-year holding period according to
Share Ownership Guideline)
LTIP tranche 2020 (Jan 1, 2020-Dec 31, 2022),
payout was in fiscal year 2023
Profit sharing for fiscal year 2023, payout in fiscal year 2024:
- Payout in cash
- Investment (in shares; 4-year holding period according to
Share Ownership Guideline)
Other compensation
The compensation of the current members of the Executive Board is shown in the following tables.
Service cost as voluntary disclosure
Compensation awarded or due
Base salary
Additional benefits
Corporate Governance Compensation Report
184
Belén Garijo
Chair of the Executive Board
(since May 1, 2021; previously member of the Executive Board)
In the fiscal year
(pursuant to section 162 AktG)
The figures presented in the tables have been rounded in accordance with standard commercial practice. As a
result, the individual values may not add up to the totals presented.
To provide a complete picture of the total compensation of the Executive Board members, pension expense is
also reported on a voluntary basis.
To ensure a transparent presentation of the relation between business performance and the resulting
compensation, variable compensation for fiscal 2023 is also disclosed on a voluntary basis, with the variable
compensation components being allocated to the year in which the final performance was rendered, irrespective
of the actual date of payment or the legal due date. Owing to the introduction of the holding period, the
performance cycle of the LTIP tranche 2021 will run until December 31, 2024. We will report about the
performance of the LTIP tranche 2021 for the first time on a voluntary basis in the Compensation Report 2024.
In accordance with section 162 (1) of the German Stock Corporation Act (AktG), the compensation awarded or
due to each member of the Executive Board in fiscal 2023 and the respective relative share of total
compensation are presented transparently in the tables below. This includes all compensation elements that
were paid out or became legally due in fiscal 2023.
181
Compensation-related transactions
Contracts with the members of the Executive Board are usually concluded for a period of five years. If a
contract begins during the year, the fixed compensation, profit sharing and individual LTIP tranches are paid on
a pro rata basis.
Should members of the Executive Board be held liable for financial losses while executing their duties, this
liability risk is covered by a D&O insurance policy under certain circumstances. The D&O insurance policy has a
deductible in accordance with the legal requirements.
Obligations in connection with the termination of Executive Board membership
The contracts of the Executive Board members do not provide for ordinary termination. The right to
extraordinary termination for good cause in accordance with section 626 BGB is available to both parties
without observing a notice period.
The contracts of the Executive Board members may provide for the continued payment of fixed compensation
to surviving dependents for a limited period in the event of death. Above and beyond existing pension
obligations, no further obligations are provided for in the event of the termination of the contractual
relationships of the Executive Board members.
The amounts payable to Executive Board members are capped in the event of the early termination of the
contract without good cause justifying such termination. Pursuant to this, payments in connection with the
termination of an Executive Board member's duties shall not exceed twice the annual total compensation or
constitute compensation for more than the remaining term of the employment contract (severance cap). If an
Executive Board member's membership terminates due to the termination of the contract either by the
company or the Executive Board member before the four-year performance cycle of an open LTIP tranche
expires, the obligations resulting from the LTIP shall continue if there are specific reasons for the termination,
such as the contract is not renewed after it expires or if the Board of Partners determines this to be appropriate
at its own discretion; otherwise, the obligations shall expire.
Should obligations resulting from the LTIP continue to apply, any early severance payout is excluded. Likewise,
no early payout or severance for the profit-sharing payment is granted. If the compensation in the fiscal year in
which the Executive Board member's duties cease is expected to be significantly higher or lower than in the
previous fiscal year, the Board of Partners may decide to adjust the amount applied as the member's total
compensation at its own discretion.
During the fiscal year, no adjustments or changes were made to the employment contracts of the Executive
Board. In particular, the terms of the termination agreement with Marcus Kuhnert did not result in any
adjustments or changes to the original contract with Marcus Kuhnert.
Corporate Governance Compensation Report
182
Post-contractual non-competition
Post contractual non-competition clauses have been agreed with the members of the Executive Board except
for Marcus Kuhnert. His contract provided for the option to agree on a post-contractual non-compete in the
event of termination of his membership of the Executive Board. In general, the post-contractual non-
competition clause involves the payment of compensation amounting to 50% of the member's average
compensation within the last twelve months and is paid for a period of two years. Other earnings, pension
payments and any severance payments are offset against this amount.
Owing to his early termination, a post-contractual non-compete was agreed with Marcus Kuhnert with effect
until July 31, 2024. As compensation, the post-contractual non-compete agreement provides for the payment
of the fixed compensation as well as for the payment of the variable compensation until July 31, 2024, which
means for the regular remaining term of his contract. Further compensation will not be granted.
There was also a post-contractual non-competition agreement with Stefan Oschmann which came into force
upon the termination of his membership of the Executive Board. The parties agreed on a monthly compensation
of € 343,184 for the period from May 1, 2021, to April 30, 2023. The monthly pension of € 51,569 as well as
further additional income has been offset against this amount.
Loans, advances, payments by affiliates of Merck Group
In fiscal 2023, E. Merck Beteiligungen KG granted a loan of € 560,640.00 to Helene von Roeder. The loan bore
interest at 4% per annum and had to be repaid within three years of disbursement. The loan was fully repaid in
fiscal 2023.
Besides this, neither loans or advances were paid to other members of the Executive Board during fiscal 2023,
nor any payments by affiliated companies.
Corporate Governance Compensation Report
183
Individual Disclosure of the Compensation of
the Executive Board
Compensation awarded or due to current members of the Executive
Board in fiscal 2023
2023
2023
2022
2023
4,629
39.5%
3,910
3,910
Others
Compensation awarded or due pursuant to
section 162 AktG
9,889
100.0%
9,891
Compensation for the fiscal year
6,176
9,891
Service cost
Total compensation incl. service cost
638
10,527
638
10,529
638
6,814
638
10,529
1 Reduction of LTI 2019 and LTI 2020 payout due to maximum amount of direct compensation.
Kai Beckmann
Member of the Executive Board
In the fiscal year
(pursuant to section 162 AktG)
For the fiscal year
(voluntary disclosure)
3,058
1,529
Corporate Governance Compensation Report
LTI 2020 (2020 to 2022)
LTIP¹
€ thousand
1,500
in %
15.2%
89
0.9%
€ thousand
1,500
91
€ thousand
1,500
89
2022
€ thousand
1,500
91
Profit sharing
Profit sharing 2021
Payout in cash
Investment (in shares; 4-year holding period)
2,447
1,224
Profit sharing 2022
Payout in cash
2,927
Investment (in shares; 4-year holding period)
Profit sharing 2023
1,463
29.6%
14.8%
2,927
1,463
Payout in cash
Investment (in shares; 4-year holding period)
LTI 2019 (2019 to 2021)
Merck Shares
Identified investors by region as of November 2023
To Our Shareholders
Net sales by region
€ million/in % of net sales
21%
In the therapeutic area of SCCHN, we advanced our global Phase III development program for xevinapant, an
IAP (inhibitor of apoptosis protein) inhibitor in 2023, with enrollment completed in the Trilynx study. The
recruitment of patients in the XRay Vision study is ongoing (for further details see "Research and
Development").
In 2023, we also continued to expand the availability of Tepmetko® (tepotinib), our oral MET inhibitor designed
to inhibit the oncogenic MET receptor signaling caused by MET (gene) alterations, with additional regulatory
approvals. TepmetkoⓇ is now available in 43 markets globally.
In September 2023, we received U.S. Food and Drug Administration approval of a supplemental Biologics
Licensing Application for BavencioⓇ, converting the MCC indication from accelerated approval into full approval
approximately four years earlier than anticipated. As a result, BavencioⓇ is the first MCC treatment to receive
full approval in the U.S. market.
BavencioⓇ is also approved in the first-line treatment of advanced renal cell carcinoma in combination with
axitinib and it is a standard of care as a monotherapy in metastatic Merkel cell carcinoma (MCC), a rare form of
skin cancer.
Through our subsidiary Ares Trading SA, we regained exclusive worldwide rights to develop, manufacture and
commercialize BavencioⓇ from Pfizer as of June 30, 2023.
We have made progress in changing the standard of care globally for patients with locally advanced or
metastatic urothelial carcinoma (UC) as we continue to obtain additional regulatory approvals and
reimbursement decisions for our anti-PD-L1 antibody Bavencio® (avelumab) (for further details see "Research
and Development"). BavencioⓇ is approved as a first-line maintenance treatment for advanced UC in 71
countries. It has become a standard of care in the treatment of this disease based on the results of the JAVELIN
Bladder 100 trial, the only Phase III study of an immunotherapy to demonstrate a significant overall survival
benefit in the first-line maintenance setting.
Erbitux® (cetuximab) remains our best-selling cancer drug with € 1 billion in sales in 2023. The drug is a
standard of care for patients with epidermal growth factor receptor (EGFR)-expressing, RAS wild-type
metastatic colorectal cancer (mCRC) as well as both recurrent and/or metastatic and locally advanced
squamous cell carcinoma of the head and neck (SCCHN). With more than 200 active clinical trials involving
ErbituxⓇ, including more than 15 Phase III studies, we are also continuously advancing our broad-based
lifecycle management strategy.
Oncology
In 2023, Healthcare generated 38% of Group sales and 41% of EBITDA pre (excluding Corporate and Other).
Europe and North America generated 53% of Healthcare's net sales in 2023. In recent years, we have steadily
expanded our presence in growth markets. In 2023, Asia-Pacific and Latin America accounted for 40% of sales.
In Healthcare, we operate as a global specialty innovator in the Neurology & Immunology and Oncology
franchises as well as in the therapeutic areas of fertility and cardiovascular, metabolic and endocrinological
disorders. The Healthcare business sector discovers, develops, manufactures, and markets pharmaceutical and
biological prescription drugs to treat cancer, multiple sclerosis (MS), infertility, and growth disorders as well as
certain cardiovascular and metabolic diseases. Our R&D pipeline is focused on strengthening our position in the
fields of oncology, neurology and immunology.
Healthcare
17
Merck
Fundamental Information about the Group
Combined Management Report
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
In March, Life Science launched its open-source code library for Palantir Foundry on GitHub®. Our source code,
"Foundry DevTools", was published under an open-source license in collaboration with Palantir. We have been
partnering with Palantir since 2017 to build our data and analytics capabilities and contribute to the digital
product portfolios of our Life Science, Healthcare and Electronics business sectors. The source code is freely
accessible to all Foundry developers worldwide.
Digitalization
Four years after its inception in 2019, the SMASH Packaging plan has entered its next generation, called SMASH
2.0. So far, more than 100 packaging improvement projects have been completed or are underway, removing
tens of thousands of metric tons of CO2 without sacrificing safety, quality, or performance. Key achievements
include avoiding more than 300 metric tons of packaging and achieving a 23% reduction of expanded
polystyrene (EPS), also known as Styrofoam. 72.5% of the paper-based materials sourced directly for packing
and shipping products therefore aligns with the so-called zero deforestation standards.
Sustainable packaging solutions*
In November, we completed the second phase of our new € 29 million Biologics Testing Center in Shanghai,
China, expanding our first biosafety laboratories, which we inaugurated in 2022, in this market. This
expansion enables us to provide local access to a broad range of testing for cell line characterization and lot
release, from preclinical development to commercialization.
Since September, CTDMO can offer integrated services for all critical stages of mRNA development,
manufacturing and commercialization, including products and testing, with the opening of two new GMP-
grade mRNA drug substance manufacturing sites in Darmstadt and Hamburg, Germany. The new sites are
part of the company's ongoing € 1 billion investment to advance mRNA technologies and build its global
mRNA network and capabilities in addition to key acquisitions such as AmpTec and Exelead. With this
€ 28 million investment, we can provide mRNA services at different scales and applications from preclinical
to commercial.
In July, Life Science announced a € 23 million expansion of its facility in Lenexa, Kansas, USA, adding lab
space and production capacity to manufacture cell culture media. Cell culture media is used in processes as
varied as vaccine manufacturing, gene therapy and monoclonal antibody manufacturing. The company's
strategic investments to expand capacity in existing production facilities in the Lenexa, Kansas, USA, and
Nantong, China, sites with dry powder media manufacturing lines will increase both local and global
production capacity.
In fiscal 2023, we also continued to advance our efforts in novel medicines. For the first antibody-drug
conjugate (ADC) developed in our labs, the anti-CEACAM5 ADC M9140, we completed the dose-finding portion
of our Phase I study (for further details see "Research and Development").
€ 70 million investment will enable large-scale manufacturing of high-purity reagents for quality control and
testing for biopharma customers.
18
Beyond our ADC platform, we are also evaluating small-molecule DNA damage response (DDR) inhibitors as
this therapeutic class has the potential for better outcomes in patients with cancer.
Denmark was chosen because of the existing recycling infrastructure in the country. Today, the four companies
involved in this partnership account for around six million injection pens used in Denmark annually. The
ambitious target for the first 12 months is for 25% of all injection pens distributed by the four companies in
Denmark to be recycled, amounting to more than 25 metric tons of plastic.
We are continuously taking action to further reduce the negative ecological impact of our operations on our
planet with a holistic approach that includes our locations, products, logistics and patients. A portfolio-related
activity to reduce the ecological footprint of our operations is the partnership we entered in May with Novo
Nordisk, Eli Lilly and Sanofi to pioneer the world's first cross-industry solution for recycling materials from
injection pens after use by patients.
Minimizing the ecological footprint of our operations*
In endocrinology, we build evidence in the digital health space and leverage technology to provide new
solutions for patient engagement, partnership with healthcare practitioners and better payer value proposition.
SaizenⓇ, containing the active ingredient somatropin, is our main endocrinology product and is indicated for the
treatment of multiple growth hormone disorders in children and adults. SaizenⓇ can be delivered with the
EasypodⓇ electromechanical injection device, the only growth hormone injection device able to wirelessly
transfer data such as injection times, dates and doses to the web-based software system Growzen® Connect.
AluettaⓇ (the SaizenⓇ pen) is now available in 67 countries with the objective of expanding the reach of
SaizenⓇ, offering additional options for healthcare practitioners and patients and expanding our devices
portfolio.
GlucophageⓇ, containing the active ingredient metformin, is a drug for first-line treatment of type 2 diabetes
and is available in more than 100 countries. In recent financial years, GlucophageⓇ has been approved by
further health authorities for use in prediabetes when intensive lifestyle changes failed.
EuthyroxⓇ, with the active ingredient levothyroxine, is a leading medicine for the treatment of hypothyroidism,
a disease with high prevalence but still low diagnosis rates in most emerging markets.
ConcorⓇ/Concor Cor®, containing bisoprolol, is a beta-blocker for treating hypertension and cardiovascular
diseases such as coronary heart disease and chronic heart failure. In addition to ConcorⓇ/Concor Cor®, the
ConcorⓇ family includes fixed-dose combinations such as Concor Plus®/Lodoz® (bisoprolol with
hydrochlorothiazide).
Cardiovascular, Metabolism & Endocrinology (CM&E), which includes the medicines Glucophage®, Euthyrox®,
ConcorⓇ, and SaizenⓇ, is the largest franchise of the Healthcare business sector in terms of sales.
Cardiovascular, Metabolism & Endocrinology
Fundamental Information about the Group Merck
Combined Management Report
19
In September 2023, we announced our new employee "Fertility Benefit" program. The new offer is available to
our employees in a number of countries and to their partners, regardless of their marital status. Apart from
financial assistance, we offer employees facing fertility issues additional information services related to fertility
disorders.
To support and meet the needs of a variety of patients, in addition to Gonal-fⓇ, we offer another key product
called PergoverisⓇ. It is a product that combines recombinant human follicle-stimulating hormone (r-hFSH) and
recombinant human luteinizing hormone (r-hLH). This represents another treatment option for women with
severe FSH and LH deficiency. PergoverisⓇ is also available in a ready-to-use liquid version in a pre-filled
injection pen, eliminating the need for mixing.
Infertility is an increasing challenge globally due to demographic changes and lifestyle adjustments such as
delayed childbearing. Based on the latest data from WHO, one in six people worldwide is affected by infertility.
According to the latest data, more than five million babies have been born worldwide with the help of Gonal-f®,
a therapeutic within our Fertility portfolio. It contains the active ingredient follitropin alfa (r-hFSH alfa), which is
a recombinant form of the natural hormone FSH and is available in a convenient and ready-to-use pre-filled
injection pen. Treatment with Gonal-f® can result in increased follicles, oocytes, and embryos compared to
urinary gonadotropins, thereby improving the chances of pregnancy and live birth.
Our Fertility franchise is a global market leader in fertility drugs and treatments.
Fertility
With evobrutinib, we had originally aimed to commercialize a first-in-class Bruton's tyrosine kinase (BTK)
inhibitor for RMS. In December, we shared the outcome from the EVOLUTION clinical trials, which showed that
the investigational drug did not meet its primary endpoint of annualized relapse rate for up to 156 weeks
compared to oral teriflunomide.
MavencladⓇ, a short-course oral therapy for the treatment of adults with various forms of highly active RMS,
reached blockbuster status in fiscal 2023 with total net sales of more than US$ 1 billion, and is approved in 95
countries worldwide, including those of the European Union, Switzerland, Australia, Canada, and the United
States.
In Neurology & Immunology, we aim to provide transformative treatment solutions to support people living with
neurological and immune-mediated conditions while significantly improving quality of life for them and their
caregivers. With over two decades of experience in MS, our current portfolio includes two approved products for
the treatment of relapsing MS (RMS) - Rebif® (interferon beta-1a) and MavencladⓇ (cladribine tablets).
Rebif®, a disease-modifying drug, has been a standard treatment in RMS for over 20 years with more than
1.9 million patient-years of therapy since approval.
Neurology & Immunology
Within our DDR portfolio, we continue to advance the development of our potent and selective inhibitor of
ataxia telangiectasia and Rad3-related (ATR), tuvusertib (M1774). We initiated the Phase Ib/IIa DDRiver NSCLC
322 study of tuvusertib in combination with cemiplimab in participants with non-squamous non-small cell lung
cancer (NSCLC) (for further details see "Research and Development").
Combined Management Report Fundamental Information about the Group Merck
In June, we announced the expansion of production capacity for highly purified reagents at the site in
Nantong, China, a major transportation hub in the Yangtze River Delta region. The approximate
Also in May, we signed a non-binding memorandum of understanding with the Korean Ministry of Trade,
Industry and Energy and Daejeon City, Korea, for a new Asia-Pacific bioprocessing center aimed at
supporting the region's healthcare ecosystem. The planned bioprocessing facility would support commercial
manufacturing for biotech and pharmaceutical customers in this region.
The investment includes a new facility in Glasgow, which will house molecular biology and sequencing
services. Testing capacity in current buildings will be expanded to include biosafety testing, analytical
development and viral clearance suites. The latest investment follows our recent testing expansions in
Rockville, Maryland, USA, and Shanghai, China. With its BioRelianceⓇ testing services portfolio, Life Science
performs more than 20,000 studies annually in the United Kingdom for more than 400 customers globally.
BioRelianceⓇ contract testing services and the recently formed Millipore® CTDMO Services are part of the
Life Science Services business unit.
O
5,952
14,718
North America
28%
6,037 North America
23%
Europe
29%
1,169
Latin America
3,458
737
Middle East and Africa (MEA)
5%
Middle East and Africa (MEA)
2%
4%
Employees by region as of December 31, 2023¹
Number/in %
Merck Group
33%
Asia-Pacific
(APAC)
6,936
1,331
Latin America
6%
45%
Europe
28,304
24%
Asia-Pacific
(APAC)
15,259
16
16
Merck
Fundamental Information about the Group
Combined Management Report
In May, we announced an investment of € 35 million in biosafety testing facilities at our Glasgow and
Stirling sites in Scotland. Biosafety testing is a step in the drug development and manufacturing process to
ensure that drugs are safe, effective and compliant with regulatory requirements. Through the expansion,
we plan to create nearly 500 new jobs, bringing our Life Science workforce to over 1,200 employees across
the two sites.
We have started building a new € 30 million expansion in Allentown, Pennsylvania, USA, which will join the
existing facility to create a two-building "distribution campus".
Investments to expand capabilities and production
In March, we opened a lateral flow assay development lab in St. Louis, Missouri, USA, an innovative space
where customers collaborate with our technical experts to troubleshoot point-of-care testing.
The Science & Lab Solutions business unit serves customers in the pharmaceutical, biotech industries and other
industries in production, testing and research, as well as public authorities and research institutions. We provide
customers with access to a broad portfolio including reagents, consumables, devices, instruments, software,
and services for scientific discovery in addition to lab water instruments, consumables and services,
microbiology and biomonitoring products, test assays, analytical reagents, and flow cytometry kits and
instruments.
Science & Lab Solutions
Electronics
The Life Science Services business unit offers traditional and novel modalities, including monoclonal antibodies,
high-potency active pharmaceutical ingredients (HPAPIs) and antibody-drug conjugates as well as viral and
gene therapies, including mRNA. In addition to manufacturing, Life Science Services includes sales and
marketing, research and development and supply chain operations. Our integrated CTDMO services support
clients from preclinical phases to commercial production.
The Process Solutions business unit continued to focus on delivering its product offering for the pharmaceutical
development and manufacture of filtration devices, chromatography resins, single-use assemblies and systems,
processing chemicals, and excipients.
Process Solutions
In 2023, Life Science generated 44% of Group sales and 45% of EBITDA pre (excluding Corporate and Other).
In recent years, we have steadily expanded our presence in growth markets. Europe and North America
generated 70% of Life Science's sales in 2023; Asia-Pacific and Latin America accounted for 29% of sales.
nanomaterials.
Across our Life Science business sector, we collaborate with the global scientific community to deliver
innovations and to this end, we offer a broad and deep product portfolio as well as global Contract Testing
Development Manufacturing Organization (CTDMO) services ranging from process development to
commercialization. In 2023, we continued to execute our strategy as a diversified life science company to
strengthen our three business units, Process Solutions, Life Science Services, and Science & Lab Solutions.
Our R&D teams in the three business units have launched more than 8,500 products to respond to growth
trends, including those launched through our "faucet program" for antibodies, reference materials and
We are a leading global provider of products and services for a wide range of customers, including research
labs, biotech and pharmaceutical companies, diagnostic labs, and the industrial sector.
Life Science
Fundamental Information about the Group Merck
Combined Management Report
15
1 Merck also employs people at sites of subsidiaries that are not fully consolidated. This number refers to people employed in fully consolidated subsidiaries.
Life Science Services
11
We are a major supplier of materials and solutions for the semiconductor and display industries. We have a
portfolio of materials, systems and services as well as R&D and a global production network close to our
customers. We have built our portfolio to cater to the continued digitalization and the unabated growth of data.
The demand for increasingly sophisticated semiconductor chips and displays will continue to rise, not least
thanks to developments such as Artificial Intelligence (AI), 5G (fifth-generation mobile networks) and
autonomous driving. In recent years, we have developed into a relevant player in the global electronic
materials market. In addition, we offer decorative and functional solutions for surfaces of all kinds.
Combined Management Report
Merck
Strategy
Internal Management System
35 Research and Development
48 Report on Economic Position
48
Macroeconomic and Sector-Specific Environment
52 Review of Forecast against Actual Business Developments
Course of Business and Economic Position
Merck Group
55
55
65
Life Science
69
Healthcare
73
Electronics
76
Corporate and Other
77 Report on Risks and Opportunities
94 Report on Expected Developments
96 Report in Accordance with Section 315a HGB1
28
99
22
13
German Retail/
Undisclosed
4%
Rest of World
0
19%
Europe (ex-Germany/UK)
29%
United States
17%
United Kingdom
Source: Nasdaq Shareholder Identification; Total Shares Outstanding: 129.2 million.
Identified investors by type as of November 2023
3%
Hedge
19%
Index
19%
Value
Source: Nasdaq Shareholder Identification.
1%
Others
33%
Growth
25%
GARP (Growth At
Reasonable Price)
Combined
Management Report*
Fundamental Information about the Group
13
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Non-Financial Statement
Environmental Matters
The assessment of business development and the allocation of financial resources are carried out by the entire
management of the company for the Life Science, Healthcare and Electronics business sectors as well as the
supporting corporate functions. In addition to the Chair of the Executive Board and CEO Belén Garijo, the
Members of the Executive Board are Matthias Heinzel, CEO Life Science, Peter Guenter, CEO Healthcare, Kai
Beckmann, CEO Electronics, and Helene von Roeder, Chief Financial Officer (CFO). Helene von Roeder was
appointed CFO as of July 1, 2023, succeeding Marcus Kuhnert on the Executive Board of Merck.
Combined Management Report
Fundamental Information about the Group Merck
14
14
We hold the global rights to the Merck name and brand. The only exceptions are Canada and the United States.
In these countries, we operate as MilliporeSigma in the Life Science business, as EMD Serono in the Healthcare
business and as EMD Electronics in the Electronics business.
Apart from our three business sectors, our financial reporting presents five regions: Europe, North America,
Asia-Pacific, Latin America, the Middle East and Africa. As of December 31, 2023, we had 62,908 employees¹
worldwide. The figure as of December 31, 2022, was 64,232 employees¹. We have summarized further details on
our employee structure and important aspects such as Diversity, Equity, and Inclusion in the "Non-Financial
Statement".
For fiscal 2023, we exercise the option of publishing the Statement on Corporate Governance on the Group's
website in accordance with section 315d HGB in conjunction with section 289f (1) sentence 2 HGB. It is
available at https://www.merckgroup.com/en/investors/corporate-governance/reports.html.
Merck Group
Semiconductor manufacturers continue to invest at a high level. This is also evidenced by the strong growth of
our equipment business (part of DS&S) in 2023 despite the currently weak semiconductor market. In view of
the expected long-term increase in demand, we continue to expand global production capacity for our specialty
gas, liquid chemical and slurry delivery systems.
In 2023, the semiconductor market was impacted by a cyclical downturn, mainly due to advance spending on
consumer electronics (PCs, smartphones, game consoles) in previous years due to the Covid-19 pandemic. The
situation was amplified by inflation and high interest rates during the fiscal year. These developments prompted
consumers to postpone purchases of electronic devices.
The Delivery Systems & Services (DS&S) business field, with its systems business, develops and installs
reliable delivery equipment to ensure the safe and responsible handling of specialty chemicals and gases for
semiconductor manufacturing. At many sites of the industry, production facilities and delivery systems are
operated and maintained by our MEGASYS® Total Gas and Chemical Services employees.
The Specialty Gases business field provides high-purity gases for semiconductor manufacturing. These
gases are crucial for precise deposition, doping, etching, and cleaning during wafer fabrication. With a
strong commitment to meeting the semiconductor industry's stringent requirements, our Specialty Gases
business supports the industry in the development of advanced electronic devices.
The Thin Films business field supplies solutions and productions for our customers in the fields of dielectrics
(organosilanes and spin-on dielectrics) and metallics product offerings. Many of our materials are used for
leading edge nodes, which is the enabler of advanced chips for generative AI.
The Formulations business field comprises the Patterning and Planarization production steps. This includes
lithography products for surface treatment such as photoresists and the associated auxiliaries, anti-
reflective coatings and materials for directed self-assembly (DSA). The Planarization business comprises
CMP materials (chemical-mechanical planarization).
Our Semiconductor Solutions business unit consists of the following business fields: Formulations, Thin Films,
Specialty Gases and Delivery Systems & Services.
Semiconductor Solutions is the largest business unit in terms of sales within Electronics. It comprises our
product and service offering for the semiconductor industry. We are developing materials and solutions to make
the next generation of devices - we help make chips smaller, faster, more powerful and more sustainable.
Semiconductor Solutions supplies products for major production steps in wafer processing, including doping,
patterning, deposition, planarization, etching, and cleaning. It also supplies delivery equipment for
semiconductor manufacturing. Specialty cleans, photoresists, and conductive pastes for semiconductor
packaging complement the portfolio. Intermolecular is our center for complex material solutions in Electronics,
located in San Jose, California, USA. There, we explore, test, and develop combinations of different materials
for next-generation electronics.
Semiconductor Solutions
Electronics accounted for 18% of Group sales in 2023, and its share of EBITDA pre (excluding Corporate and
Other) was 15%. In 2023, Asia-Pacific generated 67% of Electronics' net sales, Europe and North America
accounted for 30% of sales.
In 2021, we started our "Level Up" growth program and are continuing to invest significantly more than
€ 3 billion in innovation and capacity expansion. Despite difficult market conditions in 2023, we plan to continue
our "Level Up" growth program and will adjust the timeframe of our investments in line with market demand.
The Electronics business sector consists of three business units: Semiconductor Solutions, Display Solutions and
Surface Solutions. Three cross-functional boards support the business units: Technology Leadership Board,
Supply Chain Leadership Board, and Commercial Leadership Board. They define cross-sector standards, steer
portfolio management, drive forward the exchange on good practice, and promote transparency.
20
20
Fundamental Information about the Group Merck
The founding family, now in the 13th generation, is still the majority owner. This is made possible by our
company structure: a corporation with general partners (Kommanditgesellschaft auf Aktien - KGaA). In a
KGaA, the total capital is divided between general partners and limited partners. The founding family holds a
70.274% stake in the listed Merck Kommanditgesellschaft auf Aktien (Merck KGaA), Darmstadt, as general
partner via the Group's ultimate parent company, E. Merck Kommanditgesellschaft, Darmstadt. The remaining
29.726% of the share capital of Merck KGaA is traded on the regulated market of the Frankfurt Stock Exchange
and other stock exchanges.
104
Ever since we were established in 1668, we have continuously reinvented ourselves and adopted a long-term
mindset. This approach is rooted in responsibility, care and respect: for our work, our employees, our
customers, patients, society, and our planet. We want to become the global 21st century science and technology
pioneer and are committed to working towards a better future: sustainable progress for humankind.
In our Electronics business sector, we are the company behind the companies, advancing digital living. Our
semiconductor and display solutions are used in the manufacture of many components for electronic devices.
We are thus changing the way in which information is processed and made accessible.
Employee-Related Matters
Social Matters and Respect for Human Rights
114
123
139
144
Other Topics
Anti-Corruption and Anti-Bribery
155 Additional Information on Merck KGaA in Accordance with HGB1
* The management report of Merck KGaA has been combined with the Group management report and published in the 2023 Merck Annual Report as well as in
the annual financial statements of Merck KGaA. The management report also contains the combined non-financial (Group) statement of Merck KGaA, which
we issue pursuant to sections 289b-289e and 315b-315c HGB. The 2023 Annual Report is an additional, non-official publication, which does not comply
with the requirements of the European Single Electronic Format (ESEF). The official annual financial report for fiscal 2023, prepared in accordance with the
ESEF format, has been filed with the electronic German Federal Gazette (elektronischer Bundesanzeiger) and is available on the website of the German
company register.
This combined management report contains certain financial indicators such as operating result (EBIT), EBITDA, EBITDA pre, net financial debt and
earnings per share pre, which are not defined by International Financial Reporting Standards (IFRS). These financial indicators should not be taken into
account in order to assess the performance of Merck in isolation or used as an alternative to the financial indicators presented in the consolidated financial
statements and determined in accordance with IFRSS.
In addition, our specialists also explore visionary new solutions at the interfaces of our three diversified
business sectors.
The figures presented in this combined management report have been rounded. This may lead to individual values not adding up to the totals presented.
The Statement of Corporate Governance according to section 315d HGB in conjunction with section 289f (1) sentence 2 HGB is available at
https://www.merckgroup.com/en/investors/corporate-governance/reports.html.
1 German Commercial Code.
Combined Management Report
Fundamental Information about the Group
Merck
13
33
Fundamental Information
about the Group
Merck
We are Merck, a science and technology company. We are pioneers of human progress, driven by our curiosity.
We are working toward a better future in a special organizational setup and are bringing together different
disciplines under one roof with the three business sectors Life Science, Healthcare and Electronics.
Our Life Science business sector provides the tools, high-grade chemicals and consumables that accelerate
scientific breakthroughs and enable the biopharmaceutical industry to ensure that medicines are safe and
effective for a global population.
In our Healthcare business sector, we advance innovation through our research, enable life-changing therapies
for serious illnesses, treat patients with cancer, cardiovascular, diabetes, thyroid disorders, and multiple
sclerosis, and help people to realize their wish to have a child.
It is our aim to ensure that our communication is inclusive and so we strive to use language that is both non-discriminatory and easy to read. This report
attempts to use gender-neutral language, which may not yet be consistent in all instances. Even if masculine forms are used, all genders are explicitly
meant.
9%
Germany
7,158
7,180
Member of the Executive Board
-77.80%
695
154
Walter Galinat (until September 30, 2018)
-16.30%
-19.40%
-43.80%
-70.30%
2,131
633
-11.30%
41.80%
-47.00%
-11.80%
10,189
4,011
Stefan Oschmann (until April 30, 2021)
Udit Batra (until July 13, 2020)
Former Member of the Executive Board
609
-9.70%
43.20%
17.00%
-0.30%
In our opinion, on the basis of the knowledge obtained in the audit, the compensation report for the financial
year from January 1 to December 31, 2023, including the related disclosures, complies, in all material respects,
with the accounting principles of section 162 AktG.
Corporate Governance Compensation Report
195
-60.60%
22.30%
-10.10%
Karl-Ludwig Kley (until August 31, 2016)
89.3
Sascha Held
13.10%
2.10%
0.70%
112.0
112.8
Wolfgang Büchele
Member of the Supervisory Board
0.50%
85.00%
-66.00%
5.90%
6,999
7,409
Further former members
-43.00%
6.70%
-3.50%
443
443
Bernd Reckmann (until April 29, 2016)
67.10%
10.30%
8.80%
695
756
Other Matter - Formal Audit of the Compensation Report
88.5
The audit of the content of the compensation report described in this report comprises the formal audit required
under section 162 (3) AktG including the issuance of a report on this audit. Since our audit opinion on the audit
of the content is unmodified, this audit opinion includes that the disclosures required under section 162 (1) and
(2) AktG are contained, in all material respects, in the compensation report.
We issue this report as stipulated in the engagement letter agreed with the Company. The audit has been
performed for the purposes of the Company and the report is solely intended to inform the Company about the
result of the audit.
statement on corporate
Governance
The Statement on Corporate Governance contains the Declaration of Conformity, relevant
information on practices within the company, and a description of the procedures of the corporate
bodies, as well as targets for the percentage of positions held by women and the diversity policy.
Joint report of the Executive Board and the
Supervisory Board including Declaration of
Conformity
-
The German Corporate Governance Code is geared toward the conditions found in a German stock corporation
("Aktiengesellschaft" or "AG") and does not take into consideration the special characteristics of a corporation
with general partners ("Kommanditgesellschaft auf Aktien” or “KGaA") such as Merck KGaA. Given the
structural differences between an AG and a KGaA, several recommendations of the German Corporate
Governance Code are to be applied to a KGaA only in a modified form. Major differences between the two legal
forms exist in terms of liability and management. In the case of an AG, only the AG is liable as a legal entity,
whereas the general partners of a KGaA also have unlimited personal liability for the company's obligations
(section 278 (1) AktG). At Merck KGaA, this pertains to both E. Merck KG - which is excluded from
management and representation pursuant to article 8 (5) of the Articles of Association as well as to the
managing general partners who collectively make up the Executive Board of Merck KGaA. The members of the
Executive Board of Merck KGaA are therefore subject to unlimited personal liability. Unlike an AG, their
executive authority is not conferred by the Supervisory Board, but rather by their status as general partners.
Consequently, in addition to other responsibilities typical of the supervisory board of an AG (see description of
the procedures of the Supervisory Board), the supervisory board of a KGaA does not have the authority to
appoint the management board, draw up management board contracts, or specify the compensation of the
management board. This legal form also involves special features with regard to the Annual General Meeting.
For example, in a KGaA, many of the resolutions made require the consent of the general partners (section 285
(2) AktG), including in particular the adoption of the Annual Financial Statements (section 286 (1) AktG).
Merck KGaA applies the German Corporate Governance Code analogously where these regulations are
compatible with the legal form of a KGaA. In order to enable shareholders to compare the situation at other
companies more easily, we base corporate governance on the conduct recommendations made by the
Government Commission of the German Corporate Governance Code to a broad extent and refrain from
adopting our own, equally permissible, code. All recommendations of the German Corporate Governance Code
in the version dated April 28, 2022, the intent and meaning of which are applied, have been complied with
since the last Declaration of Conformity was submitted in February 2023.
For a clearer understanding, the following gives a general explanation of the application of German company
law at Merck KGaA with additional references to the Annual General Meeting and shareholder rights.
Corporate Governance
Statement on Corporate Governance
198
Merck KGaA
The general partner E. Merck KG holds around 70% of the total capital of Merck KGaA (equity interest); the
shareholders hold the remainder, which is divided into shares (share capital). E. Merck KG is excluded from the
management of business activities. The general partners with no equity interest (Executive Board) manage the
business activities. Nevertheless, due to its substantial capital investment and unlimited personal liability,
E. Merck KG has a strong interest in ensuring that the businesses of Merck KGaA operate efficiently in
compliance with procedures. Merck KGaA's participation in the profit/loss of E. Merck KG in accordance with
articles 26 et seq. of the Articles of Association further harmonizes the interests of the shareholders and of
E. Merck KG. E. Merck KG appoints and dismisses the Executive Board. In addition, E. Merck KG has created
bodies - complementing the expertise and activities of the Supervisory Board - to monitor and advise the
Executive Board. This applies primarily to the Board of Partners of E. Merck KG.
197
Based on the provisions of the German Stock Corporation Act, the Articles of Association of Merck KGaA, and
the rules of procedure of the various committees, Merck KGaA has adopted a set of rules for the Executive
Board and its supervision that meet the requirements of the German Corporate Governance Code. The
investors, who bear the entrepreneurial risk, are protected as provided for by the German Corporate
Governance Code. We take suggestions from the capital market on corporate governance seriously and hold
discussions with investors and shareholder representatives.
The 28th Annual General Meeting of Merck KGaA was held in Darmstadt, Germany, on April 28, 2023. In 2023,
the Executive Board again decided, with the approval of the Supervisory Board, to hold the 2023 Annual
General Meeting in virtual form, i.e. without the shareholders and their proxies attending in person. In doing so,
it exercised the option that the legislation provided with the transitional provision of section 26n (1) of the
Introductory Act to the German Stock Corporation Act (EGAktG) in relation to virtual annual general meetings
in accordance with section 118a (AktG). Shareholders and shareholder representatives participated in the
Annual General Meeting virtually. The meeting was broadcast audiovisually on the Internet in full. At 72.59%,
the proportion of share capital represented at the meeting (including postal votes) was slightly higher than in
the previous year. In 2022, the proportion of share capital represented was 70.34%. The Annual General
Meeting service provider does not forward voting instructions to Merck in advance of the Annual General
Meeting but keeps them in the system until the count takes place.
In particular, the Annual General Meeting passes resolutions concerning the approval of the Annual Financial
Statements, the appropriation of net retained profit, the approval of the actions of the Executive Board
members and the Supervisory Board members, the election of the auditor, amendments to the Articles of
Association, the compensation system for the Executive Board, and the control and profit and loss transfer
agreements of Merck KGaA. The shareholders of Merck KGaA exercised their rights at the virtual Annual
General Meeting using the Internet-based Annual General Meeting system and via video communication. In
addition, the shareholders were again given the opportunity to submit statements on the agenda to the
company prior to the Annual General Meeting. They were able to exercise their voting rights personally,
through an authorized representative or a proxy appointed by the company, or by postal vote. The proxies were
in attendance throughout the duration of the Annual General Meeting. All the documents and information
concerning upcoming General Meetings (including a summary explanation of shareholder rights) are also posted
on our website. The introductory speech by the Chair of the Executive Board was published in advance on the
Internet on April 17, 2023, in order to make it available to interested shareholders and members of the public
and thus satisfy the high transparency requirements of the Merck Group.
Corporate Governance
Statement on Corporate Governance
199
Declaration of Conformity
In accordance with section 161 AktG, applying the provisions of the German Corporate Governance Code
correspondingly, the Executive Board and the Supervisory Board issued the following Declaration of Conformity
with the recommendations of the Government Commission of the German Corporate Governance Code:
"Declaration of the Executive Board and the Supervisory Board of Merck KGaA on the recommendations of the
Government Commission of the German Corporate Governance Code pursuant to section 161 of the German
Stock Corporation Act (AktG). Since the last Declaration of Conformity in February 2023, we have complied
with all the recommendations of the Government Commission of the German Corporate Governance Code in the
version dated April 28, 2022, as published in the official section of the German Federal Gazette.
With regard to future compliance with the current recommendations of the Government Commission of the
German Corporate Governance Code, the Executive Board and the Supervisory Board declare the following: The
company will comply with the recommendations of the Code in the version dated April 28, 2022."
Darmstadt, February 2024
For the Executive Board
signed Belén Garijo
For the Supervisory Board
signed Wolfgang Büchele
Corporate Governance Statement on Corporate Governance
The General Meeting of Merck KGaA
Statement on Corporate Governance
Corporate Governance
Further information can be found under "Merck KGaA" in the "Statement on Corporate Governance".
Liability
This report is not intended to be used by third parties as a basis for any (asset) decision. We are liable solely to
Merck Kommanditgesellschaft auf Aktien, Darmstadt, Germany, and our liability is also governed by the
engagement letter dated July 24/28, 2023, agreed with the Company as well as the "General Engagement
Terms for Wirtschaftsprüfer and Wirtschaftsprüfungsgesellschaften (German Public Auditors and Public Audit
Firms)" promulgated by the Institut der Wirtschaftsprüfer (IDW) in the version dated January 1, 2017 (IDW-
AAB). However, we do not accept or assume liability to third parties.
Frankfurt am Main, Germany, February 16, 2024
Deloitte GmbH
Wirtschaftsprüfungsgesellschaft
Signed:
Christoph Schenk
Wirtschaftsprüfer
(German Public Auditor)
Signed:
Daniel Weise
Wirtschaftsprüfer
(German Public Auditor)
Corporate Governance Capital Structure and Corporate Bodies of Merck KGaA
196
capital structure and
corporate Bodies of
Merck KGaA
Total capital of Merck KGaA
€ 565,211,241.95
Executive Board of Merck KGaA
General partners with no equity interest
MONITORING
Supervisory board
Annual General Meeting
Shareholders hold share capital
€ 168,014,927.60
Board of Partners of
E. Merck KG
General partner E. Merck KG
holds equity interest
€ 397,196,314.35
Intended Use of the Report
0.80%
2.70%
17.30%
11.00%
-0.50%
6,184,000
62,552
99
63,642
97
Average compensation of an employee
Average number of employees
6,152,000
Personnel expenses without pension expenses
42.00%
1.50%
50.0
50.8
3.90%
Simon Thelen
25.40%
3.70%
1.20%
65.0
65.8
Daniel Thelen
1.50%
50.0
50.8
Helga Rübsamen-Schaeff
42.00%
50.80%
42.00%
8.90%
1.70%
-2.20%
6.60%
An audit involves performing audit procedures in order to obtain audit evidence for the amounts stated in the
compensation report, including the related disclosures. The choice of the audit procedures is subject to the
auditor's professional judgment. This includes assessing the risk of material misstatements, whether due to
fraud or error, in the compensation report, including the related disclosures. In assessing these risks, the
auditor considers the system of internal control, which is relevant to preparing the compensation report,
including the related disclosures. Our objective is to plan and perform audit procedures that are appropriate in
the circumstances, but not to express an audit opinion on the effectiveness of the Company's system of internal
control. An audit also comprises an evaluation of the accounting policies used, of the reasonableness of
accounting estimates made by the executive directors and the supervisory board as well as an evaluation of the
overall presentation of the compensation report, including the related disclosures.
Our responsibility is to express an opinion on this compensation report, including the related disclosures, based
on our audit. We conducted our audit in compliance with German Generally Accepted Standards for Financial
Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW). These Standards require that we
fulfill the professional responsibilities and that we plan and perform the audit so that we obtain reasonable
assurance as to whether the compensation report, including the related disclosures, is free from material
misstatements.
Auditor's Responsibilities
The executive directors and the supervisory board of Merck Kommanditgesellschaft auf Aktien,
Darmstadt/Germany, are responsible for the preparation of the compensation report, including the related
disclosures, that complies with the requirements of section 162 AktG. The executive directors and the
supervisory board are also responsible for such internal control as they consider necessary to enable the
preparation of a compensation report, including the related disclosures, that is free from material
misstatements, whether due to fraud or error.
Board
Responsibilities of the Executive Directors and of the Supervisory
We have audited the accompanying compensation report of Merck Kommanditgesellschaft auf Aktien,
Darmstadt, Germany, ("the Company") for the financial year from January 1 to December 31, 2023, including
the related disclosures, which has been prepared to comply with Section 162 German Stock Corporation Act
(AktG).
To Merck Kommanditgesellschaft auf Aktien, Darmstadt/Germany
Report of the Independent Auditor
194
Corporate Governance Compensation Report
52.60%
56.80%
7.30%
59.40%
-16.20%
9.50%
17.70%
-16.10%
241,958
3,288,000
284,881
2,759,954
Profit after tax of the E. Merck Group (IFRS)
Profit after tax of the Merck KGaA (HGB)
Earnings development
1.40%
1.90%
4.20%
7.40%
2.00%
6.10%
-70.80%
80.0
23.4
50.0
50.8
Renate Koehler
45.30%
1.50%
50.0
50.8
Michael Kleinemeier
42.00%
-1.40%
20.70%
10.50%
59.5
65.8
Jürgen Glaser
116.00%
23.5
50.8
Birgit Biermann (since July 14, 2022)
30.5
Barbara Lambert (since August 11, 2023)
-1.60%
1.50%
50.0
50.8
Gabriele Eismann
110.00%
1.50%
200
42.00%
50.8
Helene von Roeder (until April 17, 2023)
42.00%
25.40%
3.70%
1.20%
65.0
65.8
Christian Raabe
87.30%
70.10%
1.50%
50.0
50.8
Alexander Putz
-1.60%
1.50%
50.0
50.8
Dietmar Oeter
42.00%
1.50%
50.0
50.8
Peter Emanuel Merck
45.30%
1.50%
50.0
Anne Lange
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Information on corporate governance practices
It is Merck KGaA's objective to provide the latest information to all shareholders, media, financial analysts, and
interested members of the public, while creating the greatest possible transparency. For this reason, Merck
uses a wide range of communication platforms to engage in a timely dialog with all interested parties about the
company's situation and business changes. Merck's principles include providing factually correct,
comprehensive, and fair information.
7%
3.8
30.5
3%
0.8
37%
ལྦ། །། T
47.0 93%
47.0 93%
47.0 93%
47.0 93%
47.0 93%
Alexander Putz
Dietmar Oeter
Peter Emanuel
Merck
50.8 22.0
Anne Lange
47.0 93%
Kleinemeier
Michael
72%
47.0
Jürgen Glaser
93%
47.0
14, 2022)
(since July
Birgit Biermann
60%
Renate Koehler
23.5
23%
3.8
3.0
50.8 47.0 94%
7%
3.8
50.0
6%
3.0
94%
50.0
6%
94%
47.0
47.0
50.8
7%
50.8
7%
3.8
50.0
6%
50.8 47.0 94%
7%
3.8
59.5
5%
47.0 79%
65.8
6%
18.4
6%
2023)
Barbara Lambert
sand
thou-
thou-
€
thou-
thou-
thou-
Total
compen-
sation
Meeting fees
€
€
€
€
in %
€
duties
Compensation
for committee
Fixed
compensation
Total
compen-
sation
Meeting fees
2022
Compensation
for committee
duties
2023
Fixed
compensation
Compensation awarded or due
191
Corporate Governance Compensation Report
€
in %
sand
in %
47.0 94%
50.8
7%
3.8
47.0 93%
Gabriele Eismann
15.0
89.3 70.5 80%
4%
3.8
17%
79%
70.5
Sascha Held
15.0
84%
94.0
sand
in %
sand
thousand
112.8
3%
3.8
13%
83%
94.0
Wolfgang Büchele
(since August 11,
Reporting
50.0
7%
Change
2021/2020
Change
2022/2021
2022 2023/2022
2023
Change
193
Corporate Governance Compensation Report
in € thousand/change in %
Comparative presentation
For members of the Executive Board, the compensation awarded or due in the fiscal years 2021, 2022 and
2023 is used in accordance with section 162 AktG. For the years 2020 and 2019, the allocated compensation is
used excluding the service costs according to the German Corporate Governance Code (DCGK) sample table in
the Compensation Report of the respective fiscal year.
For employee compensation, the average personnel expenses excluding company pension costs are used. This
reflects the total compensation of employees worldwide.
The comparative presentation in accordance with section 162 (1) no. 2 AktG shows the annual change in the
compensation of current and former members of the Executive Board as well as members of the Supervisory
Board, the development of earnings of the Merck Group and the development of the average compensation of a
full-time employee of Merck KGaA over the last five years.
Change
2020/2019
Comparative presentation of compensation and
earnings development
Corporate Governance Compensation Report
Supervisory Board member Helene von Roeder received an additional € 150,000 (2022: € 150,000) for 2023 in this function as a member of the corporate bodies of E. Merck KG.
Supervisory Board member Peter Emanuel Merck received an additional € 80,000 (2022: € 80,000) for 2023 in this function as a member of the corporate bodies of E. Merck KG.
Supervisory Board member Daniel Thelen received an additional € 140,000 for 2023 in this function as a member of the corporate bodies of E. Merck KG (2022: € 140,000).
Supervisory Board member Simon Thelen received an additional € 140,000 (2022: € 140,000) for 2023 in this function as a member of the corporate bodies of E. Merck KG and an
additional €3,000 (2022: € 3,000) for 2023 as a member of the Supervisory Board of Merck Healthcare KGaA.
Supervisory Board member Michael Kleinemeier received an additional € 140,000 (2022: € 140,000) for 2023 in this function as a member of committees of E. Merck KG,
Darmstadt, Germany.
Supervisory Board member Wolfgang Büchele received an additional € 140,000 (2022: € 140,000) for 2023 in this function as a member of the corporate bodies of E. Merck KG.
Supervisory Board member Helga Rübsamen-Schaeff received an additional € 150,000 (2022: € 150,000) for 2023 in this function as a member of the corporate bodies of
E. Merck KG and an additional € 6,000 (2022: € 6,000) for 2023 as a member of the Supervisory Board of Merck Healthcare KGaA.
50.0
6%
3.0
65.0
5%
3.0
23%
50.0
192
Belén Garijo (Chair since May 1, 2021)
9,889
9,891
Information subject to disclosure requirements, as well as information that is not, can be accessed worldwide
on the Merck KGaA website (www.merckgroup.com), which is the company's most important publication
platform. In addition to a comprehensive financial calendar, quarterly statements and/or quarterly and half-
year financial reports covering at least the past five years are available there in German and English. In line
with the legal requirements, ad hoc announcements are also published on the website. These contain
information on circumstances and facts that could impact the Merck share price.
Regular press conferences, investor meetings on the occasion of investor conferences, and roadshows offer
another platform for dialog. The company presentations prepared for this purpose are also available on the
Merck KGaA website. In addition, the Investor Relations team is available to private and institutional investors
who wish to receive further information. To ensure the greatest possible transparency, all documents
concerning the General Meeting are available on the company website. Additionally, at least some parts of the
General Meeting are generally webcast live on the Internet. The Annual General Meeting on April 28, 2023, was
again held virtually and hence was webcast live on the Internet in full.
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 necessary
measures. The members of the Insider Committee are appointed by the Executive Board; at least two members
work in Group Legal & Compliance. The Insider Committee meets at regular intervals or when circumstances
require. The Chief Financial Officer is vested with the authority to make the final decision on handling potential
insider information.
In order to ensure a high level of protection for insider information, the Executive Board issued internal insider
guidelines applicable throughout the Merck Group worldwide. The guidelines inform employees about their
responsibilities under insider trading laws and give clear instructions for compliant behavior. In addition, they
describe the function of the Insider Committee in detail. Moreover, our Code of Conduct, which is binding for all
employees, also contains an explicit, detailed reference to the ban on using insider information. Within the
scope of obligatory training courses on the Code of Conduct as well as specific training courses on insider law,
all employees are instructed on the key stipulations of insider trading.
Accounting and audits of financial statements
Merck KGaA prepares its Consolidated Financial Statements and Combined Management Report in accordance
with the International Financial Reporting Standards (IFRS) effective at the end of the reporting period and
adopted by the European Union and the additional provisions of section 315e (1) of the German Commercial
Code (HGB). The Consolidated Financial Statements and the Combined Management Report are prepared by
the Executive Board and examined by an auditor, taking into account the German generally accepted standards
for the audit of financial statements promulgated by the Institute of Public Auditors in Germany (Institut der
Wirtschaftsprüfer, IDW).
288.90%
32.60%
3,597
4,768
Matthias Heinzel (since April 1, 2021)
Marcus Kuhnert (until June 30, 2023)
Helene von Roeder (since July 1, 2023)
185.10%
8.00%
4,761
5,144
Peter Guenter (since January 1, 2021)
-11.00%
37.90%
25.00%
-0.90%
7,895
7,820
Kai Beckmann (since April 1, 2011)
-6.90%
43.30%
22.20%
6%
3.0
47.0 94%
65.8 47.0 72% 15.0
50.8 47.0 94%
7%
88.5
3%
17%
112.0
3%
13%
in % thousand
in %
€
thou-
་།༄་། ་། ་།
སྦྱོརྞྞཞཞ | འ ཀ།
9.5 16%
65.0
5%
3.0
15.0 23%
50.0
6%
50.0
6%
3.0
50.8 47.0 94%
50.8 47.0 94%
65.8 47.0 72%
6%
3.8
23%
3.8 7%
6%
3.8
50.0
47.0 72%
3.8
6%
3.8
23%
47.0 72% 15.0
47.0 93%
Simon Thelen
Daniel Thelen
50.8
7%
3.8
47.0 93%
Schaeff
Helga Rübsamen-
80.0
4%
3.0
38%
23.4 47.0 59% 30.0
3%
0.8
38%
59%
13.8
17, 2023)
Roeder (until April
Helene von
Christian Raabe
Audit Opinion
201
Corporate Governance Statement on Corporate Governance
The German Stock Corporation Act and the German Corporate Governance Code in the versions currently
applicable to the company state that at least one member of the Audit Committee shall have professional
expertise in accounting and at least one additional member of the Audit Committee shall have professional
expertise in auditing. Accounting and auditing also include sustainability reporting and its audit and assurance.
The Chair of the Audit Committee should have professional expertise in at least one of the two areas. As
financial experts, Helene von Roeder and Barbara Lambert both have particular knowledge and experience of
the application of reporting principles and internal control and risk management systems. They are also familiar
with auditing and, in this context, with sustainability reporting. Helene von Roeder's aforementioned knowledge
is based, among other things, on her previous role as a member of the Management Board of Vonovia SE, to
which she belonged first as Chief Financial Officer (CFO) and later as Chief Technology Officer (CTO). She was
also the Chair of the Audit Committee of the company's Supervisory Board and the Finance Committee of the
Board of Partners of E. Merck KG (stepping down on April 17, 2023). Helene von Roeder thus qualifies as a
financial expert within the meaning of section 100 (5) of the German Stock Corporation Act (AktG) and
Recommendation D.3 of the German Corporate Governance Code. Barbara Lambert's aforementioned
knowledge is based, among other things, on her education and many years of activity as an auditor and a
To improve occupational safety, we aim to lower the lost time injury rate (LTIR) to below 1 by 2025.
Merck has also rolled out BeHealthy, a global program aimed at maintaining and promoting employee health.
The objective of the program is to strengthen the physical, mental, social and workplace-related health of all
employees for the long term. The focal points of the content are healthy leadership, mindfulness, and delivering
a diverse healthcare offering that is accessible globally.
Based on the EHS Policy, many guidelines specify how the sites and employees of the Merck Group are to
observe the principles in their daily work. The Group function Corporate Sustainability, Quality and Trade
Compliance steers these global activities and ensures compliance with statutory requirements, internal
standards, and business needs throughout the entire Group. In this way, Group-wide risks are minimized, and
continuous improvement is promoted in the areas of environment, health, safety, security, and quality.
We report on our ecological, environmental and social performance transparently in accordance with the
internationally recognized principles of the Global Reporting Initiative (GRI), the standards issued by the
Sustainability Accounting Standards Board (SASB), and the recommendations of the Task Force on Climate-
related Financial Disclosures (TCFD).
Corporate Governance Statement on Corporate Governance
207
Procedures of the Executive Board,
Supervisory Board, Board of Partners, and its
Committees
Members of the Executive Board of Merck KGaA
Information on memberships of statutory supervisory boards and comparable German and foreign supervisory
bodies (section 285 no. 10 HGB in conjunction with section 125 (1) sentence 5 AktG).
In addition, we are aiming to source 80% of our purchased electricity from renewable energies by 2030.
We also intend to reduce the environmental impact of our waste, reduce water intensity, and improve the
quality of our wastewater by 2030. Having achieved our short-term targets for waste and water
consumption to 2025 ahead of schedule in 2023, we have adopted new ambitions for the period to 2030.
By the end of the decade, we want to achieve a circularity rate of 70% in our waste flows and improve our
water intensity (per euro of value added) by 50%.
Member
Frankfurt am Main, Chair
Kai Beckmann
Darmstadt, CEO Electronics
Peter Guenter
Matthias Heinzel
Weinheim, CEO Life Science
Marcus Kuhnert (until June 30, 2023)
Königstein, Chief Financial Officer
Helene von Roeder (as of July 1, 2023)
Frankfurt am Main, Chief Financial Officer
Memberships of
(a) statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of corporations
(b) ⚫ Banco Bilbao Vizcaya Argentaria S. A., Bilbao, Spain (listed)
⚫L'Oréal S. A., Clichy, France (listed)
Belén Garijo
We have set ourselves the goal of climate-neutral business operations along the entire value chain by
2040. By 2030, we aim to reduce our direct (Scope 1) and indirect (Scope 2) emissions by 50% compared
with 2020. Our goal is to achieve this primarily by reducing process-related emissions and implementing
energy efficiency measures. In terms of our Scope 3 emissions, we want to reduce emissions throughout
the entire value chain by 52% (per € of value added) by 2030. These short-term targets for 2030 were
approved by the Science Based Targets Initiative (SBTi) in May 2022. The independent initiative assesses
and approves companies' targets based on its strict climate science criteria. By receiving this confirmation,
we are helping limit global warming to 1.5 °C, meeting the requirements of the Paris Agreement.
We also adopt environmental safety and protection targets with the aim of permanently improving our
environmental protection and safety:
Our thinking and actions with regard to environmental protection and safety are based on the principle of
sustainability and the guidelines for responsible action as set out by the International Council of Chemical
Associations (ICCA) in its Responsible Care Global Charter, which emphasizes overall responsibility for products,
supply chains, and society. We have signed up to this charter and declared its principles to be binding
throughout the Group in our Environment, Health and Safety (EHS) Policy.
and workflows to enhance
Data Privacy compliance
BUSINESS
COUNSELING
Creates high value
business advice
and provides
tailored solutions
Corporate Governance
Statement on Corporate Governance
205
The Data Privacy organization has put specific guidelines in place to ensure that Data Privacy processes comply
with the relevant regulations. The Group Data Privacy Policy defines the standards according to which data is
processed, stored, used, and transmitted at Merck. This enables us to provide a high level of privacy when it
comes to processing the data of our employees, contract partners, customers, suppliers, patients, healthcare
practitioners, and participants in clinical trials. The statutory documentation requirements are realized in a
central IT tool that also serves as the basis for other key data privacy processes: documenting processing
activities, performing a general risk audit and if required by law a specific data privacy impact assessment,
-
reporting and evaluating potential data privacy violations, and processing requests from data subjects. Our
understanding of data privacy throughout the Group is based on European legislation in particular, including the
data privacy principles of the EU's General Data Protection Regulation (EU GDPR), which has been in force since
May 2018. However, we also comply with and implement local data privacy regulations.
Corresponding training and awareness measures are a core element of any data privacy management system.
The effective communication of relevant standards, procedures and other guidelines in the form of regular
training is important, as are regular awareness measures in order to establish an appropriate culture of data
privacy within our company. Our data privacy services comprise general awareness measures, such as e-
learning on data privacy that is mandatory for all Merck employees, and broad-based communication using
various channels including e-mail and the company intranet, as well as targeted training, e.g. interactive
training for certain subsets of employees and standardized training sets focusing on specific topics and tailored
to corresponding groups of companies.
Risk and opportunity management
For detailed information, including a description of the main characteristics of the entire internal control system
and risk management system and the statement on the appropriateness and effectiveness of these systems,
please refer to the “Internal control system” section of the "Report on Risks and Opportunities” in the
Management Report.
Avoidance of conflicts of interest
Within the framework of their work, all Executive Board and Supervisory Board members of Merck KGaA are
exclusively committed to the interests of the company and neither pursue personal interests nor grant
unjustified advantages to third parties.
Before an Executive Board member takes on honorary offices, board positions, or other sideline activities, this
must be approved by the Personnel Committee of the Board of Partners of E. Merck KG. The Chair of the
Executive Board, Belén Garijo, the Chief Financial Officer until June 30, 2023, Marcus Kuhnert, and the Chief
Financial Officer from July 1, 2023, Helene von Roeder, are also members of the Executive Board of
E. Merck KG. This does not, however, create conflicts of interest.
In its report to the General Meeting, the Supervisory Board discloses any conflicts of interest involving its
members and how they were dealt with. Consultancy agreements as well as other service and work contracts of
a Supervisory Board member with Merck require the approval of the Supervisory Board. In fiscal 2023, there
were neither conflicts of interest nor consultancy agreements or other service or work contracts with
Merck KGaA involving Supervisory Board members.
Corporate Governance Statement on Corporate Governance
206
Adherence to environmental and safety standards
(a) ⚫Bundesdruckerei GmbH, Berlin, Germany (not listed)
⚫ Bundesdruckerei Gruppe GmbH, Berlin, Germany (not listed)
(b)
•
No board positions
Member of the
Supervisory
Board since
Jul. 1, 2009
of meeting
of the
Supervisory
Board
5/5
Apr. 26, 2019
5/5
Sascha Held
(Vice Chair of the Supervisory Board)
Riedstadt, Application Consultant (full-time
member and Chair of the Merck Joint Works
Council)
Birgit Biermann
Bochum, Member of the Central Board of
Executive Directors of the German Mining,
Chemical and Energy Industrial Union (IG BCE),
Hannover
Gabriele Eismann
Seeheim-Jugenheim, full-time member of the
Works Council
Jürgen Glaser
Bingen, former Regional Director of the German
Mining, Chemical and Energy Industrial Union (IG
BCE), Darmstadt
Michael Kleinemeier
Heidelberg, Managing Director of e-mobiligence
GmbH, Heidelberg
Renate Koehler
Darmstadt, Pharmacist and until January 02,
2024, Manager of Engel-Apotheke pharmacy,
Darmstadt (Independent Shareholder
Representative)
Barbara Lambert
⚫ KNDS NV, Amsterdam, Netherlands
(not listed)
Systems, processes, templates
• Wegmann Unternehmens-Holding GmbH &
Co. KG, Fürstenfeldbruck, Germany (Chair)
(not listed)
⚫ Merck Electronics KGaA, Darmstadt,
Germany¹ (Chair) (not listed)
Galapagos N.V., Mechelen, Belgium (listed)
• Zentiva Group a.s., Prague, Czech Republic (not listed)
No mandates
(b) ⚫ Döhler Group SE, Darmstadt, Germany (not listed)
No mandates
The general partners with no equity interest (Executive Board) manage the business activities in accordance
with the laws, the Articles of Association, and the rules of procedure. They are appointed by E. Merck KG with
the approval of a simple majority of the other general partners. The members of the Executive Board are jointly
responsible for the entire management of the company. Certain tasks are assigned to individual Executive
Board members based on a responsibility distribution plan. Each Executive Board member promptly informs the
other members of any important actions or operations in his or her respective business area. Among other
things, the Executive Board is responsible for preparing the Annual Financial Statements of Merck KGaA and of
the Merck Group as well as for approving the quarterly and half-year financial statements of the Merck Group.
In addition, the Executive Board ensures that all legal provisions, official regulations, and the company's
internal policies are observed, and works to achieve compliance with them by all the companies of the Merck
Group. A Group-wide guideline defines in detail which transactions require prior approval by the Executive
Board.
The Executive Board provides the Supervisory Board and its Audit Committee with regular, up-to-date, and
comprehensive reports about all company-relevant issues concerning strategy, planning, business
development, risk situation, risk management, and compliance. The rules of procedure of the Executive Board
and of the Supervisory Board regulate the further details and ensure that the Supervisory Board is kept
adequately informed by the Executive Board.
The Executive Board informs the Board of Partners and the Supervisory Board at least quarterly of the progress
of business and the situation of the company. In addition, the Executive Board informs the aforementioned
boards at least annually of the company's annual plans and strategic considerations.
The Executive Board passes its resolutions in meetings that are normally held once a month.
Corporate Governance Statement on Corporate Governance
208
Supervisory Board
The Supervisory Board has 16 members. The Supervisory Board was composed as follows in fiscal year 2023:
Attendance
Member
Wolfgang Büchele
(Chair of the Supervisory Board)
Römerberg, Chair of Exyte GmbH, Stuttgart
(Independent Shareholder Representative)
Memberships of
(a) other statutory supervisory boards and
(b) comparable German and foreign supervisory bodies of
corporations
(a) ⚫Gelita AG, Eberbach, Germany (Chair)
(not listed)
⚫ Merck Life Science KGaA, Darmstadt,
Germany¹ (not listed)
(b) ⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
Programs & Tools
Training & Awareness
Appropriate training and
additional measures to
educate and keep
awareness high
processing activities
internal & external
reporting
3
Policies & Procedures
Global policies, procedures
and standards to mitigate
identified risks
Compliance
Committee / Forum
Platform for Compliance-
related discussion and
decision making including
relevant key functions
BUSINESS
COUNSELING
Is a core activity
reflected into the
daily cross- and
sector-specific
advice
Programs & Tools
5
4
Comprehensive Compliance
Programs & supporting tools
Training & Awareness
Appropriate training and
contributing to internal controls
additional measures to educate
and keep awareness high
202
and overall governance
Living our values together is the underlying principle of our compliance management system. The Compliance
department adopts a specific brief in this respect.
A global framework for ethical and legally compliant business processes serves to minimize risk. We achieve
this by identifying specific compliance risks and requirements. Suitable policies and effective controls are
implemented in order to reduce risk. Our goals also focus on our employees. We achieve this by informing
employees about the applicable compliance rules and ethical standards and by giving them the responsibility for
complying with these requirements. This serves to strengthen employees' sense of responsibility and
accountability. As compliance is the second line of defense against risks, it is important that we consistently
safeguard what really matters. This is why we regularly monitor key indicators that allow us to assess risks and
the effectiveness of controls. Compliance not only contributes to company growth but also creates targeted
value added by allowing us to advise the business sectors and help them to navigate the respective compliance
requirements. Our advice takes into account and adapts to changing business requirements.
related data; perform
Based on a corporate culture that places the fundamental company values
responsibility, respect, integrity, and transparency
Tracking of Compliance-
Monitoring & Reporting
The Supervisory Board commissioned Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, to audit the
Consolidated Financial Statements and the Combined Management Report for 2023. Deloitte GmbH
Wirtschaftsprüfungsgesellschaft, Munich, is obliged to inform the Supervisory Board without delay of any
grounds for disqualification or bias occurring during the audit if these cannot be immediately rectified.
Additionally, the auditor shall immediately report to the Supervisory Board any findings and issues that emerge
during the audit that have a direct bearing upon the tasks of the Supervisory Board. The auditor shall inform
the Supervisory Board or note in the audit report any circumstances determined during the audit that would
render inaccurate the Declaration of Conformity made by the Executive Board and the Supervisory Board. It has
also been agreed with the auditor that in order to assess whether the Executive Board has fulfilled its
obligations in accordance with section 91 (2) of the German Stock Corporation Act (AktG), the audit will also
cover the company's early warning risk identification system. Moreover, the auditor is required to examine and
evaluate the accounting-relevant internal control system as part of its audit insofar as this is necessary and
appropriate for assessing the accuracy of financial reporting.
Since 2023, Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, has been the auditing firm responsible for
the statutory audit of the Annual Financial Statements and Consolidated Financial Statements of Merck KGaA.
The auditor responsible for auditing the Consolidated Financial Statements changes regularly as required by
law. Daniel Weise is currently leading the audit engagement. Mr. Weise has been the auditor in charge of the
engagement since fiscal 2023. Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich, has assured the
company that it is independent of the group entities in accordance with the requirements of European law and
German commercial and professional law, and that it has fulfilled its other German professional responsibilities
in accordance with these requirements. The Supervisory Board has found no grounds to doubt the
independence of Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich. Neither party identified any conflicts
of interest. The Audit Committee reviews the quality of the audit, including the performance of the auditor in
charge of the engagement, annually on the basis of objective indicators.
Further reports
The Combined Management Report of Merck KGaA and the Merck Group includes a combined non-financial
declaration that incorporates the non-financial declaration of the Merck Group in accordance with section 315b
HGB and the non-financial declaration of Merck KGaA in accordance with 289b HGB and section 315b (1) HGB
in conjunction with section 298 (2) HGB. It is included as a separate chapter of the Combined Management
Report. An overview of the information contained in the combined non-financial declaration can be found at
"Topics for the non-financial statement”. In addition, Merck publishes a sustainability report that meets the
requirements of the Global Reporting Initiative (GRI) standards and contains reports in accordance with the
standards published by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-
related Financial Disclosures (TCFD). This will be available from April 11, 2024, as an online version on the
company's website at https://www.merckgroup.com/en/sustainability-report/2023. In addition, the
remuneration report, which is also published on the company's website, is included as a separate item of the
disclosures on corporate governance.
Values and compliance
-
First and foremost, responsible entrepreneurship means acting in accordance with the law also known as
compliance. All our activities are required to adhere to the applicable laws, regulations, and international ethical
standards around the world. Compliance violations would result not only in possible legal action but also could
seriously compromise our reputation as an employer and business partner.
Our Group Compliance function is responsible for the core topics: Merck's Code of Conduct, anti-corruption and
anti-bribery (including healthcare compliance, third-party due diligence, transparency reporting), anti-money
laundering, and conflicts of interest. Group-wide and local policies, procedures, and processes are in place for
these important compliance topics in order to ensure that our business activities are consistent with the
relevant laws, regulations, and international ethical standards.
Corporate Governance Statement on Corporate Governance
Our compliance management system encompasses eight core elements and ongoing consultation with the
business fields that make up our compliance portfolio:
Elements of our compliance program
Continuous Improvement
Based on and applying to all
Compliance Program Elements
Risk Assessment
Identifying internal and external critical
risks in regular business operations
Case Management
Timely response to reports of
misconduct and implementation
of corrective actions
8
1
7
2
Givrins (Switzerland), Supervisory and
Administrative Board Member (Independent
Shareholder Representative)
-
courage, achievement,
Response to reports of
misconduct and case
management
8
7
Monitoring & Reporting
2
Tracking of data privacy
key metrics; internal and
external reporting
incl. forum
6
3
5
4
Individuals' Requests
Responses to requests
for information and data
deletion by data subjects
Policies & Procedures
Global data privacy policies,
standards and procedures
Risk Assessment &
Documentation
Identify internal &
external risks; records of
Incident Management
-
Data Privacy Program Elements
Continuous Improvement
at the center of our entrepreneurial actions, our Code of
Conduct (https://www.merckgroup.com/company/responsibility/en/regulations-and-
guidelines/code-of-conduct.pdf) helps us implement these when dealing with one another daily. The Code
of Conduct applies to all Merck employees in all countries and at all levels of our organization.
With its Code of Conduct, Merck has established a set of rules intended to help our employees to act
responsibly and to make the right decisions in their daily work.
The Code of Conduct explains the company principles for dealings with business associates, shareholders,
colleagues, and employees, and within the scope of our responsibility for society. Therefore, it supports all
employees in acting ethically - not only in their dealings with one another but also outside the company.
Accordingly, the Code of Conduct is also the main set of rules for our Compliance Program. Merck has aligned
the content of its Code of Conduct with the Merck values and integrated important topics such as data privacy,
healthcare compliance, and bioethics.
To Merck, compliance means observing legal and internal regulations and the basic ethical principles anchored
in the company's values. With the Code of Conduct and the various unit-specific ethical compliance rules, the
values are integrated into daily work and business practice. We also expect our business partners (e.g.
Corporate Governance Statement on Corporate Governance
203
customers, suppliers, distributors etc.) to comply with these principles or to have their own comparable
principles. Our Business Partner Code of Conduct describes our expectations and requirements regarding
human rights, health and safety, integrity, environmental protection, and continuous improvement. While
supplier management ensures compliant behavior of suppliers, global business partner risk management
encompasses the relations with sales-related business associates such as distributors, commercial agents,
dealers and high-risk suppliers.
The Compliance department monitors observance of the Code of Conduct with support from corresponding
monitoring and training programs throughout the company. Suitable controls and tailored training programs
across the company ensure monitoring of the Code of Conduct. All employees are called upon to report
potential compliance violations, so that Merck can take the necessary and appropriate action. In cooperation
with Group Internal Auditing, the Compliance Office regularly reviews the implementation of Group-wide
compliance measures at the subsidiaries. The audits regularly focus on the local compliance structure, the
compliance measures taken, and the existence of corresponding compliance guidelines and processes.
The Group Compliance Officer is responsible for the establishment, maintenance, and further development of
our global Compliance Management System. Among other things, the Group Compliance Officer and its team,
consisting of a global Compliance Center of Expertise and compliance officers, take appropriate measures to
help lower the risk of serious compliance violations and implement the compliance program across Merck
globally. Our Compliance Center of Expertise is a central body responsible for designing and structuring our
compliance program in all business areas and Group functions.
Our Group Compliance Officer reports on the status of our compliance activities, potential risks and serious
compliance violations to the Executive Board and Audit Committee twice a year at a minimum. As part of our
regular reporting processes, we compile a comprehensive compliance and data privacy report annually for the
Executive Board. This includes the status of our compliance program, continuous improvement initiatives and
key figures on compliance and data privacy cases. Additionally, we prepare a mid-year update to highlight
ongoing developments and the status of relevant projects and initiatives.
A further focus area of the Compliance Program is ensuring legally and ethically correct dealings with medical
stakeholders and adhering to the transparency requirements. The Compliance organization has agreed on
extensive measures with the affected areas of the company in order to establish an internal framework of rules
as well as the corresponding processes for approving and documenting interactions with healthcare
professionals that ensure Merck complies with reporting obligations. We, of course, also ensure compliance with
the respectively valid data protection regulations.
The importance of compliance is also reflected in the subsidiaries, which ensure via country representatives that
compliance measures are implemented effectively in the countries. Compliance tasks in the countries are
largely performed by full-time compliance officers. In terms of the functional structure, compliance officers in
the countries report directly and indirectly to the Group Compliance Officer. A separate responsibility was
created for Group functions. Regular regional and global compliance meetings are held to promote the
exchange of information within the Compliance organization. This is supplemented by a global concept for local
compliance forums and global compliance committees, at which relevant compliance-related topics are
discussed with senior management. These constitute an important element of risk assessment and quality
assurance.
Newcomer trainings are run for newly appointed compliance officers. These seminars serve to build up
compliance expertise and strengthen cooperation within the Compliance organization. This Group-wide network
is used to steer the global Compliance Program. The Compliance organization is also involved in the relevant
due diligence processes for the incorporation of new business units as well as possible divestments and
acquisitions, and the subsequent integration of companies. Within the scope of the global compliance program,
a high degree of importance is given to regular compliance trainings of the Merck Compliance Training Plan,
which are conducted as web-based training courses and classroom sessions. The various training topics
addressed, particularly on the Code of Conduct, anti-corruption and bribery, conflicts of interest, anti-money
laundering, antitrust and competition law, and healthcare compliance, serve to sensitize employees and
management on the consequences of compliance violations.
Corporate Governance Statement on Corporate Governance
204
As described in various compliance training courses and the Code of Conduct, whistleblowers may choose from
various reporting channels. The choice of reporting channel may depend on the reason for the report and the
whistleblower's preferences in the respective circumstances. Reports to the central reporting channels,
including the Compliance hotline, are received directly by an independent and qualified team at Group
Compliance and examined. The report may be forwarded to a different responsible function for further
processing depending on the nature and content of the report. Employees and individuals from outside the
company can report potential compliance violations to the Compliance hotline by telephone or via a web-based
application in their respective language. The Compliance hotline is available 24 hours a day, free of charge. The
system enables anonymous, two-way communication. If there is evidence of a compliance violation,
corresponding corrective measures are taken based on concrete action plans. If necessary, disciplinary
measures are taken which can range from a simple verbal warning up to the dismissal of the employee who
violated a compliance rule. Merck has set up a Compliance Case Committee to guide these processes. The
Compliance Case Committee consists of senior members from various Group governance functions; they are
involved in reviewing certain compliance violations and initiating appropriate and necessary measures. The joint
work in the Compliance Case Committee enables processes between the various Group functions to be
coordinated optimally and designed efficiently and potential risks to be addressed adequately.
Data privacy
Group Data Privacy at Merck is integrated into the Group's Compliance organization. As required by law, this
department operates independently and without being required to follow instructions. The department regularly
prepares data privacy updates and produces a comprehensive data privacy report at regular intervals as part of
our broader compliance reporting efforts. The Group Data Privacy Officer has a team of dedicated local data
privacy officers working in countries that are particularly privacy-sensitive for Merck. Other individuals around
the world also serve as local Data Privacy Officers alongside their core activity for Merck. The tasks of these two
groups of local data privacy officers include implementing and applying the global data privacy policy in the
countries, performing regular efficiency tests, and promoting awareness of data privacy. They also advise the
company on relevant and critical matters relating to data privacy. A Center of Expertise also provides support in
the form of structures and tools.
Our data privacy management system encompasses various elements of our portfolio alongside the pillars of
people and communication. The portfolio is composed as follows:
Elements of our Data Privacy program
Based on and applying to all
(a) adidas AG, Herzogenaurach, Germany (listed)
Berlin, CEO Healthcare
(a) Deutsche Börse AG, Eschborn, Germany
(listed)
Corporate Governance
Statement on Corporate Governance
209
Member
Peter Emanuel Merck²
Hamburg, Managing Partner of Golf-Lounge
GmbH, Hamburg (Independent Shareholder
Representative)
Dietmar Oeter
Seeheim-Jugenheim, Vice President Corporate
Quality Assurance
Alexander Putz
Höchst, IT Business Partner Darmstadt Site
Helene von Roeder
Frankfurt am Main, at that time Member of the
Executive Board (CTO) of Vonovia SE, Bochum
(Independent Shareholder Representative)
Memberships of
5/5
(a) other statutory supervisory boards and
No board positions
No board positions
Member of the
Supervisory
Board since
Apr. 26, 2019
Attendance
of meeting
of the
Supervisory
Board
5/5
May 09, 2014
5/5
(a) Merck Electronics KGaA, Darmstadt,
Germany (not listed)
(b) comparable German and foreign supervisory bodies of
corporations
Apr. 26, 2019
No board positions
⚫ UBS Switzerland AG / Credit Suisse AG
(Group Mandate), Zurich, Switzerland
(not listed)
Jul. 14, 2022
5/5
No board positions
May 09, 2014
5/5
(a)
•
SIRONA Dental Systems GmbH, Wals, Austria
(not listed)
Apr. 26, 2019
5/5
(b)
⚫ Merck BKK, Darmstadt, Germany (not listed)
(a) Merck Life Science KGaA, Darmstadt,
Germany¹ (Chair) (not listed)
(b) ⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
⚫ SRH Holding (SdbR), Heidelberg (not listed)
No board positions
Synlab AG, Munich, Germany (listed)
(b)
.
Implenia AG, Opfikon, Switzerland (listed)
Apr. 26, 2019
5/5
Apr. 26, 2019
5/5
Aug. 11, 2023
1/1
Anne Lange
Riedstadt, Application Engineer (full-time member
and Vice-Chair of the Merck Joint Works Council)
Footnotes follow at the end of the table.
May 28, 2020
5/5
Michelstadt, Chemical Laboratory Assistant (full-
time member of the Merck Joint Works Council)
Christian Raabe
Apr. 26, 2019
Cologne, Senior Physician at the Clinic for Trauma
and Hand Surgery, University Hospital Düsseldorf
(Independent Shareholder Representative)
Merck Healthcare KGaA, Darmstadt,
Germany¹ (not listed)
Apr. 26, 2019
5/5
⚫ Merck Life Science KGaA, Darmstadt,
Germany¹ (not listed)
⚫ Merck Electronics KGaA, Darmstadt,
Germany (not listed)
(b)
⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
1 Internal board position.
2 Members delegated according to article 6 (5) of the Articles of Association.
The Supervisory Board performs a monitoring function. It supervises the Executive Board's management of the
company. In comparison with the supervisory board of a German stock corporation, the role of the supervisory
board of a corporation with general partners (KGaA) is limited. This is due to the fact that the members of the
Executive Board are personally liable partners and therefore are responsible for the management of the
company. In particular, the Supervisory Board is not responsible for appointing and dismissing general partners
or for regulating the terms and conditions of their contracts. This is the responsibility of E. Merck KG. Similarly,
the Supervisory Board does not have the authority to issue rules of procedure for the Executive Board or a
catalog of business transactions requiring approval. This is also the responsibility of E. Merck KG (article 13 (3)
sentence 1 and (4) sentence 1 of the Articles of Association).
However, the fact that the Supervisory Board has no possibility of directly influencing the Executive Board
restricts neither its information rights nor its audit duties. The Supervisory Board must monitor the legality,
regularity, usefulness, and economic efficiency of the Executive Board. In particular, the Supervisory Board has
the duty to examine the reports provided by the Executive Board. This includes regular reports on the intended
Corporate Governance Statement on Corporate Governance
210
business policy, as well as other fundamental issues pertaining to corporate planning, especially financial,
investment, and HR planning, the profitability of the Merck Group, and the course of business. In particular, this
also includes IT security and sustainability issues, which fall within the responsibility of the Audit Committee.
The regular reports pertaining to Group Internal Auditing, risk management, the internal control system, and
compliance are received by the Audit Committee of the Supervisory Board. In addition, by means of
consultation with the Executive Board, it creates the basis for supervision of the management of the company
by the Supervisory Board in accordance with section 111 (1) AktG. The Supervisory Board and the Audit
Committee examine the Annual Financial Statements as well as the Consolidated Financial Statements and the
Combined Management Report, taking into account the auditor's reports. Moreover, the Audit Committee
discusses the quarterly statements and the half-year financial report, taking into account in the latter case the
report of the auditor on the audit review of the abridged financial statements and the interim management
report of the Group, and reports to the Supervisory Board. The adoption of the Annual Financial Statements is
not the responsibility of the Supervisory Board, but of the Annual General Meeting. The Supervisory Board and
the Audit Committee normally meet four times a year. Further meetings may be convened if requested by a
member of either the Supervisory Board or the Executive Board. As a rule, resolutions of the Supervisory Board
are passed at meetings at the instruction of the Chair. In exceptional cases a resolution may be passed by
other means, details of which are given in the rules of procedure.
The members of the Board of Partners of E. Merck KG and of the Supervisory Board may be convened to a joint
meeting if so agreed by the chairpersons of the two boards.
The Supervisory Board has adopted rules of procedure for its activities that are available on the company's
website at: https://www.merckgroup.com/company/who-we-are/management-and-company-
structure/supervisory-board/EN/Rules-of-Procedure-Supervisory-Board-EN.pdf.
The rules of procedure prescribe that the Supervisory Board may form committees. The Supervisory Board has
formed a Nomination Committee and an Audit Committee.
No board positions
The Audit Committee comprises three shareholder representatives and three employee representatives. The
members of the Audit Committee are Helene von Roeder (Chair) until April 17, 2023, and Barbara Lambert
(Chair) since August 11, 2023, Wolfgang Büchele, Jürgen Glaser, Sascha Held, Christian Raabe, and Daniel
Thelen.
(a)
5/5
The Nomination Committee comprises three shareholder representatives. Its members are Wolfgang Büchele
(Chair), Helga Rübsamen-Schaeff, and Simon Thelen. The Nomination Committee is responsible for proposing
to the Supervisory Board suitable candidates for its proposal to the Annual General Meeting. In addition to the
legal requirements and the recommendations of the German Corporate Governance Code, the objectives of the
Supervisory Board with respect to its composition, the qualification matrix, and the diversity policy must be
taken into consideration.
(b) E. Merck KG, Darmstadt, Germany¹
(not listed)
Apr. 26, 2019
5/5
Apr. 26, 2019
1/1
until
⚫ Deutsche Wohnen SE, Berlin, Germany
(listed)
Apr. 17, 2023
(b)
⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
Helga Rübsamen-Schaeff
Düsseldorf, Member of the Supervisory Board of
AiCuris Anti-infective Cures AG, Wuppertal
(a) AVW Versicherungsmakler GmbH, Hamburg,
Germany (not listed)
(a) Merck Healthcare KGaA, Darmstadt,
Germany (Chair) (not listed)
⚫ Merck Life Science KGaA, Darmstadt,
Germany¹ (not listed)
• 4SC AG, Martinsried, Germany (listed)
• AiCuris Anti-Infective Cures AG, Wuppertal,
Germany (not listed)
(b) ⚫ E. Merck KG, Darmstadt, Germany¹
(not listed)
5/5
⚫ AVW Versicherungsmakler GmbH, Hamburg,
Germany (not listed)
Daniel Thelen
Cologne, Program Manager Infrastructure at DB
InfraGO AG, Frankfurt am Main (Independent
Shareholder Representative)
Simon Thelen²
May 09, 2014
1 This group makes up around 7% of the total workforce; see the description under "Diversity and management".
In turn, the obligation to stipulate a target for the percentage of positions held by women on the Executive
Board pursuant to section 111 (5) AktG and the minimum composition requirement for the Executive Board
pursuant to section 76 (3a) AktG are not applicable to the legal form of a corporation with general partners
(Kommanditgesellschaft auf Aktien), as a corporation with general partners neither has a management board
comparable to that of a stock corporation, nor does the Supervisory Board have personnel authority over the
Executive Board. Rather, the Executive Board of Merck KGaA consists of personally liable general partners (see
also the description of Supervisory Board procedures). In line with its diversity policy, however, Merck also
continues to pursue representation of both genders as an objective for the Executive Board.
The statutory target of 30% pursuant to section 96 (2) AktG is already applied to the Supervisory Board of
Merck KGaA; this eliminates the obligation to stipulate a further target for the percentage of positions held by
women on the Supervisory Board (see section 111 (5) sentence 5 AktG).
The first management level comprises all managers of Merck KGaA with a direct reporting line to the Executive
Board of Merck KGaA or who belong to the Global Executive Group. The second management level comprises all
managers of Merck KGaA who report to managers with a direct reporting line to the Executive Board of
Merck KGaA or the Global Executive Group.
Stipulations pursuant to section 111 (5) AktG (target for the
percentage of positions on the Supervisory Board held by women)
Corporate Governance Statement on Corporate Governance
First management level of Merck KGaA below the Executive Board: 35.5% of positions held by women,
corresponding to full headcounts at the date on which the targets were defined.
December 31, 2024, in order to implement the obligations under section 76 (4) AktG as follows:
Pursuant to section 111 (5) AktG, the Supervisory Board of companies that are listed or subject to
codetermination must stipulate binding targets for the percentage of positions on the Supervisory Board and on
the Management Board held by women. However, Merck KGaA is not required to stipulate targets pursuant to
section 111 (5) AktG for the following reasons:
215
Internationality,
global mindset
Merck is pursuing a Group-wide, global diversity strategy. At Merck, diversity stands for a culture of inclusion,
mutual esteem, and respect. To demonstrate this open and dynamic company culture, we promote diversity,
equal opportunity, and inclusion throughout the Group - and do so at all levels, including the Executive Board
and Supervisory Board.
We believe that a diverse workforce boosts the innovative strength of the Merck Group and contributes
materially to our business success. That is why Merck is furthering a culture of diversity independent of factors
such as age, gender, disability, ethnic or cultural background, religion, industry experience, and educational
background. As part of our global diversity strategy, we have developed a diversity policy to strategically steer
the topics of diversity and inclusion in our corporate bodies; this focuses on the following key criteria:
Age
Industry
knowledge
Our
diversity
strategy
Educational
background
Management
experience
•
Gender
The Group-wide diversity strategy encompasses both voluntary as well as legally defined objectives that we
continuously and sustainably work to achieve (see also the "Diversity and Inclusion” section of the Non-
Financial Statement and the Sustainability Report for 2023). In this context, it should be noted that, with
respect to the Executive Board of Merck KGaA, many rules can only be applied correspondingly. This is because
the Executive Board comprises personally liable general partners of Merck KGaA and is not a management
board with employed members of a corporate body (for details, please also see the "Joint Report of the
Executive Board and the Supervisory Board").
In addition to the aspects presented below, reference is made to the objectives of the Supervisory Board with
respect to its composition and the profile of skills and expertise and qualification matrix of the Supervisory
Board (see the information under "Objectives of the Supervisory Board with Respect to Its Composition,
Profile of Skills and Expertise, and Qualification Matrix"). The statements made therein form part of the
diversity policy for the Supervisory Board presented here.
Diversity policy pursuant to section 289f (2)
no. 6 of the German Commercial Code (HGB)
On December 21, 2021, the Executive Board of Merck KGaA therefore set the new targets to be achieved by
The Personnel Committee has four members: Johannes Baillou (Chair), Wolfgang Büchele, Michael Kleinemeier,
and Frank Stangenberg-Haverkamp. The Personnel Committee meets at least twice a year. Further meetings
are convened as and when necessary. Meetings of the Personnel Committee are attended by the Chair of the
Executive Board of Merck KGaA unless the Committee decides otherwise. Among other things, the Personnel
Committee is responsible for the following decisions concerning members and former members of the Executive
Board: contents and conclusion of employment contracts and pension contracts; granting of loans and salary
advances; changes to the compensation structure and adaptation of compensation; approval for taking on
honorary offices, board positions, and other sideline activities; and division of responsibilities within the
Executive Board of Merck KGaA. The Personnel Committee passes its resolutions by a simple majority; in
matters concerning the Chair of the Executive Board, unanimity is required. The Chair of the Committee
regularly informs the Board of Partners of its activities.
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)
Corporate Governance
The Board of Partners may delegate the performance of individual duties to committees. Currently, the Board of
Partners has three committees in place: the Personnel Committee, the Finance Committee, and the Research
and Development Committee.
Personnel Committee
normally meets four times a year. The members of the Executive Board of Merck KGaA are invited to all
meetings of the Board of Partners, unless the Board of Partners resolves otherwise in individual cases. The
members of the Board of Partners may convene a joint meeting with the Supervisory Board of Merck KGaA if so
agreed by the chairpersons of the two boards.
213
Corporate Governance Statement on Corporate Governance
The Board of Partners supervises the Executive Board in its management of the company. It informs itself
about the business matters of Merck KGaA and may inspect and examine the company's accounts, other
business documents, and assets for this purpose. According to article 13 (4) of the Articles of Association of
Merck KGaA, the Executive Board requires the approval of E. Merck KG for transactions that are beyond the
scope of the Group's ordinary business activities. For such transactions, approval must first be obtained from
the Board of Partners of E. Merck KG. The Board of Partners convenes as and when necessary; however, it
(b) ⚫Travel Asset Group Ltd., London, United Kingdom (Chair) (not listed)
(a) Merck KGaA, Darmstadt, Germany (listed)
Cologne, Program Manager Infrastructure at
DB InfraGO AG, Frankfurt am Main
Daniel Thelen
We foster diversity within the company, which also includes ensuring a balance of genders in management. To
this end, we pursue both voluntary and legally required objectives, and we work continuously and sustainably
to achieve them. As a global company with correspondingly aligned global (leadership) structures, we are
striving to increase the proportion of management positions held by women (managers, experts, and project
managers in roles 4 and above)¹ as a voluntary goal. Our aim is to achieve gender parity by the end of 2030.
In addition, Merck KGaA is subject to the statutory obligations under section 76 (4) AktG.
Merck Electronics KGaA, Darmstadt, Germany (Vice Chair) (not listed)
Merck Healthcare KGaA, Darmstadt, Germany (not listed)
•
Finance Committee
The Finance Committee has four members: Wolfgang Büchele (Chair) since May 9, 2023, and Helene von
Roeder (Chair) until April 2, 2023, Johannes Baillou, Daniel Thelen, and Simon Thelen. The Finance Committee
holds at least four meetings a year, some of which are joint meetings with the Audit Committee of the
Supervisory Board of Merck KGaA. At least one meeting is a joint meeting with the auditor of Merck KGaA.
Further meetings are convened as and when necessary. Meetings of the Finance Committee are attended by the
Chief Financial Officer of Merck KGaA. Other members of the Executive Board of Merck KGaA may attend the
meetings upon request of the Finance Committee. These meetings regularly include the Chair of the Executive
Board. Among other things, the Finance Committee is responsible for analyzing and discussing the Annual
Financial Statements, the Consolidated Financial Statements, and the respective reports of the auditor, as well
as the half-year financial report and the quarterly statements. In addition, the Finance Committee addresses
Merck's net assets, financial position, results of operations, and liquidity, as well as accounting issues. Upon
request of the Board of Partners, the Finance Committee examines investment projects that must be approved
by the Board of Partners and provides recommendations pertaining thereto. It passes its resolutions with a
simple majority. The Chair of the Committee regularly informs the Board of Partners of its activities.
Research and Development Committee
The Research and Development Committee has four members: Helga Rübsamen-Schaeff (Chair), Johannes
Baillou, Katharina Kraft, and Simon Thelen. The Research and Development Committee is convened as and
when necessary but holds at least two meetings a year. Meetings of the Research and Development Committee
are attended by members of the Executive Board of Merck KGaA upon request of the Committee. These
meetings regularly include the Chair of the Executive Board as well as the CEO Life Science, the CEO
Healthcare, and the CEO Electronics. Among other things, the Research and Development Committee is
responsible for reviewing and discussing the research activities of the Life Science, Healthcare, and Electronics
business sectors. It passes its resolutions with a simple majority. The Chair of the Committee reports to the
Board of Partners on the insights gained from the meetings.
Corporate Governance Statement on Corporate Governance
214
Stipulations to promote the percentage of
management positions held by women
pursuant to section 76 (4) and section 111 (5)
of the German Stock Corporation Act (AktG)
Merck Life Science KGaA, Darmstadt, Germany (Vice Chair) (not listed)
Statement on Corporate Governance
Second management level of Merck KGaA below the Executive Board: 31.8% of positions held by women,
also corresponding to full headcounts at the date on which the targets were defined.
Age
Key topics of the Supervisory Board meetings
A total of five Supervisory Board meetings were held in fiscal 2023. All of the meetings were held in person. At
four of these five meetings, the Supervisory Board intensely discussed the reports of the Executive Board, as
well as company developments and strategic issues together with the Executive Board. The Chair of the Audit
Committee or, in the case of the meetings in May and July 2023, the Vice Chair reported comprehensively on
the previous meetings of the Audit Committee at these meetings of the Supervisory Board.
At the meeting in February 2023, the Supervisory Board intensively addressed the Annual Financial Statements
and Consolidated Financial Statements for 2022, the Combined Management Report, the reports of the auditor
(KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, "KPMG"), including the audit report on the non-financial
declaration for fiscal 2022, and the proposal for the appropriation of net retained profit. The auditor (KPMG)
explained the audit reports including the focus areas of the audit. The Executive Board and the Head of Group
Accounting reported on the financial statements. Furthermore, the Supervisory Board resolved on the report and
the objectives of the Supervisory Board with respect to its composition and the profile of skills and expertise
including the qualification matrix, the Declaration of Conformity with the German Corporate Governance Code, and
the Statement on Corporate Governance. The Supervisory Board also adopted the proposals to be made to the
Annual General Meeting (including the creation of new Contingent Capital II) and approved the plan to hold the
Annual General Meeting in virtual form. The Executive Board reported on business performance in 2022 and
presented the plans for fiscal 2023, which was likely to be challenging in light of geopolitical tensions in particular.
The Supervisory Board met in April 2023 to resolve on the amendment to the rules of procedure of the Audit
Committee and the election of Daniel Thelen as the Vice Chair of the Audit Committee. The meeting was held
after Helene von Roeder stepped down as a member of the Supervisory Board and the Audit Committee
effective April 17, 2023. The Chair of the Supervisory Board informed the Supervisory Board members about
this development at the meeting. As part of the amendment to the rules of procedure of the Audit Committee,
the Supervisory Board transferred the responsibility for resolving on sustainability topics of relevance to the
company to the Audit Committee.
The meeting in May 2023 focused on the report of the Executive Board on business performance in the first
quarter and the forecast for fiscal 2023. The Executive Board discussed developments in the first quarter of
Corporate Governance
Report of the Supervisory Board
219
2023 and provided an outlook concerning expected business performance in 2023 as a whole. The Supervisory
Board extensively discussed the contributions of the individual business sectors to the company's financial
performance. The report of the Research and Development Committee of the Board of Partners of E. Merck KG
for Life Science and Electronics was an additional focus of the meeting. Finally, the Supervisory Board
addressed Merck's global strategy.
At the meeting in July 2023, the Executive Board reported on the comparatively good business performance in the
second quarter of 2023 in spite of the challenging environment. The non-financial statement, which forms part of
the Combined Management Report, was a further topic of discussion. The Supervisory Board resolved to
commission the auditor (Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich) to conduct a limited assurance
review of the non-financial declaration for fiscal 2023. In addition, the auditor (Deloitte GmbH
Wirtschaftsprüfungsgesellschaft, Munich) was commissioned to conduct the formal and material audit of the
compensation report for fiscal 2023. Another topic addressed by the meeting was the amendment to the Articles of
Association of Merck KGaA following the departure of Marcus Kuhnert and the appointment of Helene von Roeder to
the Executive Board. All of the training undertaken by the Supervisory Board was on the subject of sustainability.
At the Supervisory Board meeting in November 2023, the Executive Board provided an overview of business
performance in the third quarter of 2023 in an extremely challenging business environment. The background to
this business performance was then discussed in detail by the Supervisory Board. Other topics discussed
included the report by the Research and Development Committee for Healthcare and Merck KGaA's transactions
with related parties within the meaning of section 111a et seq. of the German Stock Corporation Act (AktG).
There were no transactions requiring the approval of the Supervisory Board in accordance with section 111b (1)
AktG. This was followed by an overview and an intensive discussion of the Group and business sector
strategies, also in the context of external developments. The Chair of the Executive Board also reported on the
Global Leadership Summit (GLS), at which Merck managers discussed the geopolitical environment and its
impact on Merck as well as the priorities of the Merck Group.
Annual Financial Statements and Consolidated
Financial Statements
The cooperation with the Executive Board was characterized by an intensive dialog on the basis of mutual trust.
During fiscal 2023, the Executive Board provided the Supervisory Board with regular written and verbal reports
on the business development of Merck KGaA and the Merck Group. In particular, the Supervisory Board was
informed about the market and sales situation of the company in the context of macroeconomic developments,
and the financial position of the company and its subsidiaries, along with their earnings development and
corporate planning. Within the scope of quarterly reporting, the sales and operating results were presented for
the Merck Group as a whole and broken down by business sector. In addition to the Supervisory Board
meetings, the Chair of the Supervisory Board also maintained, and continues to maintain, a regular exchange of
information with the Chair of the Executive Board.
•
Corporate governance is a high-priority topic for the Supervisory Board. In its own estimation, the Supervisory
Board has an adequate number of independent members. There were no conflicts of interest as defined by the
German Corporate Governance Code involving Supervisory Board members during the year under review.
Dialog with the stakeholder groups set out in the German Corporate Governance Code is an important aspect of
opinion-forming within the company. Among other things, this takes the form of surveys in connection with the
materiality analysis as well as direct discussions. For example, we take the related investor suggestions
extremely seriously. In fiscal 2023, the Chair of the Supervisory Board held discussions with investors on
Supervisory Board-specific topics, including investor meetings with Allianz Global Investors GmbH and DWS
Investment GmbH. In particular, the topics discussed included the qualification matrix and the independence of
the Supervisory Board with a view to the Supervisory Board election in 2024 as well as the remuneration of the
Supervisory Board. Mr. Büchele stated that the qualification matrix plays a significant role in the selection of
candidates and that a particular focus has been placed on sustainability and digitalization. Independence,
internationality and diversity are other important factors. Mr. Büchele also stated that the company is planning
to reduce the term of office of the Supervisory Board members. Mr. Büchele reported that consideration was
being given to possibly adjusting Supervisory Board compensation to reflect the development of the market in
recent years in order to remain competitive with regard to attracting the best candidates. Ahead of the
Supervisory Board election in 2024, the Supervisory Board also actively engaged in dialog with the biggest
investors in order to determine their expectations and opinions. Among others, initial meetings with Blackrock,
Amundi and Union Invest already took place in December 2023.
Corporate governance and Declaration of
Conformity
At its meeting in February 2024 to approve the financial statements, the Supervisory Board also assessed the
Annual Financial Statements of Merck KGaA, the proposal for the appropriation of net retained profit, the
auditor's report presented in accordance with Article 27 (2) of the Articles of Association, the Consolidated
Financial Statements of the Merck Group, and the Combined Management Report of Merck KGaA and the Merck
Group in accordance with Article 14 (2) of the Articles of Association, and took note of the auditor's reports of
Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich. The discussion of the relevant agenda item at this
meeting was also attended by the auditors who sign the audit opinion on the Annual Financial Statements of
Merck KGaA and the Consolidated Financial Statements of the Merck Group. This was also the case for the
meeting of the Audit Committee. Based on the recommendation of the Audit Committee and its own review, the
Supervisory Board approved the Annual Financial Statements for Merck KGaA, the Consolidated Financial
Statements of the Merck Group, the Combined Management Report of Merck KGaA and the Merck Group
prepared by the Executive Board, and the report presented by the auditor in accordance with Article 27 (2) of
the Articles of Association. The Supervisory Board gave its consent to the proposal of the Executive Board for
the appropriation of net retained profit after conducting its own review.
The Audit Committee assessed the Annual Financial Statements of Merck KGaA, the proposal for the
appropriation of net retained profit, and the auditor's report. It also examined the Consolidated Financial
Statements of the Merck Group as well as the Combined Management Report for Merck KGaA and the Merck
Group, including the non-financial declaration, and took note of the auditor's reports of Deloitte GmbH
Wirtschaftsprüfungsgesellschaft, Munich. In particular, it focused on the key audit matters of particular
importance in the audit opinion, the resulting risks for the financial statements, the approach adopted during
the audit as described, and the conclusions drawn by the auditor. On completion of its assessment, the Audit
Committee raised no objections and thus recommended that the Supervisory Board approve the Annual
Financial Statements for Merck KGaA, the Consolidated Financial Statements of the Merck Group, the Combined
Management Report of Merck KGaA and the Merck Group prepared by the Executive Board, and the report
presented by the auditor in accordance with Article 27 (2) of the Articles of Association.
220
Corporate Governance Report of the Supervisory Board
In addition, the auditor audited the calculation of Merck KGaA's participation in the profit of E. Merck KG in
accordance with Article 27 (2) of the Articles of Association, as well as the combined non-financial declaration.
The Annual Financial Statements of Merck KGaA, the Consolidated Financial Statements of the Merck Group,
and the Combined Management Report for Merck KGaA and the Merck Group, including the non-financial
declaration and the proposal of the Executive Board for the appropriation of net retained profit, were submitted
firstly to the Audit Committee and then to the Supervisory Board together with the auditor's reports.
For the Consolidated Financial Statements prepared in accordance with International Financial Reporting
Standards and for the Combined Management Report, the auditors issued the unqualified auditor's report that
is reproduced in the Annual Report of the Merck Group.
The auditors issued an unqualified audit opinion on the Annual Financial Statements of Merck KGaA in
accordance with German Auditing Standards.
The Annual Financial Statements of Merck KGaA, the Consolidated Financial Statements of the Merck Group,
and the Combined Management Report for Merck KGaA and the Merck Group, including the accounts, were
audited by Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich.
The Supervisory Board has an onboarding process aimed at enabling the quick and efficient induction of new
members. Most recently, Barbara Lambert received corresponding training upon joining the Supervisory Board.
Cooperation with the Executive Board
The Supervisory Board again properly executed its duties in 2023 in accordance with the law as well as the
company's Articles of Association and rules of procedure. In particular, the Supervisory Board monitored the
work of the Executive Board diligently and regularly.
Report of the
supervisory Board
Our boards are to have a balanced age structure. This permits future-oriented and consistent succession
planning and is a key element of sustainable company management and monitoring. Maximum age limits apply
to both boards. A maximum age of 70 applies to members of the Executive Board, while the standard age limit
for Supervisory Board members is 75. Our diversity policy aims for an age range of at least ten years between
the youngest and the oldest member of the respective board.
The current composition of the Executive Board and the Supervisory Board satisfies this objective. The age
range of the Supervisory Board is 35 years, while the age range of the Executive Board is currently ten years.
Gender
Gender diversity also plays a crucial role, since it enables us to benefit from a larger talent pool and allows us
to develop a better understanding of important customer groups as a company.
Additionally, Merck continues to pursue representation of both genders as an objective for the Executive Board.
The Board of Partners of E. Merck KG appointed Belén Garijo as the new Chair of the Executive Board effective
May 1, 2021, making it the first time a woman had been appointed to this position. Helene von Roeder has
been a member of the Executive Board and the Chief Financial Officer of Merck since July 1, 2023. This means
that women account for 40% of the members of the Executive Board. The statutory target of 30% pursuant to
section 96 (2) AktG already applies to the Supervisory Board of Merck KGaA and is currently met.
Internationality and global mindset
As a science and technology company with global operations and major markets on five continents with more
than 64,000 employees at locations in 66 countries, internationality and the associated global mindset is one of
our key success factors. According to our diversity policy, the Executive Board's internationality derives from
leadership experience or national origin, relative to our key sales markets or those locations that are
organizationally and culturally relevant to our employee development efforts. For both criteria, Europe, North
America, and Asia-Pacific are currently the key regions.
The Executive Board meets this objective with management experience in these regions, e.g. in the following
countries: Denmark, United Kingdom, Malaysia, Singapore, Spain, and United States. In addition, 40% of the
Executive Board members are not German citizens.
Management experience
The key prerequisites for high-performance leadership teams are the diversity of the individual competency
profiles and a balance between an internal and external management perspective. Therefore, the Executive
Board as a whole must have in-depth knowledge and experience in the following key areas of importance to the
company: strategy and planning, finance and accounting, sales and operations, human resources, legal and
compliance, and information technology, as well as ecological and social sustainability. In addition, it is
important for the composition of the Executive Board to ensure a good balance of members from within and
outside the company. Our diversity policy seeks to derive inspiration and innovation from outside the company
and to identify the latest trends of relevance to the core businesses of the company, while ensuring
sustainability and continuity in line with our corporate culture.
The current Executive Board fulfills both of the aforementioned objectives: All required aspects of the
competency profile are covered by at least one member of the Executive Board. Likewise, two members of the
Executive Board possess multiple years of experience working within the Merck Group prior to their
appointment to the Executive Board.
Corporate Governance Statement on Corporate Governance
217
Industry experience
To efficiently lead and manage the Group, the Executive Board must have in-depth knowledge of the key
industries and business sectors in which the company operates. For each of the areas Life Science, Healthcare,
and Electronics, there should be at least one member of the Executive Board with in-depth expertise in
accordance with the diversity concept.
The Executive Board covers the full range of the necessary industry experience.
Educational background
In order to translate the tremendous innovative potential of a science and technology company into sustainable
business success, interdisciplinary educational backgrounds are a key element of our diversity policy both for
the Executive Board and for the Supervisory Board. The current composition of both boards illustrates this
interdisciplinary aspect to a very high degree.
The members of the Executive Board contribute knowledge of various fields including medicine (pharmacology,
physical education), (astro)physics, information technology, and electrical engineering. In addition, the majority
of members of the Executive Board hold a university and doctorate degree.
Moreover, the members of the Supervisory Board have a background in one or more of the following fields of
specialization: chemistry, pharmaceutics, mathematics, law, business administration and economics, physics,
process technology, and computer sciences.
Seven Supervisory Board members are university graduates and hold doctorates.
218
Corporate Governance Report of the Supervisory Board
216
(a) Fortas GmbH, Rösrath, Germany (Chairman) (not listed)
In parts of its meetings, the Supervisory Board regularly meets without the members of the Executive Board
being present. Additionally, the employee representatives gather for a preparatory meeting ahead of each
Supervisory Board meeting. The employee representatives also gather immediately after each Supervisory
Board meeting to discuss the topics addressed at the meeting. Among other things, this includes a discussion of
topics which should be placed on the agenda for the next Supervisory Board meeting.
• 4SC AG, Martinsried, Germany (listed)
•
•
•
(a) ⚫Merck KGaA, Darmstadt, Germany (listed)
⚫ Merck Electronics KGaA, Darmstadt, Germany (not listed)
(b) comparable German and foreign supervisory bodies of corporations
(a) ⚫Merck Life Science KGaA, Darmstadt, Germany (not listed)
(a) statutory supervisory boards and
Memberships of
Römerberg, Chair of Exyte GmbH, Stuttgart
Wolfgang Büchele
(Vice Chair of the Board of Partners)
Cologne, Senior Physician at the Clinic for
Trauma and Hand Surgery, University
Hospital Düsseldorf, Düsseldorf
Vienna, Austria, Vice Chair of the Executive
Board and General Partner of E. Merck KG
Simon Thelen
Merck Healthcare KGaA, Darmstadt, Germany (not listed)
Merck Life Science KGaA, Darmstadt, Germany (not listed)
(Chair of the Board of Partners)
Member
The Board of Partners has nine members. The Board of Partners was composed as follows in fiscal 2023:
Some of the responsibilities that lie with the supervisory board of a German stock corporation are fulfilled at
Merck by E. Merck KG. This applies primarily to the Board of Partners of E. Merck KG. Accordingly, the Board of
Partners as well as the composition and procedures of its committees are described below.
Board of Partners of E. Merck KG
Statement on Corporate Governance
Corporate Governance
212
The Supervisory Board and the Audit Committee conduct regular self-assessments every two years. These take
the form of an internal efficiency review based on an extensive questionnaire. The questionnaire includes
feedback on cooperation within the Supervisory Board, corporate governance, accounting, risk management,
and the dialog with the Executive Board and the Audit Committee. The next self-assessment of the Supervisory
Board is scheduled for 2024.
member of the Board of Directors of Banque Pictet & Cie SA until 2022. Among other things, she is also a
member of the Supervisory Board and Chair of the Audit Committee of Deutsche Börse AG and a member of the
Board of Directors of UBS Switzerland AG. In these roles, she regularly participates in the training offered by
the respective companies. Barbara Lambert thus qualifies as a financial expert within the meaning of
section 100 (5) of the German Stock Corporation Act (AktG) and Recommendation D.3 of the German
Corporate Governance Code. Furthermore, the Vice Chair of the Audit Committee, Daniel Thelen, qualifies as a
financial expert within the meaning of section 100 (5) of the German Stock Corporation Act (AktG) and
Recommendation D.3 of the German Corporate Governance Code. A fully qualified lawyer with a Master of
Business Administration (MBA) and many years of experience as a member of the Audit Committee, he has
particular knowledge and experience of the application of reporting principles and internal control and risk
management systems. Finally, Wolfgang Büchele also has expertise in the area of accounting. His expertise
results from his role as CEO of Exyte GmbH, his many years as a member of the executive boards of other
companies, and his membership of other supervisory bodies. Wolfgang Büchele thus also qualifies as a financial
expert within the meaning of section 100 (5) of the German Stock Corporation Act (AktG) and Recommendation
D.3 of the German Corporate Governance Code.
211
Corporate Governance Statement on Corporate Governance
• AiCuris Anti-Infective Cures AG, Wuppertal, Germany (not listed)
Johannes Baillou
Merck Electronics KGaA, Darmstadt, Germany (not listed)
Defining the required knowledge in more detail, a further provision of the German Stock Corporation Act also
states that the members of the Supervisory Board must be collectively familiar with the sector in which their
company operates. This requirement is addressed in the Supervisory Board's qualification matrix, which
stipulates that the Supervisory Board should have at least four members who possess such knowledge of the
sector. We currently meet this requirement (see also "Objectives of the Supervisory Board with Respect
to Its Composition, Profile of Skills and Expertise, and Qualification Matrix"). Information on the
independence of the shareholder representatives can be found under "Objectives of the Supervisory Board
with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix".
(a) Merck KGaA, Darmstadt, Germany (listed)
Merck Healthcare KGaA, Darmstadt, Germany (Chair) (not listed)
•
(a)
(b)
⚫ AVW Versicherungsmakler GmbH, Hamburg, Germany (not listed)
⚫ Deutsche Wohnen SE, Berlin, Germany (listed)
(a) • Merck KGaA, Darmstadt, Germany (listed)
• Merck Life Science KGaA, Darmstadt, Germany (Chair) (not listed)
(b) ⚫ SRH Holding (SdbR), Heidelberg (not listed)
No board positions
(a) Merck KGaA, Darmstadt, Germany (listed)
⚫ KNDS NV, Amsterdam, Netherlands (not listed)
Wegmann Unternehmens-Holding GmbH & Co. KG, Fürstenfeldbruck, Germany
(Chair) (not listed)
.
(b)
AVW Versicherungsmakler GmbH, Hamburg, Germany (not listed)
Merck KGaA, Darmstadt, Germany (listed)
Merck Electronics KGaA, Darmstadt, Germany (Chair) (not listed)
• Gelita AG, Eberbach, Germany (Chair) (not listed)
•
Merck Life Science KGaA, Darmstadt, Germany (not listed)
Michael Kleinemeier
Heidelberg, Managing Director of e-
mobiligence GmbH, Heidelberg
Katharina Kraft
⚫ Merck Life Science KGaA, Darmstadt, Germany (not listed)
Helene von Roeder (until April 2, 2023)
Frankfurt am Main, at that time Member of
the Executive Board (CFO) of Vonovia SE,
Bochum
Helga Rübsamen-Schaeff
Mannheim, Senior Strategy Manager at BASF
SE, Ludwigshafen
Düsseldorf, Member of the Supervisory
Board of AiCuris Anti-infective Cures AG,
Wuppertal
Frank Stangenberg-Haverkamp
Darmstadt, Chair of the Executive Board and
General Partner of E. Merck KG, Darmstadt
Corporate Governance Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
The Supervisory Board shall have an appropriate number of independent shareholder representatives as
members. In any case, at least five of the shareholder representatives on the Supervisory Board shall be
independent. According to the Articles of Association of Merck KGaA, six members representing the
shareholders are to be elected by the Annual General Meeting, and two members are to be delegated. Taking
this and the special ownership structure of Merck KGaA into account, the shareholder representatives consider
five shareholder representatives to be an appropriate number of independent members. In the opinion of the
shareholder representatives, the objectives concerning independent members are met at the present time. The
shareholder representatives consider the following members to be independent: Wolfgang Büchele, Michael
Kleinemeier, Renate Koehler, Barbara Lambert, Peter Emanuel Merck, Helene von Roeder (until stepping down
Independence
Women on the Supervisory Board
226
The Supervisory Board shall have at least three members with business experience in the main sales markets of
Merck KGaA. Currently, the main sales markets of Merck KGaA are Europe, America, and Asia-Pacific. The
present composition of the Supervisory Board satisfies this objective. More than three Supervisory Board
members have entrepreneurial experience in a wide range of European countries. More than three Supervisory
Board members have experience in management positions in companies that operate globally.
Internationality
In accordance with recommendation C.1 of the German Corporate Governance Code in the version dated
April 28, 2022, the Supervisory Board has specified the following objectives regarding its composition, and
reports below on the status of implementation.
Objectives of the Supervisory Board with
Respect to its composition
Six women are currently members of the Supervisory Board of Merck KGaA. This corresponds to a share of
women of 37.5%. The Supervisory Board has undertaken to comply with the minimum quotas set out in
section 96 (2) sentence 2 AktG separately for the shareholder and employee representatives. When nominating
candidates for election to the Supervisory Board or making proposals for delegations, the Supervisory Board
shall examine whether the percentage of women can be increased by suitable candidates. The Supervisory
Board considers the 37.5% share of female members to be satisfactory at the present time. This is due to the
percentage of women in leadership positions at Merck and in consideration of the composition of the
Supervisory Boards of other companies of comparable size.
from the Supervisory Board on April 17, 2023), Helga Rübsamen-Schaeff, Daniel Thelen, and Simon Thelen. In
determining the independence of Wolfgang Büchele, the shareholder representatives took account of the fact
that he has been a member of the Supervisory Board for more than twelve years, which the German Corporate
Governance Code considers to be an indicator of a lack of independence.
No material conflicts of interest
In addition, the shareholder representatives do not believe that membership of the Board of Partners of
E. Merck KG conflicts with independence. The Board of Partners exists to complement the skills and expertise of
the Supervisory Board and its activities. Like the Supervisory Board, it supports the Executive Board in an
independent advisory and control function. This is not expected to lead to material and not merely temporary
conflicts of interest. It should also be taken into account that, due to its substantial capital investment and
unlimited personal liability, E. Merck KG has a strong interest in the businesses of Merck KGaA operating
efficiently and in compliance with procedures, thus counteracting from the outset any conflicts of interest
between E. Merck KG and Merck KGaA and hence any corresponding conflicts of interest between the members
of the respective corporate boards.
Moreover, no one shall be proposed for election to the Supervisory Board who simultaneously serves on a board
of or advises a major competitor of the company, or who, owing to another function, such as advisor to major
contractual partners of the company, could potentially become involved in a conflict of interest. No Supervisory
Board member serves on a board of or advises a major competitor. Moreover, no Supervisory Board member
performs a function that could lead to a lasting conflict of interest.
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.
The objective of the Supervisory Board regarding its composition is that, as a rule, all members shall belong to
the board for an uninterrupted period of no more than twelve years. This objective is also met at the present
time (with the exception of Wolfgang Büchele; see the discussion under "Independence" above). The length of
membership of the Supervisory Board members is set out in the "Procedures of the Executive Board,
Supervisory Board, Board of Partners, and its Committees" section of the Statement on Corporate
Governance.
Corporate Governance
Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
227
knowledge and experience in the application of accounting principles and internal control and risk management
systems, and the expertise in the field of auditing shall consist of special knowledge and experience in the
auditing of financial statements. Accounting and auditing also include sustainability reporting and its audit and
assurance. The Chair of the Audit Committee shall have appropriate expertise in at least one of the two areas
and shall be independent. When proposing Supervisory Board candidates for election or delegation, the
Supervisory Board will always give top priority to these prerequisites, which are essential for fulfilling its legal
duties. Overall, the Supervisory Board's policy is to optimally meet its monitoring and advisory duties by
ensuring diversity among its members. In particular, diversity includes internationality as well as different
experience backgrounds and career paths. The proportion of women on the Supervisory Board is also
considered to be an aspect of diversity. When preparing proposals for election or delegation to the Supervisory
Board, the Supervisory Board shall consider in each case to what extent different, complementary specialist
skills, professional and life experience, and an appropriate representation of both genders benefit the work of
the Supervisory Board. Additionally, the Supervisory Board shall support the Executive Board in its efforts to
increase diversity within the company.
Qualification matrix
Exercising their own professional judgment, the shareholder representatives satisfied themselves that this
indicator does not contradict their assessment that Wolfgang Büchele is, on the whole, independent of the
company and its Executive Board. In his work on the Supervisory Board and its committees and in the exercise
of his duties, Mr. Büchele continues to demonstrate the necessary critical distance from the company and its
Executive Board, along with the capacity for objective judgment. Moreover, Mr. Büchele has confirmed in a
personal statement that he considers himself to be independent of the company and its Executive Board.
Regular limit on the length of Supervisory Board membership
Employees
Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
Additionally, in accordance with recommendation C.1 of the German Corporate Governance Code in the version
dated April 28, 2022, the Supervisory Board has prepared a qualification matrix and reports on the status of
implementation below.
After discussing corporate governance issues in detail, the Executive Board and the Supervisory Board adopted
the updated Declaration of Conformity in accordance with section 161 AktG and issued it jointly in February 2024.
The statement is permanently available on the website of Merck KGaA (https://www.merckgroup.com/en/
investors/corporate-governance/reports.html). More information about corporate governance at
221
Corporate Governance Report of the Supervisory Board
230
Consolidated Financial Statements Consolidated Income Statement
Scope of Consolidation
339
Other Disclosures
336
Capital Structure, Investments and Financing Assets
301
Merck KGaA, including the compensation of the Executive Board and Supervisory Board, can be found in the
Statement on Corporate Governance.
290
267 Operating Assets, Liabilities, and Contingent Liabilities
Operating Activities
249
242 Group Structure
General Disclosures
235
The Supervisory Board of Merck KGaA currently comprises 16 members, of whom eight represent the
shareholders and a further eight represent the employees. The eight employee representative members are
elected by employee delegates pursuant to the provisions of the German Co-determination Act (MitbestG).
These consist of six company employees, including a senior executive, as well as two union representatives.
The Supervisory Board has no statutory right of proposal with respect to the election of delegates or employee
representatives to the Supervisory Board. Two of the eight shareholder representatives are appointed under a
delegation right of E. Merck Beteiligungen KG. The Supervisory Board also has no statutory right of proposal
with respect to the exercise of this delegation right. The other six shareholder representatives are elected by
the Annual General Meeting. In accordance with section 124 (3) sentence 1 AktG, the Supervisory Board shall
propose Supervisory Board members to the Annual General Meeting for election. These proposals require a
majority of the votes of the shareholder representative members of the Supervisory Board. The next scheduled
election to the Supervisory Board will take place at the 2024 Annual General Meeting. The Annual General
Meeting is not required to follow the election proposals. Accordingly, the appointment objectives and
competency requirements set out by the Supervisory Board below do not constitute requirements to be met by
those eligible to elect or delegate members. Instead, they are intended to express the objectives pursued by
the Supervisory Board in office with regard to its advisory and monitoring functions.
For the Supervisory Board of Merck KGaA, professional qualifications and personal expertise are the two most
important prerequisites for appointments to positions on the Supervisory Board. In accordance with the German
Stock Corporation Act, at least one member of the Supervisory Board must have knowledge and expertise in
the area of accounting, and at least one additional member of the Supervisory Board must have knowledge and
expertise in the auditing of financial statements. The expertise in the field of accounting shall consist of special
Corporate Governance
225
Wolfgang Büchele (Chair)
•
Birgit Biermann
•
•
1 Including internal control system & risk management system.
2 According to the German Corporate Governance Code, experience in the fields of accounting and auditing requires own activity in these areas.
3 Not Supervisory Board or Board of Partners at Merck.
• Criterion met, based on a self-assessment by the Supervisory Board. A dot means at least "good knowledge" and thus the ability to understand the
relevant issues well and make informed decisions on the basis of existing qualifications, the knowledge and experience acquired in the course of work as
a member of the Supervisory Board (for example, many years of service on the Audit Committee) or the training measures regularly attended by all
members of the Supervisory Board.
Corporate Governance Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
228
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 Life Science and Healthcare/Electronics
business sectors. This requirement is met at the present time. At present, more than four members of the
Supervisory Board have in-depth knowledge and experience in the fields of Life Science, Healthcare and
Electronics. In addition, more than four Supervisory Board members also have executive experience in
companies that also or exclusively operate in the Life Science and Healthcare/Electronics business sectors.
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.
Business Administration
The Supervisory Board must have at least four members who have in-depth knowledge of business
administration and at least one member who has professional expertise in accounting or auditing. This
requirement is met at the present time.
Experience in other supervisory or control bodies
In addition, the Supervisory Board shall have at least four members who have experience as members of other
supervisory or control bodies (not including membership of the Board of Partners of E. Merck KG). This
requirement is also met at the present time.
Sustainability expertise
Finally, the qualification matrix for the Supervisory Board shall also comprise expertise regarding sustainability
issues relevant to the enterprise. The majority of the Supervisory Board members have such expertise.
consolidated
Financial statements
230 Consolidated Income Statement
231 Consolidated Statement of Comprehensive Income
232 Consolidated Balance Sheet
233 Consolidated Cash Flow Statement
•
Committees
Data and
Digital
Adminis-
tration
Gabriele Eismann
Jürgen Glaser
Michael Kleinemeier
Renate Koehler
Barbara Lambert
(from Aug. 11, 2023)
Anne Lange
Peter Emanuel Merck
Dietmar Oeter
Alexander Putz
Christian Raabe
Sascha Held (Vice Chair)
Helene von Roeder
Helga Rübsamen-Schaeff
Daniel Thelen
Simon Thelen
Sector
Knowledge
(HC and
LS/EL)
Accounting
incl.
External
Supervisory
Business
Management Sustainability
Experience Reporting1,2
or Control
Auditing2
Bodies³ Sustainability
(until Apr. 17, 2023)
The Supervisory Board of Merck KGaA had a Nomination Committee and an Audit Committee in fiscal year 2023.
Initial situation
The Audit Committee meets four times a year. Further meetings are convened as and when necessary. The
Audit Committee is generally responsible for accounting and auditing matters. This includes sustainability
reporting and auditing the sustainability reports. In particular, its responsibilities include auditing the Annual
Financial Statements, the Consolidated Financial Statements, and the respective reports of the auditor, as well
as the half-year financial report and the quarterly statements. The Audit Committee discusses the assessment
of audit risk, the audit strategy and audit planning, and the results of the audit with the auditor. The Chair of
the Audit Committee regularly discusses the progress of the audit with the auditor and reports back to the
committee. The other responsibilities of the Audit Committee include assessing the performance of the auditor,
and especially the performance of the auditor in charge of the engagement. The Audit Committee is also tasked
with sustainability. This topic was assigned to it at the Supervisory Board meeting in April 2023.
-2,445
12
Research and development costs
-1,306
-1,392
40
-322
-277
3,484
4,287
Income tax
15
-650
-948
Profit after tax
2,834
3,339
thereof: attributable to Merck KGaA shareholders (net income)
thereof: attributable to non-controlling interests
2,824
3,326
34
10
14
-2,521
Earnings per share (in €)
Impairment losses and reversals of impairment losses on financial assets (net)
-51
235 Notes to the Consolidated Financial Statements
7.65
6.49
7.65
6.49
Profit before income tax
Finance costs
90
197
40
Finance income
4,474
3,609
Operating result (EBIT)¹
-1,170
-830
14
Other operating expenses
486
445
13
Other operating income
-6
42
Audit Committee
Basic
1 Not defined by International Financial Reporting Standard (IFRS).
objectives of the
supervisory Board with
Respect to its
224
Corporate Governance Objectives of the Supervisory Board with Respect to its Composition, Profile of Skills and Expertise, and Qualification Matrix
Chair
Wolfgang Büchele
The Supervisory Board of Merck KGaA
Darmstadt, February 2024
For the purposes of targeted further training, the Supervisory Board is offered an information event with internal
and external speakers at least once a year. In fiscal 2023, a training event on sustainability for all Supervisory
Board members was held on May 10, 2023. The event, which featured high-profile internal and external speakers,
encompassed the topics of "Sustainability in the Corporate Environment" as well as the legal dimensions of aspects
and developments in the area of sustainability and ESG that are relevant to the Supervisory Board (e.g. climate-
related litigation, greenwashing, due diligence obligations in supply chains, and sustainability reporting in
accordance with the CSRD). The company generally covers the cost of training measures for the Supervisory Board.
New members of the Supervisory Board - including Barbara Lambert in 2023 also undergo an onboarding
process prepared by employees of the Legal department in accordance with the onboarding plan.
The Supervisory Board attended all of the meetings in full. Helene von Roeder attended the meeting in
February prior to stepping down from the Supervisory Board, while Barbara Lambert attended the meeting in
November following her appointment to the Supervisory Board. The members of the Audit Committee attended
all meetings of the Audit Committee. Helene von Roeder attended the meeting in February, while her successor
Barbara Lambert attended the meeting in November. The members of the Nomination Committee attended all
meetings of the Nomination Committee.
Personnel matters and training
Corporate Governance Report of the Supervisory Board
223
The meeting in October 2023, which was held as a video conference, heard a report on the search for candidates
for the Supervisory Board to be proposed for election at the 2024 Annual General Meeting. In particular, a well-
known headhunting firm was commissioned in order to ensure that the criteria of the candidate profiles were
satisfied to the greatest possible extent. Potential candidates were selected on the basis of several selection
interviews and discussed at the meeting. The Nomination Committee then resolved to propose the candidates it
deemed most suitable to the Supervisory Board of Merck KGaA for election at the 2024 Annual General Meeting.
At the meeting in July 2023, which was held as a video conference, the members of the Nomination Committee
met with the aim of recommending a suitable replacement for Helene von Roeder to the Supervisory Board.
Following a brief discussion regarding potential candidates, Barbara Lambert was proposed to the Supervisory
Board of Merck KGaA as a suitable candidate for its proposal for election by court appointment.
The Nomination Committee met twice in fiscal 2023.
Nomination Committee
At the meeting in November 2023, which was held in person, the Chief Financial Officer presented the initial
observations and findings of the financial reporting health check. In particular, this included a discussion of the
internal control system and the IT systems used to support financial reporting. The Chief Financial Officer and the
Head of Group Accounting then reported on the net assets, financial position, and results of operations of the
Merck Group in the third quarter of 2023. It was noted that the income statement was showing lower net sales
than in the same quarter of the previous year due to the sustained difficult environment. The Audit Committee
discussed the report on the third quarter in detail. It then reviewed the contractual terms for the annual audit of
the financial statements and evaluated the audit of the financial statements and non-audit services following an
extensive presentation by the Head of Group Accounting. Finally, the planned scope of the audit of the financial
statements on the basis of the statutory provisions and the provisions of the European Securities and Markets
Authority (ESMA) and the defined schedule were discussed with Deloitte GmbH Wirtschaftsprüfungsgesellschaft,
Munich. The reports on Group Internal Auditing and compliance and data protection were then presented.
The meeting of the Audit Committee in July 2023, which was also held in person, began with a detailed
discussion of the report on the net assets, financial position, and results from operations of the Merck Group for
the second quarter of 2023. The auditors (Deloitte) shared their initial impressions following the handover of
the audit engagement and presented the results of the audit review of the half-year financial report. The
auditors also presented an overview of the process planning for the audit of the Annual Financial Statements
and the planned focal points. Next, the Audit Committee resolved on the list of the individual audit and non-
audit related services. A further focal point was the report on the key developments regarding the accounting-
related internal control system (ICS), which the Audit Committee discussed in detail. This was followed by the
risk management status report for the first half of 2023.
222
Corporate Governance Report of the Supervisory Board
The report on the net assets, financial position, and results of operations of the Merck Group for the first
quarter of 2023 was presented to the meeting in May 2023, which was held in person. The Audit Committee
then discussed the report in detail. The Audit Committee also discussed the start date of the audit period with
the auditors (Deloitte). The auditors shared their initial impressions following the handover of the audit
engagement and provided an overview of the planning for the audit review of the half-year financial report.
At the meeting in February 2023, which was held in person, the Chief Financial Officer and the Head of Group
Accounting reported on the 2022 Consolidated Financial Statements and the Annual Financial Statements of
Merck KGaA, which were then discussed in detail by the Audit Committee. This included a discussion of the
sustainability topics contained in the non-financial statement. The auditor (KPMG) also reported on the audit of
the financial statements and discussed the focus areas of the audit. The declaration of auditor independence
was acknowledged and evaluated. The meeting also reviewed and resolved on the proposal on the
appropriation of net retained profit to be submitted to the Supervisory Board, including the dividend payment
by Merck KGaA for fiscal 2022. Furthermore, the Audit Committee acknowledged and discussed the written risk
report. In addition, the Audit Committee proposed that the Supervisory Board resolve the creation of a new
authorization to issue convertible bonds and/or bonds with warrants, accompanied by the simultaneous creation
of new Contingent Capital II. The Head of Group Internal Auditing then presented the report from Group
Internal Auditing for 2022. The compliance and data protection report was also presented and discussed. The
details of the non-audit services approved in fiscal 2022 were also discussed.
The Audit Committee prepares the negotiations and resolutions of the Supervisory Board on the approval of the
Annual Financial Statements and Consolidated Financial Statements and the proposal to the Annual General
Meeting on the election of the auditor. The adoption of the Annual Financial Statements is not the responsibility
of the Audit Committee or the Supervisory Board but of the Annual General Meeting. The Audit Committee also
ascertains the independence of the auditor, assigns the audit mandate to the auditor, and determines the focus
areas of the audit and the fee agreement. Furthermore, the Audit Committee monitors the accounting process,
the effectiveness of the internal control system, the risk management system and the internal auditing system,
and compliance. The Chair of the Audit Committee and the auditor also engage in a regular dialog outside of
the meetings of the Audit Committee.
Composition,
Diluted
profile of
According to recommendation C.1 of the German Corporate Governance Code in the version dated April
28, 2022, the Supervisory Board shall specify concrete objectives regarding its composition as well as preparing
a qualification matrix for the entire board. In its composition, the Supervisory Board shall take into account the
number of independent members, consider the principle of diversity, specify an age limit, and disclose the term
of Supervisory Board membership. The qualification matrix for the Supervisory Board shall also comprise
expertise regarding sustainability issues relevant to the enterprise.
17
Administration expenses
-4,714
-4,510
11
Marketing and selling expenses
13,705
12,392
-8,527
-8,600
10
skills and Expertise, and
qualification matrix
234 Consolidated Statement of Changes in Net Equity
20,993
9
2022
2023
Note
Gross profit
Cost of sales
Net sales
€ million
Consolidated Income Statement
General notes on the composition of the
Supervisory Board
22,232
22
16
Changes in remeasurement
-1
-746
-1
-746
565
3,814
20,228
2,073
-746
26,680
26,754
Consolidated Financial Statements
Notes to the Consolidated Financial Statements General Disclosures
235
Notes to the consolidated
Financial statements
General Disclosures
(1) Company information
These consolidated financial statements for the year ended December 31, 2023, were prepared for Merck
Kommanditgesellschaft auf Aktien (Merck KGaA), Frankfurter Strasse 250, 64293 Darmstadt, Germany, entered
in the commercial register of the Darmstadt Local Court under HRB 6164. The ultimate parent company of the
Group is the parent company of Merck KGaA, E. Merck Kommanditgesellschaft (E. Merck KG), Darmstadt. The
consolidated financial statements of E. Merck KG can be accessed at
75
https://www.unternehmensregister.de. Shares in Merck KGaA are traded on the regulated market of the
Frankfurt Stock Exchange and on other exchanges.
5
-300
26,005
2,824
2,824
10
2,834
-28
-1,013
-1,041
5
-2
2,796
-1,013
1,783
8
1,791
-284
-284
-16
-1,043
The German Corporate Governance Code declaration (declaration of conformity) in accordance with
section 161 of the German Stock Corporation Act (AktG) was issued and can be viewed at
https://www.merckgroup.com/en/investors/corporate-governance/reports.html.
(2) Reporting principles
These consolidated financial statements have been prepared in accordance with the International Financial
Reporting Standards (IFRSS) effective at the end of the reporting period and adopted by the European Union
and the additional provisions of section 315e (1) of the German Commercial Code (HGB). The fiscal year is the
calendar year. These consolidated financial statements have been prepared in euros, the reporting currency.
The values presented in the consolidated financial statements have been rounded. This may lead to individual
values not adding up to the totals presented.
November 19, 2021 No material impact
September 8, 2022
Consolidated Financial Statements
Notes to the Consolidated Financial Statements General Disclosures
236
Title
Lease Liability in a
Sale and Leaseback
Classification of
Date of publication
September 22, 2022
Amendments to standards effective for the first time from fiscal 2024
November 19, 2021
Standard/
Amendments to
IFRS 16
Required date of
first-time
application¹
Expected impact on
the consolidated
financial statements
January 1, 2024 No material impact
Date of endorsement by
EU law
November 20, 2023
Amendments to
IAS 1
Liabilities as Current or
Non-current;
Classification of
Interpretation
May 18, 2017
June 25, 2020
December 9, 2021
November 8, 2023 See below
May 23, 2023
The Executive Board of Merck KGaA prepared these consolidated financial statements on February 14, 2024,
and approved them to be forwarded to the Supervisory Board. The Supervisory Board is responsible for
examining the consolidated financial statements and declaring whether it approves them.
The accounting and measurement policies used in the consolidated financial statements are presented in the
respective Notes and are indicated there.
Standards and amendments to standards effective for the first time in fiscal 2023
Title
Disclosure of Accounting
Policies
Date of publication
February 12, 2021
Date of endorsement Impact on the consolidated
by EU law financial statements
March 2, 2022 No material impact
February 12, 2021
March 2, 2022 No material impact
Standard/Interpretation
Amendments to IAS 1
Amendments to IAS 8
Amendments to IAS 12
Amendments to IAS 12
IFRS 17; Amendments to IFRS 17
Definition of Accounting
Estimates
Deferred Tax related to
Assets and Liabilities
arising from a Single
Transaction
International Tax Reform
Pillar Two Model Rules
IFRS 17 Insurance
Contracts;
Amendments to IFRS 17;
Initial Application of
IFRS 17 and IFRS 9 -
Comparative Information
May 7, 2021
August 11, 2022 No material impact
78
Liabilities as Current or
Non-Current
25,927
Total equity
reserves
Transactions with no change of
control
Change in scope of
consolidation/Other
Dec. 31, 2023
Equity
attributable
Gains/losses
Capital
E. Merck KG including changes in
Equity capital
Retained
earnings
recognized in
equity
to
Merck KGaA
shareholders
Non-
controlling
interests
Total equity
565
reserves
3,814
Profit transfer to/from
Dividend payments
Jan. 1, 2022
Profit after tax
Gains/losses recognized in equity
Comprehensive income
Dividend payments
Capital increases
Profit transfer to/from
E. Merck KG including changes in
Capital increases
reserves
Change in scope of
consolidation/Other
Dec. 31, 2022
€ million
Jan. 1, 2023
Profit after tax
Gains/losses recognized in equity
Comprehensive income
Transactions with no change of
control
15,134
1,824
21,338
565
3,814
18,463
3,086
25,927
78
26,005
Equity
attributable
-868
Equity capital
565
3,814
Retained
earnings
18,463
Gains/losses
recognized in
to
Merck KGaA
equity
shareholders
Non-
controlling
interests
Capital
reserves
-868
-868
-251
78
21,416
3,326
3,326
14
3,339
1,109
1,261
2,370
-2
2,368
4,435
1,261
5,696
12
5,708
-239
-239
-11
3,086
January 23, 2020
July 15, 2020
December 19, 2023
January 1, 2024 No material impact
Physical climate risks describe the risks that could result from longer-term changes in the general climatic
conditions. For example, physical climate risks can have an accounting impact in the form of the necessary
shortening of the economic life of items of property, plant, and equipment ("stranded assets"); the risk of
operational disruption; or increased future expenses due to necessary adaptations to safeguard sites. In
determining physical climate risks as part of the current TCFD project, the long-term impact of climate change
was simulated for 100 site clusters of the Merck Group using two global warming scenarios for 2030 and 2050
that took account of risks due to flood, fire, wind, extreme heat, precipitation, drought, extreme cold,
thunderstorms, and hail. All in all, the identified physical climate risks have not led to any material direct
accounting impact. However, there is significant estimation uncertainty due to the long-term nature of the
underlying analyses and the high degree of uncertainty concerning future development.
-15
-17
39
91
-2
-5
-5
Merck has concluded several virtual purchase agreements for the purchase of electricity from renewable energy
sources as an additional measure to mitigate climate risks, and it also intends to increasingly purchase such
electricity physically. After signing two virtual power purchase agreements in 2022, renewable energy sources
will account for 90% of the electricity consumed by Merck in the United States and 55% of its global electricity
consumption in the future. A further three virtual power purchase agreements were concluded in Spain in 2023
(see the disclosures in Note (42) “Management of financial risks” in addition to the existing virtual power
purchase agreements that are in place with wind and solar farm project developers in the United States and
Spain). This will further increase the proportion of energy consumption covered by renewable energy sources.
Merck participates in EU emissions trading and purchases emission certificates where the certificates allocated
by the public authorities are not sufficient to cover Merck's greenhouse gas emissions. The impact of this EU
emissions trading is currently immaterial to Merck's net assets, financial position, and results of operations.
Physical climate risks
Comprehensive income
Changes recognized in equity
Reclassification to profit or loss
Changes taken directly to equity
Currency translation difference
Changes recognized in equity
Tax effect
Reclassification to assets
Reclassification to profit or loss
Other comprehensive income
Fair value adjustments
The most significant transition-related climate risks to the net assets, financial position, and results of
operations are in the Electronics business sector, which is responsible for well in excess of half of the Group's
direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions. The majority of these greenhouse gas
emissions take the form of process-related emissions resulting from the production of specialty gases for the
semiconductor and electronics industries. In order to achieve the climate goals it has adopted, the Group
intends to reduce the emissions in its business with these specialty gases by making technological
improvements to the production process in particular. The recoverability of the assets recognized in connection
with these products depends on the successful implementation of the technological improvements in
production, as they could largely prevent the risk of long-term price rises due to the increased pricing of
greenhouse gas emissions. Furthermore, based on the information currently available, the implementation of
Merck's sustainability strategy is not expected to result in a significant decline in net sales in this business.
There have been no indications of impairment of the assets concerned to date, nor has it been necessary to
adjust their remaining useful lives. There is significant estimation uncertainty due to the long-term nature of
the underlying analyses and the high degree of uncertainty concerning future development.
Transition-related climate risks
In the past, inventories were increased in order to limit the risks in connection with supply chain disruption.
Accordingly, there is a heightened risk of subsequent write-downs if it is not possible to process or sell these
inventories. Furthermore, the impact of the trade restrictions concerning semiconductor materials that were
imposed between the United States of America and China in the fourth quarter of 2022 has been examined
since fiscal 2022. No impairment losses have been recognized to date. However, there is considerable
uncertainty with regard to future developments.
Increased uncertainty due to climate risks
As a globally active science and technology group, Merck is subject to transition-related and physical climate
risks that could have a potentially negative impact on its net assets, financial position, and results of operations
and lead to increased estimation uncertainty in accounting. To determine the potential impact of climate risks, a
structured climate risk analysis is currently being conducted as part of a project aimed at implementing the
recommendations of the "Task Force on Climate-Related Financial Disclosures" (TCFD) with the support of an
external consulting firm and an insurance company.
Reduction targets for greenhouse gas emissions
Merck has set itself the goal of reducing its direct (Scope 1) and indirect (Scope 2) greenhouse gas emissions
by 50% in comparison with the 2020 base year in the period from 2020 to 2030. By 2030, 80% of its
purchased electricity will come from renewable sources. Merck also plans to reduce the indirect emissions along
the entire value chain (Scope 3) in terms of metric kilotons of CO2 equivalents per euro of gross profit by 52%
by 2030 and to achieve climate-neutral business operations along the entire value chain (Scope 1-3) by 2040.
In 2022, the Science Based Targets Initiative confirmed that the targets for 2030 and the necessary measures
support its ambition and that of the Paris Agreement to limit global warming to 1.5°C.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements General Disclosures
240
Transition-related climate risks describe the consequences for companies as a result of the transition to a more
sustainable economic system.
The goals described above are to be achieved through the following measures in particular:
reduction in process-related emissions,
•
increased purchase of electricity from renewable sources,
energy efficiency measures,
•
reduced emissions in the supply chain (e.g. switching to sea transportation), and
•
recognition of a shadow price for the CO2 emissions of major projects.
•
Cost of cash flow hedge reserve
Changes recognized in equity
Tax effect
Note
2023
2022
2,834
3,339
Items of other comprehensive income that will not be reclassified to profit
or loss in subsequent periods
Net defined benefit liability
33
Profit after tax
Changes recognized in equity
Changes recognized in equity
Equity instruments
-236
1,440
48
-187
-300
1,140
34
Tax effect
€ million
Consolidated Statement of Comprehensive
Income
Consolidated Financial Statements Consolidated Statement of Comprehensive Income
1,109
-28
-31
160
3
2
-34
158
Reclassification to assets
194
-95
Reclassification to profit or loss
-98
98
Fair value adjustments
39
Cash flow hedge reserve
Items of other comprehensive income that may be reclassified to profit or
loss in subsequent periods
231
Impact of trade restrictions, sanctions, and supply chain bottlenecks
The war in Ukraine has not had any material effects on the Merck Group's net assets, financial position, or
results of operations owing to its limited business volume in Russia, Ukraine, Belarus, and the Republic of
Moldova. In fiscal 2023 and 2022 alike, the total share of Group net sales generated in the aforementioned
countries amounted to less than 1.5%. Furthermore, the conflict in the Middle East did not have a material
impact on the Merck Group's net assets, financial position, and results of operations in the reporting period. In
fiscal 2023 and 2022 alike, the share of Group net sales generated with customers in Israel was less than 1%.
Direct impact of armed conflicts
The higher interest rates also resulted in a rise in the discount rates applied in performing impairment testing
and determining the fair values of financial and non-financial assets compared with the previous year (see Note
(18) "Goodwill” and Note (43) “Information on fair value measurement” in particular).
Ensuring global minimum taxation within the OECD (Pillar II)
The legislation on global minimum taxation was published in the German Federal Law Gazette on December 27,
2023, and came into force on January 1, 2024. The exception provided by IAS 12 for the recognition and
disclosure of information about deferred tax assets and liabilities in connection with income taxes relating to
global minimum taxation was applied for fiscal 2023.
Under the regulations on global minimum taxation, Merck is obliged to determine the effective tax rate for each
country in which its business units operate within the meaning of the legislation and, where the effective tax
rate is lower than the minimum tax rate of 15%, to pay a top-up tax in the amount of the difference.
Jurisdictions where Merck has material operating activities and where the nominal tax rate is below 15% are
Ireland and Switzerland. Merck is currently taking action to ensure that it satisfies the reporting obligations and
tax compliance requirements arising from the legislation. When it comes to determining the effective tax rate,
the legislation provides for numerous specific adjustments that can lead to effective tax rates that differ from
those calculated in accordance with IAS 12.86. The complexity of applying the legislation, the extensive
Consolidated Financial Statements
Notes to the Consolidated Financial Statements General Disclosures
237
additional data requirements as a result and changes to the tax rules of individual nations meant that it was not
yet possible to quantify the impact precisely and fully at the reporting date. For example, it is possible that the
specific adjustments provided for the calculation of minimum taxation will not result in a tax burden for Merck
even though the effective tax rate calculated in accordance with IAS 12.86 is lower than 15%. Conversely,
minimum taxation may apply even if the effective tax rate is higher than 15%.
Based on a preliminary calculation and taking account of the data available as of the reporting date, Merck
anticipates an additional annual tax expense in a mid-double-digit million-euro amount.
The planned allocation of taxing rights between jurisdictions as part of the OECD rules is currently still being
negotiated. An analysis of the available drafts found that the rules are likely to apply to Merck. Due to the
status of the negotiations and the lack of clarity concerning the participation of key nations, it is not currently
possible to make a reliable statement about the expected impact.
Change in the recognition of liabilities and provisions
For the same reason, liabilities in connection with wages and salaries have been reported in other non-financial
liabilities rather than other financial liabilities since January 1, 2023. With regard to the comparative period
(December 31, 2022), this resulted in the reclassification of € 127 million to other non-financial liabilities (of
which € 121 million to other current non-financial liabilities).
Accounting and measurement policies
Currency translation
Functional currency
The subsidiaries of Merck KGaA conduct their business largely in the respective local currency, which they use
as their functional currency.
However, some subsidiaries, particularly in the Electronics business sector, use the U.S. dollar as their
functional currency rather than the local currency.
Transactions in non-functional currency
When the financial statements of consolidated companies are prepared, business transactions that are
conducted in currencies other than the functional currency are translated using the exchange rate on the date
of the transaction.
In order to increase transparency, the tranche of the Merck Long-Term Incentive Plan that is payable in the
months following the reporting date has been reported in other current non-financial liabilities rather than
current provisions for employee benefits since January 1, 2023. This resulted in a reclassification in the amount
of € 158 million. The changes in provisions and other assets and liabilities in the operating cash flow were
adjusted by € 166 million accordingly.
Allocation of taxing rights (Pillar I)
Based on the information currently available, Merck expects the efforts to achieve international convergence on
tax rules as part of the OECD's Inclusive Framework to have an impact on the Group's taxation. Although the
tax rules apply to the ultimate parent company of the Group, E. Merck Kommanditgesellschaft, top-up taxes
could be payable in a number of jurisdictions, and this could have an impact on the Merck Group.
Impact of efforts to achieve international convergence on taxation
Deferral of Effective
Date
Amendments to
IAS 1
Non-current Liabilities
October 31, 2022
December 19, 2023
January 1, 2024 No material impact
with Covenants
1 None of the regulations was applied early.
Regulations published but not yet endorsed by the European Union
Standard/Interpretation
Amendments to IAS 7
Amendments to IAS 21
Amendments to IFRS 7
Title
Supplier Finance
Arrangements
Lack of Exchangeability
Supplier Finance
Arrangements
Expected to be
effective for the first
time for financial years
beginning on or after
Expected impact on the
consolidated financial
statements
January 1, 2024 No material impact
Date of publication
May 25, 2023
August 15, 2023
May 25, 2023
January 1, 2025 Currently under review
January 1, 2024 No material impact
Translation of financial statements into the reporting currency (Euro)
Fair value adjustments
The financial statements of consolidated companies not using the euro as their functional currency are
translated into the reporting currency, the euro. Assets and liabilities are measured at the closing rate while
income and expenses are translated at average monthly rates. Any currency translation differences arising
during consolidation of Group companies are recognized in equity.
Argentina (since 2018) and Türkiye (since April 2022) are classified as hyperinflationary economies in
accordance with IAS 29 "Financial Reporting in Hyperinflationary Economies." Accordingly, business activities in
these countries are no longer reported at historical cost but are presented adjusted for inflation. In Argentina,
Merck uses a combination of the wholesale index IPIM (Índice de precios internos al por mayor) and the
consumer price index IPC (Índice de precios al consumidor). The index applied stood at 37,078.3 as of the
balance sheet date (December 31, 2022: 14,227.31/January 1, 2022: 7,396.8). In Türkiye, the Consumer Price
Index (CPI) published by the Turkish Statistical Institute is applied retrospectively with effect from January
1.005
1,357.642
31.336
1.054
1.107
0.931
1,428.798
33.845
0.985
1,342.189
32.728
1.065
(3) Discretionary decisions and sources of estimation uncertainty
Dealing with discretionary decisions and sources of estimation uncertainty
The preparation of the consolidated financial statements requires Merck to make discretionary decisions on the
applicable accounting and measurement policies as well as estimates to a certain extent. The discretionary
scope and estimation uncertainty are assessed on a company-specific basis. Discretion describes the need to
make assumptions concerning recognition or measurement when applying accounting policies. Sources of
estimation uncertainty affecting the selection of the valuation techniques to be applied relate in particular to the
parameters used therein. The degree of estimation uncertainty may vary considerably depending on the
availability and reliability of the input factors.
Dec. 31, 2022
7.420
140.716
Increased uncertainty due to the macroeconomic situation
Impact of inflation
The high rate of inflation slowed in fiscal 2023. Procurement costs for materials and energy in particular, which
were mainly reflected in the increased cost of sales, remained above the level seen in previous years. As in the
previous year, the cost of purchasing natural gas and electricity came to a low triple-digit million-euro amount
Consolidated Financial Statements
Notes to the Consolidated Financial Statements General Disclosures
239
for the Group in fiscal 2023. As in the previous year, Merck was able to offset these increased procurement
costs by passing on price rises to the market. The assumptions concerning the long-term salary and pension
trends applied in calculating pension obligations were reviewed again in fiscal 2023 to reflect the development
of inflation, as they had been in the previous year. Compared with the previous year, however, this resulted in
an adjustment and an increase in defined benefit obligations in connection with the measurement of defined
benefit pension plans only in certain countries (see Note (33) "Provisions for employee benefits").
Impact of higher interest rates
The sustained high level of interest rates in fiscal 2023 affected our customers' refinancing costs, especially in
the Life Science business sector, resulting in lower customer demand.
The continued dynamic development of the macroeconomic environment means that the degree of uncertainty
in the preparation of the consolidated financial statements remains high. In particular, uncertainties included
the sustained high level of inflation, the development of interest rates, geopolitical challenges, and efforts on
the part of various nations to reduce international dependencies along with the related trade restrictions and
sanctions. This applies in particular to the recoverability of non-financial assets. Based on the information
currently available, there is no evidence of significant impairment losses to date. Furthermore, as in previous
years, there are no grounds to suggest that the going concern assumption should not have been applied in
preparing the consolidated financial statements.
Dec. 31, 2023
7.854
156.462
7.088
137.989
7.667
151.913
0.972
1,412.674
33.695
1.082
Consolidated Financial Statements
Notes to the Consolidated Financial Statements General Disclosures
238
1, 2022. The index applied stood at 1,859.4 as of the balance sheet date (December 31, 2022:
1,128.5/January 1, 2022: 686.9). In accordance with the requirements of IAS 21 "The Effects of Changes in
Foreign Exchange Rates" for financial statements in non-hyperinflationary reporting currencies, the prior-year
amounts have not been restated.
The respective loss from the net position of the monetary items is recognized within other operating expenses and
reported separately as a loss from hyperinflation accounting (see Note (14) "Other operating expenses").
After adjusting the amounts for inflation, the balance sheet items and income and expenses are translated into
the reporting currency, the euro, at the closing rate in accordance with IAS 21.42.
Exchange rates of most significant currencies
The exchange rates of the most significant currencies in these consolidated financial statements were as follows:
€ 1 =
Chinese renminbi (CNY)
Japanese yen (JPY)
Swiss franc (CHF)
South Korean won (KRW)
Taiwan dollar (TWD)
U.S. dollar (USD)
Average rate
Closing rate
2023
2022
Hyperinflation
€ million
Tax effect
Operating Cash Flow
Payments for investments in property, plant and equipment
Payments from the disposal of intangible assets
Payments for investments in intangible assets
Other non-cash income and expenses
Neutralization of gains/losses on disposal of fixed assets and other disposals
Changes in other assets and liabilities¹
Changes in provisions¹
Changes in trade accounts payable/refund liabilities
Changes in trade accounts receivable
Changes in inventories
Depreciation/amortization/impairment losses/reversals of impairment losses
Profit after tax
€ million
Consolidated Cash Flow Statement
Consolidated Financial Statements. Consolidated Cash Flow Statement
Payments from the disposal of property, plant and equipment
233
Payments for investments in financial assets
Proceeds from the disposal of other financial assets
Note
Cash and cash equivalents as of December 31 (consolidated balance sheet)
Cash and cash equivalents as of January 1
Changes in cash and cash equivalents due to currency translation
Changes in cash and cash equivalents
Financing Cash Flow
Repayment of financial debt to E. Merck KG and E. Merck Beteiligungen KG
Payments from new borrowings of other current and non-current financial debt²
Repayment of other current and non-current financial debt²
Proceeds from new borrowings of financial debt from E. Merck KG and E. Merck
Beteiligungen KG
Profit withdrawal by E. Merck KG
Dividend payments to Merck KGaA shareholders
Investing Cash Flow
Payments from divestments
Dividend payments to non-controlling interests
Proceeds from the disposal of non-financial assets
Payments for the acquisition of non-financial assets
Payments for acquisitions less acquired cash and cash equivalents (net)
2 Previous year's figures have been adjusted, see note (2) "Reporting principles".
1 Previous year's figures have been adjusted, see note (6) "Acquisitions and divestments".
48,535
38
Other current financial liabilities²
1,228
702
37
Current financial debt
372
575
27
Current provisions
81
83
33
Current provisions for employee benefits²
Current liabilities¹
1,005
1,153
Trade and other current payables¹
30
9,514
8,699
48,495
Total equity and liabilities¹
1,786
1,479
29
Other current non-financial liabilities²
2023
1,483
15
Current income tax liabilities
877
9
Refund liabilities
2,499
2,545
1,433
2022
2,834
3,339
-1,364
1,281
519
-1,613
-420
1,637
697
-716
-868
-11
-12
-239
-284
-2,743
-1,892
-1,893
41
-1,732
-1,555
For details see Note (34) "Equity".
Equity
Consolidated Statement of Changes in Net
234
Consolidated Financial Statements Consolidated Statement of Changes in Net Equity
2 The lines "Repayments of bonds" and "Repayments of other current and non-current financial debt" as well as "Proceeds from the issuance of bonds"
and "Payments from new borrowings of other current and non-current financial debt", which were presented separately in the previous year, have been
summarized to improve clarity.
1 Prior-year figures have been adjusted, see note (2) "Reporting principles".
23
1,854
35
1,899
1,854
-7
-31
-39
160
1,982
13,015
4
2,511
-72
-48
-150
-445
-755
279
188
101
-43
-413
-8
-604
-89
2,030
1,880
21
16
3,784
4,259
-1,075
-2,494
219
510
-854
-12
-364
1,077
-537
19
-1,531
-1,807
38
136
-275
-216
21
13,042
912
1,130
957
981
1,287
Other non-current financial assets
27
28
25
Non-current receivables
3
3
Investments accounted for using the equity method
8,204
9,056
20
Property, plant and equipment¹
Other non-current non-financial assets
22
115
99
Trade and other current receivables
4,632
4,637
24
Inventories
Current assets
36,334
7,335
36,102
1,514
15
Deferred tax assets
10
9
15
Non-current income tax receivables
1,310
25
6,551
Other intangible assets¹
5,708
1,791
2,368
-1,043
1,259
-1,015
1,157
-1,018
-71
-15
1,228
-1,003
11
5
10
thereof: attributable to Merck KGaA shareholders
1,783
5,696
thereof: attributable to non-controlling interests
18,389
17,845
18
Dec. 31, 2022
Dec. 31, 2023
Note
Goodwill¹
19
Non-current assets¹
Consolidated Balance Sheet
232
Consolidated Cash Flow Statement
Consolidated Financial Statements.
12
8
34
€ million
4,004
36
Contract assets
27
Other non-current provisions
2,030
2,192
33
Non-current provisions for employee benefits
Non-current liabilities¹
26,005
26,754
78
75
Non-controlling interests
3,086
25,927
2,073
26,680
Equity attributable to Merck KGaA shareholders
277
299
Non-current financial debt
37
15
Deferred tax liabilities¹
38
39
15
Non-current income tax liabilities
19
Gains/losses recognized in equity
17
Other non-current non-financial liabilities²
141
147
4,114
Other non-current financial liabilities²
9,200
9,239
29
18,463
38
Retained earnings
Cash and cash equivalents
446
473
15
Current income tax receivables
705
633
35
22
499
36
Other current financial assets
128
104
26
20,228
Other current non-financial assets
1,982
321
Assets held for sale
565
3,814
1,854
3,814
Capital reserves
565
34
Total equity
Total assets¹
Equity capital
48,495
12,201
6
12,393
48,535
62
344
Investments in intangible
plant and equipment
Recognition and measurement of lease arrangements
Inventories
1,435
397
Investments in property,
694
107
97
136
provisions (according to
256
20
275
assets6
Non-cash changes in
72
174
28
-22,521
3
274
13
48,535
(segment result)²
-5,949
277
345
EBITDA pre
3,760
2,477
1,192
7,428
-579
6,849
EBITDA pre margin
36.2%
5,341
-16,571
31.6%
30.8%
(in % of net sales) 2
Assets by business sector5
24,203
8,135
10,857
43,195
Liabilities by business sector5
-2,094
-3,111
-744
29.7%
consolidated cash flow
IFRS 16
1 Excluding intersegment sales.
yes
6,551
Identification and measurement of intangible assets within the
scope of business combinations
Other intangible assets
high
IAS 36
18
yes
17,845
Determination of recoverable amount
Goodwill
6, 19
Note
Sensitivity
Discretionary
scope/
estimation
uncertainty
IFRS
Carrying
amount as
of Dec. 31,
2023 in €
million
Accounting matter
The accounting matters with the most significant discretionary decisions as well as the most comprehensive
assumptions relating to the future and sources of estimation uncertainty are described below:
Overview of significant discretionary decisions and sources of estimation
uncertainty
241
Notes to the Consolidated Financial Statements General Disclosures
Consolidated Financial Statements
6,504
analysis
statement)?
IFRS 3
In-licensing of intangible assets
2 Not defined by International Financial Reporting Standard (IFRS).
3 Without impairments on financial assets and inventories.
4 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
5 Previous-year figures have been adjusted, see note (6) "Acquisitions and divestments".
6 According to the consolidated cash flow statement.
7 Excluding provisions for pensions and other post-employment benefits.
500
Leases
medium
medium
IAS 16
IAS 36
Identification of impairments or reversal of impairments
high
Determination of depreciation
no
9,056
Property, plant, and equipment
high
IAS 36
Identification of impairments or reversal of impairments
medium
IAS 38
Determination of amortization
medium
IAS 38
20
-696
117
1,531
1,138
55
34
7,335
8,203
1
8,204
2,406
2,406
36,325
9
36,334
12,201
12,201
7,302
48,526
26,005
12,201
12,201
48,535
26,005
26,005
Non-current liabilities
Other non-current provisions and liabilities
11,729
11,729
Deferred tax liabilities
1,279
26,005
18,389
-26
18,415
The acquisition forms part of the Level Up growth program of the Electronics business sector. M Chemicals
primarily develops and produces precursors used in thin film deposition. The total purchase price involved
payments totaling € 90 million, of which € 80 million and € 9 million were due and were paid in 2022 and 2023
respectively.
No preliminary purchase price allocation had taken place by the time the 2022 consolidated financial statements
were prepared. The total difference between the purchase price and the net assets acquired, amounting to
€ 46 million, was therefore recognized as goodwill on a preliminary basis at this date. The purchase price
allocation was completed in 2023 and served to reduce goodwill by € 5 million, which mainly resulted in a
reclassification to other intangible assets.
Acquisition of Erbi Biosystems Inc., United States
Merck acquired all the shares in Erbi Biosystems Inc., United States (Erbi), on December 1, 2022. The purchase
price amounted to € 78 million in cash.
Erbi is the developer of Breez™, one of the few micro-scale, fully automated, functionally closed and continuous
perfusion cell culture platform technologies on the market. By integrating Breez™ into its existing MobiusⓇ
portfolio, Merck can offer a full range of bioreactors, cell retention systems, and devices as well as cell culture
media. The business is allocated to the Process Solutions business unit in the Life Science business sector.
No preliminary purchase price allocation had taken place by the time the 2022 consolidated financial statements
were prepared. The total difference between the purchase price and the net assets acquired, amounting to
€ 72 million, was therefore recognized as goodwill on a preliminary basis at this date. The purchase price
allocation was completed in 2023 and served to reduce goodwill by € 21 million, which mainly resulted in a
reclassification to other intangible assets.
Adjustments to the prior-year consolidated balance sheet to reflect the purchase price allocations
completed in fiscal 2023
In the case of the Erbi and M Chemicals acquisitions, the carrying amounts of the assets and liabilities as of the
acquisition date were recognized as preliminary fair values in the previous year because the completion date
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group Structure
245
was shortly before the reporting date. The completion of the purchase price allocations for both companies in
2023 resulted in the following adjustments:
€ million
Non-current assets
Goodwill
Intangible assets (excluding goodwill)
Property, plant and equipment
Other non-current assets
Current assets
Current assets
Total assets
Equity
Equity
Dec. 31, 2022
as reported
Adjustments for
Erbi and M
Chemicals
Dec. 31, 2022
adjusted
8
On December 30, 2022, Merck successfully completed the acquisition of the chemicals business of Mecaro Co.
Ltd., Korea (Mecaro), trading as M Chemicals Inc., Korea (M Chemicals), after obtaining the necessary
regulatory clearances; the acquisition had been announced on August 17, 2022. Mecaro is a Korea-based,
publicly listed manufacturer of heater blocks and chemical precursors for semiconductors.
1,287
8
As the partner companies do not have customer characteristics, these collaboration agreements do not fall directly
within the scope of IFRS 15, and any income from upfront payments, milestone payments, and royalties is
reported under other operating income. Reimbursements of research and development costs made between the
collaboration partners are recognized on a net basis in research and development costs. Merck recognizes the
consideration received in the course of collaboration agreements for bundled obligations arising from granting
rights to intellectual property as well as other goods and services promised as income over the performance
period in line with industry practice. Income is caught up cumulatively upon receipt of uncertain future milestone
payments attributable to contractual obligations that have already been fulfilled. This refers in particular to
milestone payments subsequent to regulatory approval. Furthermore, collaboration agreements in the Healthcare
business sector typically allocate the net sales generated in specific markets, or with specific products, to the
respective collaboration partners in the event of a successful approval; in turn, defined income and expense items
are carried by the collaboration partners according to fixed allocation ratios. Under these circumstances, Merck
recognizes the net sales from the commercialization of products to third-party customers, if Merck takes on the
role of a principal within the meaning of IFRS 15. Expenses resulting from payments made to collaboration
partners in connection with profit share agreements are reported under Note (14) "Other operating expenses".
Significant discretionary decisions and sources of estimation uncertainty
Collaboration and licensing agreements
As part of the accounting treatment of collaboration and licensing agreements, significant discretionary
decisions have to be made in the following areas:
Identification of an appropriate income recognition method and
•
Determination of the appropriate timing of income recognition.
Estimates are to be made, especially when it comes to determining the transaction price and progress on the
performance obligation.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group Structure
247
Strategic alliance with Pfizer Inc., United States, to jointly co-develop and co-
commercialize active ingredients in immuno-oncology and its termination
effective June 30, 2023
In addition to out-licensing agreements for selling intellectual property, Merck enters into collaboration
agreements in the Healthcare business sector in which the Group works with partners to develop
pharmaceutical drug candidates and, if regulatory approval is granted, to commercialize them.
On November 17, 2014, Merck formed a global strategic alliance with Pfizer Inc., United States (Pfizer), to co-
develop and co-commercialize the anti-PD-L1 antibody avelumab. From 2017, avelumab was approved for the
treatment of several cancer indications under the trade name BavencioⓇ. The overriding objective of the
strategic alliance was to share the development risks and to expand the two companies' presence in immuno-
oncology. The execution of the collaboration agreement was not structured through a separate vehicle. Upon
entry into the agreement in 2014, Pfizer made an upfront cash payment of US$ 850 million (€ 678 million) to
Merck, which was recognized in the income statement until the end of 2019.
On March 27, 2023, Merck announced the termination of the alliance agreement with Pfizer on the co-
development and co-commercialization of BavencioⓇ with effect from June 30, 2023.
Since the termination agreement came into force on June 30, 2023, Merck has held the exclusive global rights
for development, manufacturing, and commercialization and has full control over BavencioⓇ. Pfizer's previous
even split of the net amount of sales less defined expense components was replaced by a 15% royalty on
defined net sales of BavencioⓇ that is reported in the cost of sales (see Note (10) "Cost of sales"). While
Merck and Pfizer will continue to run their respective clinical studies on Bavencio®, Merck will control all future
research and development activities. Merck will also have sole responsibility for manufacturing the product and
serving the supply chain.
In-licensing agreement with Debiopharm International SA, Switzerland, on drug
candidates for the treatment of head and neck cancer
On March 1, 2021, Merck announced its entry into an in-licensing agreement with Debiopharm International SA,
Switzerland (Debiopharm), for the exclusive rights for the development and global commercialization of the
drug candidate xevinapant (Debio 1143) and for the development of preclinical follow-on compounds.
Xevinapant is currently being investigated in a Phase III study for patients with untreated high-risk locally
advanced squamous cell carcinoma of the head and neck in combination with platinum-based chemotherapy
and standard fractionation intensity-modulated radiotherapy.
Merck made upfront payments of € 188 million in conjunction with the agreement. Moreover, Debiopharm
received a right to future milestone payments of up to € 710 million in total, dependent on the achievement of
certain development and sales milestones, plus royalties on future net sales. The transaction became effective
in April 2021. The upfront cash payment resulted in the recognition of an intangible asset not yet available for
use in the amount of € 118 million, an asset under other financial assets for claims for reimbursement in
respect of Debiopharm, and a prepayment for future development activities.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group Structure
248
In-licensing agreement with Jiangsu Hengrui Pharmaceuticals Co. Ltd., China, on
drug candidates for the treatment of metastatic colorectal cancer
On October 30, 2023, Merck announced the conclusion of an in-licensing agreement with Jiangsu Hengrui
Pharmaceuticals Co. Ltd., China (Hengrui), including an exclusive worldwide license (excluding China) to
develop, manufacture and commercialize the PARP1 inhibitor HRS-1167 and a corresponding option for SHR-
A1904, an antibody-drug conjugate.
Merck agreed to make an upfront cash payment of € 160 million for acquired rights and future development
activities to be performed by the seller. Additional milestone payments will be due on the achievement of
certain development, approval, and commercialization milestones. The agreement also includes tiered royalties
on potential net sales. The acquisition of the rights resulted in the recognition of an intangible asset not yet
available for use in the amount of € 147 million.
In-licensing agreement with Abbisko Therapeutics Co. Ltd., China, on drug
candidates for the treatment of tenosynovial giant cell tumor
According to the collaboration agreement, each company bore one half of the development expenses during the
development period. In the commercialization phase, Merck recognized the majority of net sales from the
commercialization of BavencioⓇ while Merck and Pfizer evenly split the net amount of sales less defined
expense components up until the termination of the agreement. The net sales recognized by Merck in
connection with BavencioⓇ amounted to € 713 million in fiscal 2023 (fiscal 2022: € 611 million). Merck
recognized a high double-digit million-euro amount in research and development expenses in fiscal 2023, as in
the previous year, in addition to profit transfer expenses of € 143 million up until the termination of the
agreement (2022: € 255 million).
Collaboration agreements
The accounting and measurement policies for the in-licensing of intellectual property are presented in Note
(19) "Other intangible assets".
In-licensing agreements
13,015
Current liabilities
Trade payables and other liabilities
2,498
1
2,499
Other current liabilities
Total equity and liabilities
7,016
7,016
9,513
1
9,514
48,526
9
48,535
21
Divestments
Sale of shares in Calypso Biotech B.V., Netherlands
Assets held for sale as of December 31, 2023, included equity and debt components in connection with the
M Ventures portfolio company Calypso Biotech B.V., Netherlands (Calypso). Calypso is a biotech company that
develops drug candidates for the treatment of autoimmune diseases. It was allocated to "Corporate and other".
The company was acquired in full by Novartis AG, Switzerland, on January 8, 2024. The disposal group included
non-current equity instruments in a mid-double-digit million-euro amount that were measured at fair value
through other comprehensive income subsequent to initial recognition, and a convertible bond issued by
Calypso in a mid-single-digit million-euro amount that was measured at fair value through profit or loss
subsequent to initial recognition. The cumulative income recognized in other comprehensive income amounted
to € 48 million.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group Structure
246
(7) Collaboration and licensing agreements
Accounting and measurement policies
Out-licensing agreements
Merck primarily enters into material out-licensing agreements for intellectual property in the Healthcare
business sector. The granting of a license typically constitutes a distinct performance obligation that must
usually be recognized at a point in time. Due to the uncertainty of development results and regulatory events,
contingent consideration is typically recognized when the event in question has occurred. Sales-based and
usage-based royalties are recognized when the contract partner makes the corresponding sales or uses the
intellectual property. As out-licensing transactions in the Healthcare business sector do not form part of
ordinary activities and the licensees do not constitute customers within the meaning of IFRS 15, the
corresponding income from upfront payments, milestone payments, and royalties is reported in other operating
income (see Note (13) "Other operating income").
13,007
Acquisition of the chemicals business of Mecaro Co. Ltd., Korea
Exelead specializes in complex injectable formulations, including the lipid nanoparticles that are key
components of mRNA (messenger ribonucleic acid) therapeutics for treating Covid-19 and other indications.
The aim of the acquisition is to use Exelead's capacities and expertise to expand the service range for mRNA
contract development and manufacturing and to provide a fully integrated offering across the entire mRNA
manufacturing process. The business was integrated into the Life Science Services business unit, which is part
of the Life Science business sector.
On December 30, 2021, Merck signed a definitive agreement to acquire Exelead Inc., United States (Exelead),
a biopharmaceutical contract development and manufacturing organization (CDMO). The transaction closed on
February 22, 2022, after regulatory clearances and the satisfaction of other customary closing conditions. The
purchase price amounted to US$ 793 million (€ 702 million) in cash. The determination of the fair values for
Exelead was completed by December 31, 2022.
27, 28
Recognition and measurement of other provisions and
IAS 37
contingent liabilities
high
Revenue recognition
yes
9
Measurement of sales deductions and refund liabilities
877
IFRS 15
high
no
Income tax
15
Recognition and measurement of income tax liabilities
1,473
IAS 12
high
Recognition and measurement of deferred taxes from temporary
differences
IAS 12
medium
Recognition of deferred tax assets from tax loss carryforwards
67
IAS 12
high
no
medium
IAS 19
4,787
852
medium
4,637
no
24
Identification of impairments or reversal of impairments
Trade and other receivables
IAS 2
medium
4,031
no
25, 42
Determination of loss allowance
IFRS 9
medium
Other financial assets
yes
36, 43
Determination of fair values of contingent consideration
125
Determination of fair values of equity instruments
643
IFRS 13
IFRS 9,
IFRS 13
high
medium
Provisions for employee benefits
yes
33
Determination of present value of defined-benefit obligations
Other provisions and contingent liabilities
(4) Subsequent events
In January 2024, Merck announced measures for Life Science to streamline processes to become more efficient,
customer focused, and agile. The implementation of these measures will adversely impact profit before tax in a
mid-double-digit million-euro amount in 2024.
No other events of particular importance that could have a material impact on the net assets, financial position,
or results of operations occurred subsequent to the balance sheet date.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group Structure
243
(6) Acquisitions and divestments
Accounting and measurement policies
Business combinations
The balance sheet items goodwill, other intangible assets, and deferred taxes are significantly influenced by
purchase price allocations conducted within the scope of business combinations. As observable market prices
are mostly not available for the acquired other intangible assets, Merck regularly relies on the expertise of
external professionals when it comes to business combinations. The following overview shows the methods
typically used to measure intangible assets within the scope of purchase price allocations:
Customer relationships
Technology
Trademark
Measurement method for determining fair value
Multi-period excess earnings method
Relief from royalty method
Relief from royalty method
Results from foreign currency hedging of expected business combinations, if they meet the requirements for
hedge accounting, are offset against the carrying value of the net assets acquired.
Where management considers it to be appropriate, the optional concentration test set out in IFRS 3.B7B is
applied in individual transactions in order to determine the presentation of the transaction in the consolidated
financial statements.
Significant discretionary decisions and sources of estimation uncertainty
Business combinations
In particular, estimation uncertainty and discretionary decisions in conjunction with purchase price allocation
relate to:
planning of future cash flows;
the customer churn rate, which indicates how existing customer relationships will change in the future;
the license rate for technologies, which estimates royalty savings on the basis of comparable transactions
of similar technologies;
the discount factor, which is applied for maturity- and risk-based discounting of expected cash inflows; and
the useful life and the degree of technical obsolescence which depend, among other things, on assumptions
about technological developments.
Divestments
The assessment as to when a non-current asset, disposal group, or discontinued operation meets the
prerequisites of IFRS 5 for classification as "held for sale" is subject to discretionary judgment.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Group Structure
244
Acquisitions in the previous year
Acquisition of Exelead Inc., United States
The list of shareholdings presents all of the companies included in the consolidated financial statements as well
as all of the shareholdings of Merck KGaA (see Note (48) "List of shareholdings").
On December 4, 2023, Merck announced the conclusion of an in-licensing agreement with Abbisko Therapeutics
Co. Ltd., China (Abbisko), including an exclusive license to commercialize pimicotinib in China, Hong Kong,
Macau, and Taiwan as well as an exclusive commercialization option in the rest of the world. Pimicotinib is an
orally administered, highly selective and potent small-molecule antagonist of colony stimulating factor-1
receptor (CSF-1R).
Overall, the impact of subsidiaries not consolidated due to immateriality on net sales, profit after tax, assets,
and equity was less than 1% relative to the entire Merck Group. The two companies accounted for using the
equity method are Syntropy Technologies LLC, United States, and MM Domain Holdco Limited, United Kingdom.
There is also one (2022: two) joint operation within the meaning of IFRS 11 (Resonac Versum Materials Co.
LTD, Japan, formerly: Showa Denko Versum Materials 2 Co., Ltd., Japan). This joint operation is immaterial to
the presentation of the net assets, financial position, and results of operations. The effects of the existing
contractual arrangements also have no potentially significant effect in these contexts.
34
Group Structure
242
Group Structure
(5) Scope of Consolidation
Accounting and measurement policies
Scope of Consolidation
Subsidiaries that are immaterial to the assessment of the net assets, financial position, and results of
operations of the Group are not included in consolidation but are instead reported in non-current financial
assets (see Note (36) "Other financial assets”).
The scope of consolidation changed as follows in the reporting period:
Fully consolidated companies as of Dec. 31, 2022¹
Additions
Retirements
Fully consolidated companies as of Dec. 31, 2023
Companies rated at-equity as of Dec. 31, 2022
Companies rated at-equity as of Dec. 31, 2023
Non-consolidated subsidiaries as of Dec. 31, 2022
Non-consolidated subsidiaries as of Dec. 31, 2023
Companies established
Acquisitions
Materiality
Liquidations/mergers
Divestments
Immateriality
Loss of control
1 Previous year has been adjusted for better comparability with note (48) "List of shareholdings".
313
2
-9
306
2
2
31
The list of non-consolidated subsidiaries mainly comprises non-operating shelf companies as well as entities
subject to liquidation procedures, which were subsequently measured at fair value through other
comprehensive income.
7,200
228
Merck agreed to make an upfront cash payment of US$ 70 million (€ 64 million) for acquired rights and future
development activities to be performed by the seller. An option fee will also be payable to Abbisko if the option
is exercised. Abbisko will receive additional payments for the achievement of certain regulatory and commercial
milestones as well as tiered royalties on net sales by Merck. The acquisition of the rights resulted in the
recognition of an intangible asset not yet available for use in the amount of € 45 million.
Operating Activities
181
35
216
assets5
Non-cash changes in
provisions(according to
33
94
100
227
154
381
consolidated cash flow
statement)6
1 Excluding intersegment sales.
2 Not defined by International Financial Reporting Standard (IFRS).
3 Without impairments on financial assets and inventories.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
58
69
54
6,222
48,495
Liabilities by business sector
-1,843
-3,146
-636
-5,626
-16,115
4 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
-21,741
953
316
394
1,663
145
1,807
plant and equipment5
Investments in intangible
Investments in property,
5 According to the consolidated cash flow statement.
6 Excluding provisions for pensions and other post-employment benefits.
Information by business sector 2022
4,474
303
545
1,693
105
187
20
232
-801
1,798
232
Impairment losses³
Reversals of impairment
losses
EBITDA4
3,678
Adjustments²
82
2,385
92
Depreciation
42,273
5,275
1,895
€ million
Net sales¹
Intersegment sales
Operating result (EBIT)²
Total of
reportable
operating
Life Science
10,380
61
2,808
845
24
572
Healthcare
7,839
segments
Corporate and
Other
Group
4,013
22,232
22,232
61
-61
Electronics
10,275
Group
20,993
23,476
3,609
-77
-713
4,322
248
2,225
1,850
Impairment losses³
Depreciation
Operating result (EBIT)²
77
77
yes
20,993
3,659
8,053
9,281
Intersegment sales
848
34
299
526
1,673
6,092
816
2,545
2,731
EBITDA4
losses
8,522
-6
Net sales¹
-6
Reversals of impairment
104
1
103
42
27
1,782
109
-6
segments
Corporate and
Other
Healthcare
184
-603
206
5,489
390
EBITDA pre
2,820
(segment result)²
2,543
913
97
6,276
5,879
EBITDA pre margin
30.4%
31.6%
25.0%
28.0%
(in % of net sales)²
Assets by business sector
-397
Electronics
-1
249
Life Science
€ million
operating
Total of
reportable
250
Operating Activities
Adjustments²
88
-
Information by business sector – 2023
The segment information is derived from the financial figures, which are based on the IFRSS applied in the
Consolidated Financial Statements. Transfer prices for intragroup net sales were determined on an arm's-length
basis for all of the business sectors. Fixed assets are allocated to the segments on the basis of the degree of
utilization. Depreciation expenses are allocated on the same basis. Fixed assets are always recognized by the
buyer at the amortized Group cost following intragroup transactions. Services performed by the Group functions
are allocated on the basis of planning data. Any deviations in the actual costs incurred are not allocated to the
reportable operating segments but continue to be recognized in the Corporate and Other column.
Apart from net sales, the success of a segment is mainly determined by EBITDA pre (segment result). EBITDA
pre is a key figure that is not defined by International Financial Reporting Standards (IFRS). However, it
represents the most important variable used to steer the Merck Group. To permit a better understanding of
operational performance, EBITDA pre excludes depreciation and amortization, impairment losses, and reversals
of impairment losses in addition to specific adjustments presented below.
In addition to the direct activities of the central Group functions, Corporate and Other includes income and
expenses, assets, and liabilities, as well as cash flows that cannot be allocated to the reportable segments as
they are managed at Group level in central Group functions. This relates in particular to expenses and income
for the foreign currency hedging of transactions in operating business, financial expenses, and financial income,
which include interest expenses and interest income, and income tax expenses and income. Financial liabilities,
pension provisions and income tax assets and liabilities are also allocated to Corporate and Other. Moreover,
the column serves as the reconciliation to the Group figures.
The Merck Group's business activities are broken down into the three operational business sectors of
Life Science, Healthcare, and Electronics, as well as the central Group functions. This segment structure reflects
the internal organizational and reporting structure. The Life Science business sector encompasses business with
tools, chemicals, and equipment for academic labs, biotech, and pharmaceutical manufacturers, as well as the
industrial sector. The Healthcare business sector discovers, develops, manufactures, and markets prescription
drugs and biopharmaceuticals. The Electronics business sector supplies materials for the semiconductor and
display industries and surface design. The three business sectors differ in terms of their products and services,
their customers, their sales structures and processes, and the regulatory environment in which they operate.
However, the activities that are bundled in each individual business sector are extremely similar in terms of
these criteria. The central Group functions also encompass service activities that are the same for all business
sectors, such as procurement and human resources, as well as other central Group functions that are not
allocated to any of the business sectors. Resource allocation and the assessment of business development are
performed at the level of the business sectors by the Executive Board of Merck KGaA as the chief operating
decision-maker.
Segment reporting
Accounting and measurement policies
(8) Segment Reporting
Operating Activities
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Operating Activities
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Information by country and region 2023
251
Middle
East and
Africa
Europe
Goodwill and other
intangible assets²
5,121
1,783
1,780
18,794
18,783
480
47
2
24,396
Property, plant and
equipment
4,878
20,993
2,215
2,576
2,571
444
225
62
9,056
Research and development
costs
-2,004
-1,042
-827
-349
Number of employees
28,304
1,097
€ million
535
2,477
thereof: thereof:
Germany Switzerland
North
America
thereof:
Asia-
thereof:
Latin
USA
Pacific
China America
Group
Net sales by customer
location¹
6,037
1,000
1,267
369
5,632
6,936
2,708
1,331
737
20,993
Net sales by company
location¹
6,334
1,420
512
6,198
5,911
6,658
5,952
1,315
941
10%
417
881
4%
Services
804
8%
16
110
3%
930
4%
License income
16
4
20
Commission income
1
Income from co-
I
commercialization agreements
Total
10,380
100%
17
1
1
7,839
4%
Equipment
Total
9,281
100%
8,053
100%
3,659
100%
20,993
100%
2022
€ million
Net sales by nature of the products
Life Science
Healthcare
Electronics
Group
Goods
9,097
88%
7,804
100%
3,481
87%
20,382
92%
463
100%
4,013
100%
25%
2,261
29%
2,901
72%
7,697
35%
353
3%
838
10%
40
1%
1,231
5%
116
10,380
1%
527
7%
53
2%
695
3%
100%
7,839
2,536
29%
6,361
16%
18
1
1
22,232
100%
Net sales by region
(customer location)
Europe
North America
Asia-Pacific
Latin America
Middle East and Africa
4%
Total
33%
2,433
31%
371
9%
6,248
28%
3,931
38%
1,781
23%
649
3,445
100%
737
75
8,074
87%
8,004
99%
2,952
81%
19,030
91%
Equipment
411
5%
593
16%
1,004
5%
Services
778
8%
33
1%
111
3%
922
4%
License income
Goods
Commission income
Group
Healthcare
Surface Solutions
Total
2023
2022
2,479
68%
2,674
67%
770
21%
900
22%
411
11%
439
11%
3,659
100%
4,013
100%
The following tables present a more detailed breakdown of net sales from contracts with customers in the
individual business sectors by product type and region.
2023
€ million
Net sales by nature of the products
Life Science
Electronics
Income from co-
commercialization agreements
Total
21%
5,952
28%
Asia-Pacific
2,263
25%
2,232
28%
2,440
67%
6,936
33%
Latin America
352
4%
12%
39
1%
1,331
6%
Middle East and Africa
116
1%
546
7%
787
22%
1,793
36%
17
3
1
15
17
9,281
100%
8,053
100%
3,659
100%
20,993
2%
100%
(customer location)
Europe
3,178
34%
2,541
31%
318
9%
6,037
29%
North America
3,372
Net sales by region
Display Solutions
4,013
22,232
Marketing and selling expenses
1 Excluding amortization of internally generated or separately acquired software.
2023
2022
-950
-971
-923
-972
-515
-476
-1,061
-1,193
-596
-616
-126
-137
-339
-348
-4,510
-4,714
The reduction in logistics costs was due to lower freight rates in international goods transportation and the
lower sales volume in the Life Science and Electronics business sectors. Savings also resulted in lower expenses
for the internal and external sales force.
Of the royalty and license expenses, € 51 million (2022: € 53 million) related to the commercialization of ErbituxⓇ.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Operating Activities
Other marketing and selling expenses
259
Royalty and license expenses
Logistics
443
60
44
877
The development in contract assets and contract liabilities is shown in Note (26) "Contract assets" and in
Note (29) "Other non-financial liabilities".
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Operating Activities
258
(10) Cost of sales
Accounting and measurement policies
Cost of sales
The cost of sales primarily includes the cost of manufactured products sold and the merchandise sold.
Cost comprises the following items: directly attributable costs, such as cost of materials; personnel and energy
costs; depreciation and amortization; overheads attributable to the production process; and inventory
impairment losses and their reversals.
The cost of sales included amortization of intangible assets (excluding amortization of internally generated or
separately acquired software) in the amount of € 173 million (2022: € 207 million). Material costs amounted to
€ 3,709 million in fiscal 2023 (2022: € 3,996 million) and were largely reported under cost of sales. For the first
time, the cost of sales also included royalties of € 55 million for BavencioⓇ as a result of the agreement
terminating the strategic alliance with Pfizer Inc., United States, which came into force on June 30, 2023 (see
Note (7) "Collaboration and licensing agreements”).
Impairment losses on inventories amounted to € 424 million (2022: € 279 million) in the reporting period, while
reversals of impairment losses amounted to € 237 million (2022: € 197 million).
(11) Marketing and selling expenses
Accounting and measurement policies
Marketing and selling expenses
Marketing and selling expenses within logistics costs also include expenses for transportation services
performed on behalf of customers. The corresponding income from these services is reported under net sales.
Amortization of the intangible assets under marketing and selling expenses is mainly attributable to customer
relationships, licenses and similar rights, brands, and trademarks.
Marketing and selling expenses comprised the following items:
€ million
Sales force
Internal sales services
Sales promotion
Amortization of intangible assets¹
(12) Research and development costs
Accounting and measurement policies
Research and development costs
37
Income from fair value measurement of assets
27
47
Income from the reversal of provisions for litigation
25
24
Realized gains from currency translation
15
71
Income from miscellaneous services
13
7
Reversal of impairment losses on non-financial asset
6
Remaining other operating income
66
132
Other operating income
445
486
Income from asset disposals included income from the disposal of a non-strategic brand in the Healthcare
business sector and a portfolio of licenses and patents in the Electronics business sector.
The increase in income from contingent consideration was due in particular to a revaluation following the
achievement of milestones in connection with the biosimilars business that was sold to a subsidiary of
Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, in 2017.
The reduction in upfront payments, milestone payments, and royalties was mainly due to the lower level of
royalties for interferon beta products (Biogen Inc., United States) of € 45 million (2022: € 55 million) and the
fact that no license income was recognized in the United States for the antidepressant Viibryd® (AbbVie Inc.,
United States) after income of € 27 million in the previous year.
For information on income from the reversal of provisions for litigation, see Note (27) "Other provisions".
Currency effects from operating activities
105
53
Income from upfront payments, milestone payments and royalties
The item comprises the costs of the Group's own research and development departments, the expenses
incurred as a result of research and development collaborations as well as the costs of clinical trials in the
Healthcare business sector (both before and after approval is granted).
For information on the capitalization of development costs and their separation from research and development
services agreed in conjunction with in-licensing, see Note (19) “Other intangible assets”.
Cost reimbursements for research and development are offset against research and development costs.
The net income from repayments of subsidies received and reimbursements recognized within research and
development costs amounted to € 21 million in fiscal 2023 (2022: € 23 million).
Research and development costs include a high double-digit million-euro amount for the expected acceptance
and follow-on obligations in connection with the discontinuation of the development program for evobrutinib as
a result of not meeting their primary endpoints of the two Phase III clinical trials.
(13) Other operating income
Accounting and measurement policies
Other operating income
Other operating income comprises all income that cannot be allocated to net sales or finance income on account
of its character.
Income from upfront payments, milestone payments, and royalties
Income from upfront payments, milestone payments, and royalties comprises consideration received by Merck
from contract partners that are not customers. This relates in particular to collaboration and out-licensing
agreements in the Healthcare business sector (see Note (7) “Collaboration and licensing agreements”).
Income from the revaluation of contingent considerations
816
The accounting treatment of contingent consideration agreed at the sale of a business as defined in IFRS 3 is
shown in Note (36) “Other financial assets.”
Operating Activities
260
Other operating income was broken down as follows:
€ million
2023
2022
Income from the disposal of assets
137
54
Income from the revaluation of contingent considerations
71
6
Consolidated Financial Statements Notes to the Consolidated Financial Statements
100%
Dec. 31, 2023
2
2,526
Disposals due to divestments/Reclassification
to assets held for sale
Utilizations
-2,270
-1,739
-43
-29
-2,313
Cumulative increase (-)/decrease (+) in net
sales
-159
-147
-9
-6
-168
thereof: attributable to performance
obligations satisfied in prior periods
Currency translation
Other
Dec. 31, 2022
-118
-115
0
-118
29
31
40
2
56
2,470
100%
Group net sales amounted to € 20,993 million in fiscal 2023 (2022: € 22,232 million). Around 5% of this figure
was recognized over time (2023: € 1,119 million; 2022: € 933 million). This mainly related to net sales from
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Operating Activities
257
services in the Life Science business sector and net sales from the project business of the
Semiconductor Solutions business unit in the Electronics business sector.
Orders already received by the reporting date that will result in net sales in future periods amounted to around
€ 4 billion as of December 31, 2023 (December 31, 2022: around € 6 billion), of which around € 3 billion
related to the Life Science business sector (December 31, 2022: around € 4 billion). Based on past experience,
around 13% of orders received are not expected to result in net sales until fiscal 2025 or later
(December 31, 2022: around 10% in fiscal 2024 or later).
The following table shows the change in refund liabilities:
2022
€ million
Rebates/Bonus payments
Rights of return
Total
thereof: United
States
784
445
Total
55
thereof: United
States
Total
35
839
Jan. 1, 2022
Additions due to business combinations
Other additions
1,902
2
31
-3
-2,485
-1,855
-60
-37
-2,545
Cumulative increase (-)/decrease (+) in net
sales
-121
-120
8
10
-113
thereof: attributable to performance
-118
-116
9
10
-109
obligations satisfied in prior periods
Currency translation
-26
-18
-2
-2
-28
Other
Utilizations
Disposals due to divestments/Reclassification
to assets held for sale
2,648
31
-3
850
492
62
43
912
2023
€ million
Jan. 1, 2023
Rebates/Bonus payments
Rights of return
Total
2
thereof: United
States
thereof: United
States
Total
850
492
62
43
912
Additions due to business combinations
Other additions
2,596
1,945
52
Total
Semiconductor Solutions
19
Operating Activities
2022
-249
-198
-118
-88
51
38
Acquisition-related adjustments
-18
-29
2023
Other adjustments
-68
Adjustments before impairment losses/reversals of impairment losses¹
-390
-345
Impairment losses²
-88
-232
Reversals of impairment losses
1
Adjustments (total)¹
-56
-477
Gains (+)/losses (-) on the divestment of businesses
Restructuring expenses
2022
6,276
7,428
-397
-579
5,879
6,849
-1,880
-2,030
-390
Integration expenses/IT expenses
-345
4,474
-125
-187
3,484
256
Financial result
Profit before income tax
1 Not defined by International Financial Reporting Standard (IFRS). Please refer to the following table for the components of the adjustments.
The adjustments comprised the following:
€ million
3,609
-577
1 Not defined by International Financial Reporting Standard (IFRS).
2 Without impairments on financial assets and inventories.
-110
-1
-6
-118
€ million
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of
businesses
Acquisition-related adjustments
Other adjustments
-1
Adjustments before impairment
Impairment losses²
Reversals of impairment losses
Adjustments in the operating result (total)¹
1 Not defined by International Financial Reporting Standards (IFRS).
2 Without impairments on financial assets and inventories.
2022
€ million
Restructuring expenses
Integration expenses/IT expenses
Gains (+)/losses (-) on the divestment of
businesses
losses/reversals of impairment losses¹
-249
-21
-6
Restructuring expenses in the year under review primarily related to a program to further improve processes
and align the Group functions more closely with the businesses (€ 126 million; 2022: € 20 million; see Note
(27) "Other provisions").
As in the previous year, integration and IT expenses in fiscal 2023 related to expenses for the enhancement of
ERP systems.
Other adjustments include the losses on the net position of monetary assets and liabilities resulting from
hyperinflationary accounting in Argentina and Turkey, which are reported in other operating expenses (see Note
(2) "Reporting principles” and Note (14) “Other operating expenses”).
Impairment losses were attributable in particular to intangible assets in the Electronics and Life Science
business sectors (see Note (14) “Other operating expenses" and Note (19) "Other intangible assets”).
Consolidated Financial Statements Notes to the Consolidated Financial Statements Operating Activities
253
The adjustments are reported in the consolidated income statement as part of the respective functional costs
and allocated to them as follows:
2023
thereof:
thereof:
marketing and
thereof:
thereof:
cost of sales
selling administration
expenses
expenses
thereof:
research and
development
other
operating
income and
expenses
expenses
Total
-42
-44
-135
2023
Acquisition-related adjustments
Operating result (EBIT)¹
Depreciation/amortization/impairment losses/reversals of impairment losses
Net sales by customer
location¹
6,248
1,108
469
6,361 6,025
7,697
3,157
1,231
695
Group
22,232
location¹
6,648
1,532
592
6,596
6,302
7,297
2,818
1,175
516
Net sales by company
22,232
Middle
East and
Africa
thereof:
China
13,531
2,648
14,718
-348
14,496
-63
-25
-18
-11
-2,445
15,259
Latin
America
4,433
1,169
62,908
1 Excluding intersegment sales.
2 Goodwill and other intangible assets are allocated by currency area.
Information by country and region – 2022
€ million
Europe
thereof: thereof:
Germany Switzerland
North thereof:
America
USA
Asia-
Pacific
3,458
Goodwill and other
intangible assets 2, 3
4,930
-372
15,847 15,634
-371
-69
-26
-17
-12
15,412
4,904
3,487
1,243
-835
2,574
-2,521
64,232
2 Goodwill and other intangible assets are allocated by currency area.
3 Previous-year figures have been adjusted, see note (6) "Acquisitions and divestments".
No single customer accounted for more than 10% of the Group's total net sales in fiscal 2023 or 2022.
Consolidated Financial Statements Notes to the Consolidated Financial Statements Operating Activities
252
The following table presents the reconciliation of segment results of all operating businesses to the profit before
income tax of the Merck Group:
€ million
EBITDA pre of the operating businesses¹
Corporate and Other
EBITDA pre of the Merck Group¹
1 Excluding intersegment sales.
13,620
28,243
Number of employees
1,568
1,768
20,163
20,152
629
57
2
25,724
Property, plant and
equipment³
4,302
1,911
1,059 2,368
2,363
1,266
423
211
57
8,204
Research and development
costs
-2,051
-1,081
Adjustments¹
Other adjustments
4,287
51
22%
thereof: ErbituxⓇ
thereof: BavencioⓇ
Neurology & Immunology
thereof: MavencladⓇ
1,025
13%
1,023
13%
713
1,683
9%
8%
1,665
21%
1,743
22%
956
12%
856
11%
thereof: RebifⓇ
611
709
22%
2022
4,898
47%
Process Solutions
3,782
41%
4,540
44%
Life Science Services
792
8%
1,819
943
Total
9,281
100%
10,380
100%
1 Prior-year figures have been adjusted owing to realignment in the Life Science business sector.
Healthcare
€ million
Oncology
2023
9%
9%
887
11%
7%
553
7%
thereof: SaizenⓇ
Other
Adjustments before impairment
332
4%
266
3%
565
235
161
2%
8,053
100%
7,839
100%
Electronics
€ million
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
3%
thereof: Euthyrox®
8%
590
Fertility
1,547
19%
1,446
18%
thereof: Gonal-fⓇ
847
11%
825
11%
Cardiovascular, Metabolism & Endocrinology
2,786
35%
2,805
36%
thereof: GlucophageⓇ
882
11%
930
12%
thereof: ConcorⓇ
571
7%
51%
4,706
Total
-50
income and
expenses
expenses
Total
-27
-38
-74
-28
-198
2
operating
-77
-12
-88
38
38
-22
-29
-68
-68
losses/reversals of impairment losses¹
-32
-1
-32
thereof:
other
thereof:
administration
expenses
2022
51
-18
-18
-56
-56
-43
-44
-246
-390
thereof:
research and
development
-88
1
1
-43
-44
-246
-7
-138
-477
thereof:
cost of sales
thereof:
marketing and
selling
expenses
-88
-115
-32
-91
Determining the transaction price
Merck grants customers various kinds of rebates and discounts. These, as well as anticipated customer refund
claims, state compulsory charges, and rebates from health plans and programs, are deducted from sales. The
most significant portion of these deductions from sales is attributable to the Healthcare business sector and, in
particular, sales in the United States.
Sales deductions provided on the invoice as price-reducing items, which will likely be applied by customers
when making the respective payments, are recognized as reduction of trade accounts receivable. Expected
refunds, such as bonus payments, reimbursements for rights of return or rebates from health plans and
programs, are reported in the consolidated balance sheet under refund liabilities.
The measurement of sales deductions and refund liabilities arising from expected rebates and discounts takes
account of past experience, specific knowledge of expected sales volume growth rates, contractual conditions,
pricing information, and external information from distributors and industry services.
The measurement of sales deductions and refund liabilities resulting from rights of return takes into account
historical rates of return for individual product groups, information from distributors on inventory levels, and
publicly available information on product sales from sector-specific service providers (in the Healthcare business
sector).
Contractual payment terms
Given that the Merck Group generates the large majority of its net sales through transactions with simple
structures, the company usually has an enforceable right to payment after the performance obligation has been
Consolidated Financial Statements Notes to the Consolidated Financial Statements Operating Activities
255
fulfilled. The payment targets contractually agreed between Merck Group and its customers usually range
between 30 and 60 days.
Practical expedients
Merck uses the practical expedient of IFRS 15 in which the promised amount of consideration is not adjusted for
the effects of a significant financing component if the period between the fulfillment of a performance obligation
and the payment by the customer only amounts to up to one year.
Significant discretionary decisions and sources of estimation uncertainty
Sales deductions
The measurement of sales deductions and the corresponding refund liabilities requires extensive estimates.
Uncertainties exist in particular concerning the extent to which past experience serves as a reliable basis for
estimating the future development of expected refunds, such as bonus payments, reimbursements for rights of
return, or rebates from health plans and programs. External information from distributors and industry services
outside of Merck's control, which are also subject to uncertainty, are used to determine sales deductions.
Due to a lack of past experience, the estimation uncertainty referenced above is particularly relevant for
product launches in the Healthcare business sector.
-75
If the carrying amount of refund liabilities had been 10% higher as of the reporting date, this would have
resulted in a € 88 million (2022: € 91 million) reduction in profit before tax.
The following tables present a breakdown of net sales by key product lines/products:
Life Science¹
€ million
Science & Lab Solutions
2023
Net sales from contracts comprising several separate performance obligations are recognized on a pro rata
basis when the respective performance obligation has been fulfilled. Multiple-element arrangements of this
nature only exist to a very limited extent in the Life Science business sector.
Licenses for intellectual property are granted to a limited extent in the Life Science and Healthcare business
sectors. Unlike in the Life Science business sector, these transactions do not usually form part of ordinary
activities in the Healthcare business sector, meaning that the corresponding income is reported in other
operating income (see Note (7) "Collaboration and licensing agreements" and Note (13) "Other
operating income").
Any changes in estimates of the parameters listed above have a cumulative impact on the net sales for the
respective adjustment period.
Net sales are recognized when (or as) the customer obtains control of the asset. For sales of goods, the
customer typically obtains control as soon as delivery is made, given that the customer is generally not able to
obtain any benefits from the asset before that point in time. In the case of equipment sales, the criteria for
revenue recognition are only met after installation has been successfully completed - to the extent that the
installation requires specialized knowledge, does not represent a clear ancillary service and the relevant
equipment can only be used by the customer once successfully set up.
For service contracts and customer-specific contract manufacturing of goods and equipment, Merck recognizes
revenue over time based on the progress toward complete satisfaction of the performance obligation, if there is
a contractual claim for payment against the customer for the services already performed and there is no
alternative use. Input- and output-oriented methods are used to appropriately determine progress on a
contract-specific basis. Although progress is ideally measured using input-oriented methods, output-oriented
methods are always applied when the input cannot be reliably determined, for example. Specifically, the
appropriate degree of progress is mainly calculated on the basis of milestones reached, time elapsed, units
delivered, or costs incurred in proportion to the anticipated total costs.
Impairment losses²
-232
-345
Reversals of impairment losses
Adjustments in the operating result (total)¹
-32
-32
-115
-75
-232
-577
1 Not defined by International Financial Reporting Standards (IFRS).
2 Without impairments on financial assets.
(9) Net sales
-323
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Nature and timing of revenue recognition
Operating Activities
254
Accounting and measurement policies
scope of
consolidation/
Changes in
debited to
income
statement)
(net)
-1,261
Intangible assets
equity
Currency
translation/
Expenses for miscellaneous services
Deferred tax
assets/liabilities
(net) Assets Liabilities
235
-4
-11
€ million
Remaining other operating expenses
Currency effects from operating activities
-154
Other changes
Deferred taxes
credited/
91
Deferred tax
assets/liabilities
-120
-305
91
369
-132
23
1,829
1,807
Offset deferred tax assets and
liabilities
-520
-520
Deferred taxes (consolidated
23
1,310
1,287
balance sheet)
1 Previous-year figures have been adjusted, please refer to Note (6) "Acquisitions and Divestments".
Jan. 1, 2023
Dec. 31, 2023
Deferred taxes
(consolidated
-114
Consolidated Financial Statements
-830
Deferred tax liabilities for planned dividend payments within the next twelve months of profits already
generated are recognized.
Significant discretionary decisions and sources of estimation uncertainty
Income taxes
The calculation of the reported assets and liabilities from current and deferred income taxes requires extensive
discretionary judgments, assumptions, and estimates.
When assessing income tax assets and liabilities, the interpretation of tax provisions may be subject to
particular uncertainty. The possibility that the relevant tax authorities will take a differing view concerning the
application and interpretation of tax standards cannot be ruled out. Changes to the assumptions underlying the
interpretation of tax standards, for example as a result of changes in legislation, are recognized in the balance
sheet when the change comes into force.
With regard to deferred tax items, there is uncertainty as to when an asset will be realized or a liability settled.
This applies in particular to deferred taxes recognized in the course of company acquisitions. Assessing the
recoverability, particularly of tax credits and tax loss and interest carryforwards, requires assumptions and
estimates concerning the future taxable income of the respective Group company. Furthermore, the extent to
which a subsidiary's planned dividend distribution is probable within the next twelve months is discretionary.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Operating Activities
existing tax planning of the respective Group company.
263
€ million
Current income taxes in the period
Income taxes for previous periods
Deferred taxes in the period
thereof: from temporary differences
thereof: from changes in tax rates
thereof: from tax loss carryforwards
Income taxes
2023
2022
offsetting)
-1,140
-1,344
Income taxes in the consolidated income statement were broken down as follows:
•
results planning, and
results history,
-1,170
The reduction in profit transfer expenses was due in particular to the termination of the strategic alliance with
Pfizer Inc., United States, for BavencioⓇ in the field of immuno-oncology with effect from June 30, 2023
(see Note (7) "Collaboration and licensing agreements").
Impairments of non-financial assets were attributable to intangible assets (see Note (19) “Other intangible
assets") in the amount of € 81 million (2022: € 211 million) and to property, plant, and equipment
(see Note (20) “Property, plant, and equipment”) in the amount of € 23 million (2022: € 21 million).
Currency effects from operating activities in the previous year primarily resulted from cash flow hedges in U.S.
dollars.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Operating Activities
262
(15) Income tax
Accounting and measurement policies
Current income taxes
Current income taxes for the reporting period and, where applicable, for prior periods, are calculated in the
amounts that the tax authorities are expected to demand or reimburse. The calculation is based on the
company-specific tax rate applicable in the relevant tax year.
Uncertain income tax assets and liabilities
Factual assessments are made to calculate uncertain income tax assets and liabilities. Uncertain income tax
matters are recognized depending on the likelihood that the responsible tax authorities will accept the
respective income tax treatment. If recognition by the tax authorities is considered unlikely, the respective
uncertain tax asset or uncertain tax liability is measured at the most likely amount. Uncertain income tax
liabilities are reported within income tax liabilities. Expected income tax-related penalties and interest that do
not fall within the scope of IAS 12 are treated as provisions in line with IAS 37.
Deferred taxes
Deferred tax assets resulting from deductible temporary differences that exceed deferred tax liabilities relating
to the same taxation authority and the same taxable entity are recognized if it is considered probable that
taxable profit will be available against which they can be utilized. This corresponds to the recognition of
deferred tax assets on unused tax credits and tax loss and interest carryforwards.
The recognition of deferred tax assets requires an estimate of the probability of future use. The influencing
factors considered as part of this assessment include the following:
•
temporary differences relating to the same taxation authority and the same taxable entity that will be
subject to taxation in the future,
Other operating expenses
Deferred taxes (before
-26
41
-275
-104
-232
-102
-68
-56
-67
-47
-171
-45
-67
-39
-45
-26
-16
-30
Expenses from Litigation
Expenses from a donation to the World Health Organization
-46
-23
2022
Infrastructure expenses
167
-3
Notes to the Consolidated Financial Statements
Operating Activities
261
(14) Other operating expenses
Accounting and measurement policies
Other operating expenses
2023
Other operating expenses comprise all expenses that cannot be reasonably allocated to a functional cost type or
finance costs.
€ million
Profit share agreements
Impairment losses on non-financial assets
Non-income related taxes and expenses from tax audits
Loss from hyperinflation accounting
Premiums, fees and contributions
Project expenses (including integration and IT projects)
Non-allocable personnel expenses
The breakdown of other operating expenses was as follows:
-7
Expenses from claims
-23
93
13
-2
122
170
49
liabilities
Tax loss carryforwards
17
11
30
30
Tax refund claims/Other
-57
-2
1
3
-55
19
Current and non-current
provisions
51
-9
-20
-12
Restructuring expenses
Expenses from fair value measurement of assets and liabilities at fair value
-19
-8
Expenses from disposal of businesses and assets
51
66
15
receivables/Other assets
Current and non-current
803
-37
-296
6
475
526
96
28
Current and non-current
369
23
Offset deferred tax assets and
-627
-627
liabilities
Deferred taxes (consolidated
385
1,514
offsetting)
1,130
-9
-48
-650
-948
18.7%
22.1%
Income taxes consisted of corporation and trade taxes for the German companies and comparable income taxes
for non-German companies. Income taxes relating to previous periods recognized in fiscal 2023 resulted in
particular from completed tax audits, changes in income tax liabilities for risks from tax audits, and tax
assessments for previous years.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
balance sheet)
Operating Activities
1,757
385
liabilities
Tax loss carryforwards
30
40
-2
67
67
Tax refund claims/Other
2,142
-55
3
-57
117
174
Deferred taxes (before
323
42
-3
-5
264
Deferred taxes
The allocation of deferred tax assets and liabilities to the balance sheet items and the reconciliation of deferred
taxes in the consolidated income statement and the consolidated balance sheet are presented in the following
table:
-3
-129
39
1,374
168
Current and non-current
-6
-4
-22
-59
-32
financial assets
Inventories
737
84
2
823
846
23
32
-68
Property, plant and equipment
112
Jan 1, 2022
Dec. 31, 2022
Deferred tax
assets/liabilities
€ million
Intangible assets
(net)
Deferred taxes
(consolidated
income
statement)
Changes in
scope of
consolidation/
Deferred taxes
credited/debited
to equity
Currency
translation/
Deferred tax
assets/liabilities
Other changes¹
-1,428
302
-135
(net)
-1,261
Assets Liabilities¹
62
181
119
-6
4,287
31.7%
31.7%
-1,105
-1,360
495
568
-7
3,484
-71
28
-103
-79
32
14
-129
47
-979
167
2022
2023
Tax ratio according to consolidated income statement
290
338
-7
12
40
19
-650
-948
Tax reconciliation
The following table presents the reconciliation from the theoretical income tax expense to the income tax
expense according to the consolidated income statement. The theoretical income tax expense is determined by
applying the statutory tax rate of a corporation headquartered in Darmstadt of 31.7% (2022: 31.7%).
€ million
Profit before income tax
Tax rate
Theoretical income tax expense
Tax rate differences
Tax effect of companies with a negative contribution to consolidated profit
Income tax for previous periods
Tax credits
Tax effect on tax loss carryforwards
Tax effect of non-deductible expenses/Tax-free income/Other tax effects
Income tax expense according to consolidated income statement
111
323
1,090
-129
-1
59
92
33
receivables/Other assets
Current and non-current
475
-10
9
50
510
633
122
provisions
Current and non-current
122
-6
9
-6
51
Current and non-current
15
5
5
-119
103
222
Current and non-current
-32
13
-17
-36
2
38
financial assets
Inventories
823
42
-44
821
835
Property, plant and equipment
-5
-27
156
Accounting and measurement policies
(17) Earnings per share
The change in other non-cash income and expenses contained the neutralization of revaluations of contingent
consideration recognized in income (see Note (36) "Other financial assets"). The corresponding cash inflows
are also recognized in the cash flow from investing activities.
The item "Neutralization of gains/losses on disposal of fixed assets" included the effects recognized in income
of the disposal of a non-strategic brand in the Healthcare business sector and a portfolio of licenses and patents
in the Electronics business sector. The corresponding cash inflows are recognized in the cash flow from
investing activities.
The changes in provisions included a mid-double-digit million-euro amount for the recognition of restructuring
provisions to align the Group functions more closely with the businesses, and a high double-digit million-euro
amount for the recognition of provisions for acceptance and follow-on obligations in connection with the results
of the two Phase III clinical trials to evaluate the efficacy and safety of evobrutinib (see Note (27) "Other
provisions").
Interest paid totaled € 181 million (2022: € 185 million). Interest received amounted to € 77 million
(2022: € 25 million).
Tax payments made totaled € 1,053 million in fiscal 2023 (2022: € 1,344 million). Tax refunds received
amounted to € 38 million (2022: € 145 million).
Tax payments are reported in operating cash flow. Only significant transactions where the associated tax
payments can be practically calculated are recognized in the relevant item of the consolidated cash flow
statement.
The option to recognize interest received and interest payments made is exercised to the extent that such
transactions are recognized in cash flow from operating activities.
•
The operating cash flow is presented using the indirect method based on profit after taxes.
•
The operating cash flow is calculated and presented based on the following principles:
Accounting and measurement policies
(16) Operating cash flow
266
Operating Activities
Consolidated Financial Statements Notes to the Consolidated Financial Statements
456 million €) and mainly resulted from tax prepayments that exceeded the actual amount of tax payable for
the past fiscal year and earlier fiscal years from refund claims for previous years and from withholding tax
claims. As of December 31, 2023, income tax liabilities including liabilities for uncertain tax obligations totaled
1,473 million € (December 31, 2022: 1,522 million €).
Income tax receivables amounted to 482 million € as of December 31, 2023 (December 31, 2022:
Income tax receivables and income tax liabilities
Deferred tax assets resulting from tax loss carryforwards that exceed deferred tax liabilities relating to the
same taxation authority and the same taxable entity are not recognized if it is not considered probable that
taxable profit will be available against which they can be utilized.
The majority of the tax loss carryforwards either had no expiry date or can be utilized for up to 20 years. This
also applies to losses for which no deferred taxes were recognized.
1 Prior year's figures for Germany were adjusted.
184
Earnings per share
135
Basic earnings per share is calculated by dividing the profit after taxes attributable to the shareholders of
Merck KGaA (net income) by the weighted average number of theoretical shares outstanding. The calculation of
the theoretical number of shares is based on the fact that the general partner's equity is not represented by
shares. Corresponding to the division of the subscribed capital of € 168 million into 129,242,252 shares (see
Note (34) "Equity"), the general partner's equity of € 397 million equates to 305,535,626 theoretical shares.
Overall, equity capital amounted to € 565 million or 434,777,878 theoretical shares outstanding.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Based on a combination of different estimating methods, for example,
historical and implied stock yields
Derived from the respective sector-specific peer group
Derived from the returns of long-term government bonds based on
the Svensson method
Cost of debt and capital structure
Market risk premium
Beta factor
Risk-free interest rate
The discount factor after taxes is derived on the basis of the following input parameters:
Operating Assets, Liabilities, and Contingent Liabilities 268
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
In calculating the value in use in the previous year, the most recent medium-term plan approved by the
Executive Board, with a detailed planning period of four years starting from the following year, served as the
basis for planning. Sales planning was based on past experience and assumptions regarding future market
shares, selling prices, and volumes. Expected cash inflows and outflows from new products from the Healthcare
development pipeline and expansion investments were not included in the calculation of value in use. Profit
margins were based on past experience adjusted for expected profitability developments.
In calculating the fair value, the expected post-tax cash flows are derived from the medium-term plans
prepared by the business sectors. Due to extensive investments in the Life Science and Electronics CGUs, the
fourth planning year after the detailed planning period for both of these CGUS is extrapolated for an additional
four years in line with business-specific assumptions before being converted to the terminal value by applying a
long-term growth rate. In the Healthcare CGU, the transition to the terminal value takes place after four years
starting from the following year. Sales planning was based on internal past experience and largely non-
observable input factors in the market, such as future market shares, selling prices and volumes, and new
products from the development pipeline and expansion investments. Profit margins are based on past
experience adjusted for expected profitability developments.
For both fair value less costs of disposal and value in use, the recoverable amount is calculated in accordance
with the discounted cash flow method (Level 3 in the IFRS 13 fair value hierarchy).
In the 2023 reporting year, the recoverable amount for all CGUS was primarily determined on the basis of the
fair value less costs of disposal (2022: Life Science and Electronics on the basis of the fair value less costs of
disposal; Healthcare on the basis of the value in use).
Impairment testing is performed on a scheduled basis in the third quarter of every year and on an ad hoc basis
where there are indications of impairment. The existence of indications of impairment is monitored using
various factors such as changes in medium-term planning, analyst forecasts, validation multiples, and Merck's
average market capitalization compared to its balance sheet equity.
Impairment testing for goodwill takes place at the level of the Life Science, Healthcare, and Electronics business
sectors. These groups of cash-generating units (CGUS) are the lowest level at which goodwill at Merck is
monitored for internal management purposes.
Method for impairment testing
The purpose of impairment testing in accordance with IAS 36 is to ensure that the carrying amount of assets in
the balance sheet is not higher than their recoverable amount. The recoverable amount is the higher of the fair
value less costs of disposal and the value in use.
In the course of business combinations, goodwill is recognized on the acquisition date. The option to measure
non-controlling interests at fair value on the date of their acquisition (full goodwill method) is not utilized.
Goodwill
Accounting and measurement policies
(18) Goodwill
Liabilities
Operating Assets, Liabilities, and Contingent
Operating Assets, Liabilities, and Contingent Liabilities 267
As in the previous year, equity capital remained unchanged in fiscal 2023. The weighted average (basic)
number of shares was 434,777,878 and thus corresponded to the number of theoretical shares outstanding. In
fiscal 2023 and 2022, there were no shares with a potential diluting effect; as a result, the diluted earnings per
share were equivalent to basic earnings per share.
Derived from the market data of the respective peer group companies
49
106
Tax loss carryforwards for which a deferred
tax asset is recognized
838
677
161
793
536
257
Total
Outside
Germany
Germany
Total
Outside
Germany
Germany
Tax loss carryforwards
€ million
Dec. 31, 2022¹
Dec. 31, 2023
Tax loss carryforwards were structured as follows:
Changes in tax loss carryforwards
Deferred tax liabilities from outside basis differences for planned dividend payouts were recognized in the amount
of € 157 million (December 31, 2022: € 79 million). Retained earnings of subsidiaries for which no deferred taxes
were recognized amounted to € 10,627 million as of December 31, 2023 (December 31, 2022: € 10,249 million).
The resulting temporary differences that will be taxable in future periods in the event of dividend payments would
amount to € 603 million as of December 31, 2023 (December 31, 2022: € 582 million).
As in the previous year, the item "Changes in scope of consolidation/Currency translation/Other changes" mainly
comprised exchange rate effects for items translated from U.S. dollars to the reporting currency (euro).
Furthermore, a non-recurring deferred tax income on intangible assets impacted in the amount of € 95 million.
Given the positive earnings forecasts, it was assumed that it will be possible to realize recognized deferred tax assets
of € 597 million (December 31, 2022: € 191 million), which exceeded deferred tax liabilities relating to the same
taxation authority and the same taxable entity, even though there was a loss in the current or previous period.
No deferred tax assets were recognized in the balance sheet for deductible temporary differences and other
interest carryforwards in the amount of € 13,220 million (December 31, 2022: € 71 million). The increase in
deductible temporary differences for which no deferred tax assets were recognized in the balance sheet is due to
the change in the exercise of different tax-related options abroad compared with the previous year. The majority
of these differences can only be utilized until 2029. Their utilization for tax purposes is not expected during this
period.
265
Consolidated Financial Statements Notes to the Consolidated Financial Statements Operating Activities
23
81
95
135
251
136
29
Not recognized deferred tax assets on tax loss
carryforwards
carryforwards
30
30
67
18
49
Recognized deferred tax assets on tax loss
carryforwards
214
165
49
202
124
78
Potential deferred tax assets for tax loss
tax asset is recognized
702
541
161
542
441
101
Tax loss carryforwards for which no deferred
136
The long-term growth rate after the detailed planning period is determined taking into account expected long-
term growth and long-term inflation expectations.
Operating cash flow
In the Life Science CGU, the expected average sales growth in the period until the transition to the terminal
value was a higher single-digit percentage (2022: higher single-digit percentage). The sales expectation for the
Life Science CGU is supported primarily by the anticipated long-term positive development in the
Process Solutions and Life Science Services business units, based on ongoing high market growth and the
continuing expansion of the portfolio and production capacities. Taking into account Group costs allocated on a
pro rata basis, the EBITDA pre margin applied in the period until the transition to the terminal value was
around 31% (2022: around 34%).
Currency translation difference
Impairment losses
Transfers
for sale
Disposals due to divestments/Reclassification to assets held
Additions
Net carrying amounts, Jan. 1, 2023¹
Net carrying amounts as of Dec. 31, 20221,2
Currency translation difference
Impairment losses
Transfers
for sale
Disposals due to divestments/Reclassification to assets held
Other additions
Net carrying amounts, Jan. 1, 2022¹
€ million
The goodwill shown below mainly resulted from the following acquisitions: Exelead Inc., United States; Versum
Materials Inc., United States; Sigma-Aldrich Corporation, United States; AZ Electronic Materials S.A.,
Luxembourg; Millipore Corporation, United States; and Serono SA, Switzerland.
Operating Assets, Liabilities, and Contingent Liabilities 270
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
>2
> 2
> 2
> 2
> 10
> 10
Goodwill
Electronics
Life Science
Electronics
The additions in fiscal 2022 resulted in particular from the acquisition of Exelead Inc., United States (see Note
(6) "Acquisitions and divestments”).
Goodwill impairment testing did not give rise to the need to recognize any impairment losses in either fiscal
2022 or fiscal 2023.
The changes in goodwill caused by foreign exchange rates resulted almost exclusively from translating the
goodwill from the acquisitions of Versum Materials, Inc., United States; the Sigma-Aldrich Corporation, United
States; AZ Electronic Materials S.A., Luxembourg; and the Millipore Corporation, United States, which were
mostly denominated in U.S. dollars.
-544
17,845
2 Previous year has been adjusted, please refer to Note (6) "Acquisitions and Divestments”.
1 Net carrying amounts equal the gross amount.
4,532
1,525
-138
-406
11,787
Net carrying amounts as of Dec. 31, 2023¹
18,389
4,671
Significant measurement assumptions
12,193
828
18,389
209
4,671
1,525
12,193
619
17,004
557
4,420
42
1,525
11,059
515
Total
Healthcare
> 2
1,525
> 2
Net cash flows were discounted using the cost of capital after taxes. For the calculation of the value in use,
which was applied in the Healthcare business sector in the previous year, the cost of capital before taxes as
shown below the table was derived iteratively.
1 The weighted cost of capital before taxes to determine the value in use of the CGU Healthcare for the previous year was 7.3%.
7.1%
8.1%
5.6%
6.3%
0.00%
2.00%
1.00%
2.00%
Electronics
7.5%
8.2%
2.00%
2.00%
2022
2023
2022
2023
in %
tax
Weighted cost of capital after
Long-term
growth rate
The additional significant value-relevant assumptions underlying the goodwill impairment tests are quantified
below.
The calculation of the recoverable amount of the Electronics CGU included the expected average sales growth in
the period until the transition to the terminal value at a higher single-digit percentage (2022: higher single-digit
percentage). The sales expectation for the Electronics CGU is primarily based on the long-term growth trend in
the market for semiconductor materials and positive sales contributions from the Level Up growth program with
an initial investment volume exceeding € 3 billion by the end of 2025. Taking into account Group costs allocated
on a pro rata basis, the EBITDA pre margin applied in the period until the transition to the terminal value in the
impairment test for fiscal 2023 was around 29% (2022: around 30%).
> 2
The expected average sales growth in the Healthcare CGU in connection with the calculation of fair value less
costs of disposal amounted to a mid-single-digit percentage rate in the detailed planning period (2022: mid-
single-digit percentage rate). The sales performance reflected the probability of regulatory approval of drug
candidates in the existing research and development programs. Taking into account Group costs allocated on a
pro rata basis, the EBITDA pre margin for fair value less costs of disposal applied in the period until the
transition to the terminal value in the impairment test for fiscal 2023 was around 30%.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 269
Life Science
Healthcare¹
Goodwill
>10
> 2
Significant discretionary decisions and sources of estimation uncertainty
>10
>2
>2
>2
> 10
> 10
Life Science
Healthcare
2022
2023
2022
>2
In addition, sensitivity analyses of the key assumptions were performed as part of the scheduled impairment
tests. The following table presents the minimum amount by which individual key assumptions could have
changed when viewed in isolation before the impairment test triggered the recognition of an impairment loss.
2022
2023
Increase in cost of capital after tax
percentage points
percentage points
%
Decrease in long-term growth rate
The determination of the recoverable amount is subject to discretion and significant estimation uncertainty.
Assumptions regarding the amount of net cash flows, long-term growth rates, and discount factors are
considered a material source of estimation uncertainty due to their inherent uncertainty. Although Merck
assumes that the assumptions applied in calculating the recoverable amount are appropriate, changes to these
assumptions could result in goodwill impairment with an adverse impact on the net assets, financial position,
and results of operations. In the Electronics CGU in particular, there is a high degree of dependence on the
assumptions concerning the long-term growth trend in the market for semiconductor materials.
Decrease in net cash flows
-
As in the previous year, the recoverable amount in impairment testing in fiscal 2023 was well above the
carrying amount of the respective CGU more than 15% higher, in fact. Regardless of this, the results of the
valuation were checked for plausibility against externally available "sum of the parts" calculations and validated
using multiples based on peer group information.
2023
Disposals
Disposals due to divestments/Reclassification to
assets held for sale
1
Currency translation difference
1
Reversals of impairment losses
-23
43
67
-9
77
233
Transfers
1
5
3
-12
1
88
-2
-4,319
-1
Dec. 31, 2023
-266
43
6,326
6,625
1,946
3,045
17,943
Accumulated depreciation and impairment losses as
of Jan. 1, 2023
-2,588
-1,380
-21
-8,308
Depreciation
-332
-389
-173
-895
Impairment losses
-8
19
USA
106
Capacity expansion for drug safety testing
Membrane factory
Ireland
Research center
Germany
Germany
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities
277
(21) Leasing
Accounting and measurement policies
Leasing
Scope of IFRS 16
Merck exercises the option provided by IFRS 16 to not recognize leases of intangible and low-value assets as
leases. Right-of-use assets under leases are reported in the balance sheet item "Property, plant, and
equipment" (see Note (20) "Property, plant, and equipment”).
Where the provision of company cars to employees qualifies as an employee benefit within the meaning of
IAS 19, IFRS 16 is not applied. In this case, its balance-sheet treatment is governed solely by IAS 19.
Separation of lease and non-lease components
Leases for land, land rights, and buildings are separated into lease and non-lease components. Merck otherwise
elects to exercise the option not to separate non-lease components from lease components.
Depreciation of the right-of-use assets arising from leases
Basically, right-of-use assets are depreciated over the lease term. If it is considered sufficiently probable that
an existing purchase option will be exercised or ownership will be automatically transferred at the end of the
lease term, however, depreciation takes place over the period that applies for corresponding assets under
property, plant, and equipment (see Note (20) "Property, plant, and equipment”).
Determining the incremental borrowing rate
-37
Filling and logistics center
1
Life Science
Life Science
Dec. 31, 2023
Net carrying amounts as of Dec. 31, 2023
-2,820
3,506
-4,584
2,042
-1,454
-29
-8,887
492
3,016
9,056
1 Previous year's figures have been adjusted, see Note (6) "Acquisitions and divestments".
The individual additions to construction in progress in fiscal 2023 with an investment volume of more than
€ 50 million each are presented below:
Business sector
Life Science
Investment project
Country
Filtration plant
Ireland
Life Science
Healthcare
-27
Plant and
machinery1
-119
-319
-374
-173
-866
Impairment losses
-19
-3
-21
Reversals of impairment losses
Disposals due to divestments/Reclassification to
assets held for sale
Disposals
67
84
91
1
244
Transfers
-6
11
Depreciation
-1
-7,593
-1,287
If the interest rate for the lease cannot be reliably determined, the incremental borrowing rate is applied in
measuring the lease liability. At Merck, the incremental borrowing rate is determined on the basis of the risk-
free interest rate of the respective Group company over a similar term and in the same currency. This interest
rate is adjusted using a risk surcharge specific to Merck. Merck applies the repayment model to determine the
current portion of the lease. The current portion of the lease corresponds to the repayment share of the next 12
months.
127
-930
-1
Currency translation difference
80
63
12
20
175
Dec. 31, 2022
5,976
6,228
1,879
2,429
16,513
Accumulated depreciation and impairment losses as
of Jan. 1, 2022
-2,304
-3,987
-15
-5
-1
Currency translation difference
169
32
56
1,723
1,981
Reclassification to assets held for sale
Disposals
-85
-93
-82
-18
-278
Transfers
385
542
120
-1,053
-6
Currency translation difference
Additions
Changes in the scope of consolidation
16,513
2,429
-26
-35
-10
-70
Dec. 31, 2022
-2,588
-4,319
-1,380
-21
-84
-8,308
3,389
1,909
499
2,408
8,204
Cost as of Jan. 1, 2023
5,976
6,228
1,879
Net carrying amounts as of Dec. 31, 2022
Determining the lease term
Income from subleasing right-of-use assets
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating cash flow
Financing cash flow
Total
At the reporting date, the future lease payments were distributed over the following periods:
December 31, 2023
€ million
Future lease payments
Interest portion of future payments
€ million
Present value of future lease payments
€ million
Future lease payments
Interest portion of future payments
Present value of future lease payments
2023
2022
-147
-152
December 31, 2022
Interest expenses for lease liabilities
Total
Income from sale-and-lease-back transactions
512
-13
1
-1
-14
427
10
64
500
The net carrying amounts of other facilities, operating and office equipment mainly included the right-of-use
assets for vehicles.
The additions to land, land rights, and buildings primarily related to newly agreed right-of-use assets for
laboratories, office buildings, and warehouses as well as agreed lease renewals.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities 280
The expenses and income and the payments under the leases in accordance with IFRS 16 were reported in the
consolidated income statement and the consolidated statement of cash flows as follows:
€ million
Right-of-use assets
Depreciation
Impairment losses
Reversals of impairment losses
Expenses for leasing low-value assets
Expenses for leases with variable lease payments
-11
-14
-14
-173
-13
256
137
513
After more than
Within 1 year
132
1-5 years
281
5 years
Total
111
524
-9
-17
-9
-35
123
264
101
488
120
-147
-47
-22
-179
2023
2022
-25
-26
-149
-150
-174
-176
After more than
Within 1 year
1-5 years
5 years
Total
130
278
152
560
-11
-15
-37
-2
-108
Changes in the scope of consolidation
Additions
Disposals
Depreciation
Impairment losses
Reversal of impairment losses
Other
Dec. 31, 2022
€ million
Net carrying amounts as of Jan. 1, 2023
Changes in the scope of consolidation
Additions
Disposals
Depreciation
Impairment losses
Reversal of impairment losses
Other
Dec. 31, 2023
Right-of-use assets
Net carrying amounts as of Jan. 1, 2022
Land, land rights,
€ million
Operating Assets, Liabilities, and Contingent Liabilities 279
Operating Assets, Liabilities, and Contingent Liabilities 278
Significant discretionary decisions and sources of estimation uncertainty
Leasing
Identification of a lease
Discretionary decisions can arise during the identification of leases in answering the question of whether a
lessor's right of substitution is substantive. Merck classifies rights of substitution as not substantive if the facts
and circumstances of the case do not support a different assessment.
Measurement of lease and non-lease components
In the case of leases for land, land rights, and buildings, separating the lease into lease and non-lease
components is subject to discretion and estimation uncertainty if observable prices are not available from the
contract partner or other potential lessors.
Determining the lease term
When determining the lease term, existing renewal and termination options must be evaluated to determine the
probability that such options will be exercised. The assessment of the probability of exercise may be
discretionary even though it relies on existing and material information on the general economic context, such
as location strategies, leasehold improvements, or the degree of specificity. If the available information does
not allow a reliable assessment, Merck uses historical experience for comparable situations.
The largest 30 leases accounted for around 50% of total lease liabilities in fiscal 2023 and 2022. They are
essentially for right-of-use assets for office, warehouse, and laboratory buildings. If options to renew these
leases were exercised in future, which is not yet considered likely, this would result in additional potential
undiscounted cash outflows of up to € 235 million (2022: € 219 million).
Where individual contracts include termination options, it was considered unlikely that these would be exercised
so that additional lease payments were already considered in the corresponding lease liability.
Determining the incremental borrowing rate
Determining the risk-free interest rate and determining the risk surcharge are both discretionary.
Initial measurement of the lease liability and the right-of-use asset
In measuring the lease liability, there is discretionary scope and significant estimation uncertainty regarding
measuring any payments in the course of promised residual value guarantees, and
assessing the probability that existing purchase, termination, and renewal options will be exercised.
In measuring right-of-use assets under leases, Merck is subject to estimation uncertainty regarding any
demolition obligations and their resulting payments.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
The reconciliation of net carrying amounts of right-of-use assets from leases was as follows:
Where renewal or termination options are available, their exercise is assessed on a case-by-case basis,
considering factors such as location strategies, leasehold improvements, and the degree of specificity.
and buildings
Other facilities,
operating and
office equipment
8
58
481
Right-of-use assets
Land, land rights,
and buildings
Plant and
machinery
Other facilities,
operating and
office equipment
Total
415
8
58
481
157
4
45
206
-23
-1
-25
415
Plant and
machinery
-5
2
Total
382
9
56
447
7
7
160
43
203
-16
-1
-3
-19
-112
-3
-37
-152
-6
-1
290
Others
-282
493
401
7,336
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 273
Cost as of Jan. 1, 2023
Additions due to business combinations
Other additions
Disposals due to divestments/Reclassification to assets
Customer
relationships,
Marketing authorizations,
Software and
brands, and
trademarks
patents, licenses, similar rights,
and other items
software in
development
Total
10,391
11,302
793
1,379
5,648
-16,833
17
231
83
331
Transfers
-14
15
-1
Currency translation
-160
-36
-1
-13
-211
Dec. 31, 2022
-4,743
-10,509
-887
-695
Net carrying amounts as of Dec. 31, 2022
Other disposals
1,096
20
1,637
1,165
24,045
Accumulated depreciation and impairment losses as of
Jan. 1, 2023
-4,743
-10,509
-887
-695
-16,833
Depreciation, amortization, and write-downs
-581
-202
-104
-887
Impairment losses
-26
-24
-31
-81
-482
24,169
-16
-112
11,200
284
Transfers
396
held for sale
Other disposals
3
-25
-9
-13
-44
Transfers
16
-14
5
6
Currency translation
-351
Dec. 31, 2023
10,043
-3
Reversals of impairment losses
held for sale
Reversals of impairment losses
€ million
Cost as of Jan. 1, 2022
Additions due to business combinations
Other additions
Disposals due to divestments/Reclassification to assets
held for sale
Other disposals
Transfers
Currency translation
Dec. 31, 2022
Customer
relationships,
brands, and
trademarks
Marketing authorizations,
patents, licenses, similar rights,
and other items
Software and
software in
development
Total
Finite useful
life1
Not yet
available for
use
Identification of a need to recognize impairment loss and reverse impairment loss
Discretionary decisions are required in assessing substantial evidence of impairment as well as in identifying the
need to reverse the impairment of other intangible assets. Significant valuation-related assumptions and
estimates are also required to calculate the appropriate write-down amount in impairment testing.
9,825
97
If the amortization of intangible assets from customer relationships, brands, trademarks, marketing
authorizations, patents, licenses and similar rights, and other had been 10% higher, for example, due to
shortened useful lives, profit before income tax would have been € 78 million lower in fiscal 2023
(2022: € 83 million).
Determination of amortization
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities
271
(19) Other intangible assets
Accounting and measurement policies
Recognition and initial measurement of purchased intangible assets
In in-licensing, the portion of the consideration paid by Merck to acquire intellectual property is recognized as
an intangible asset. If research and development services to be performed by the seller are also agreed in
conjunction with the transaction, the related share of consideration is separated and recognized in research and
development expenses in line with the service performance.
Contingent consideration linked to milestone payments in connection with the purchase of intangible assets
arising outside a business combination is recognized as an intangible asset and as a financial liability once the
milestone is reached. Contingent consideration in the form of sales-based royalties is expensed when incurred.
Intangible assets acquired in business combinations are recognized at fair value on the acquisition date.
Recognition and initial measurement of internally generated intangible assets
Owing to the high level of uncertainty until pharmaceutical products are approved, the criteria for the
capitalization of development costs in accordance with IAS 38 are not met in the Healthcare business sector for
the development of drug candidates. Costs incurred after regulatory approval are insignificant and are therefore
not recognized as intangible assets. In the Life Science and Electronics business sectors, development expenses
are capitalized as soon as all the recognition criteria are met and can be verified accordingly. This also includes
expenses that are required for REACH registration. Furthermore, development expenses for internal software
projects and the enhancement of purchased ERP programs are capitalized providing that the relevant criteria
have been fulfilled.
Subsequent measurement
Subsequent measurement is at amortized cost.
Purchased and internally generated intangible assets with finite useful lives are amortized using the straight-
line method over their useful lives. The useful lives of customer relationships, brand names, and trademarks, as
well as marketing authorizations, acquired patents, licenses and similar rights, and software, are usually
between three and 24 years. In determining these useful lives, Merck considers factors including the typical
product life cycles for each asset and publicly available information about the estimated useful lives of similar
assets. The amortization expense is allocated to the respective functional costs or, if this is not possible,
recognized under other operating expenses.
The identification of indications of impairment takes place with the involvement of the responsible departments,
taking external and internal information sources into consideration. Merck examines the existence of indications
of impairment using various factors, particularly deviations from sales forecasts and the analysis of changes in
medium-term planning. An impairment test is performed if there are indications of impairment. In the event of
impairment, an impairment loss is recognized under other operating expenses. Impairment losses are reversed
up to amortized cost and reported in other operating income if the original reasons for impairment no longer
apply.
Intangible assets with indefinite useful lives and purchased, as well as internally generated intangible assets not
yet available for use, are not amortized, but rather tested for impairment when a triggering event arises or at
least once a year.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 272
Significant discretionary decisions and sources of estimation uncertainty
Purchased intangible assets
The identification and measurement of intangible assets acquired in the course of business combinations are
subject to significant discretion and estimation uncertainty.
In connection with in-licensing agreements in the Healthcare business sector, a discretionary estimate is made
of the extent to which upfront payments and milestone payments are remuneration for development services
yet to be performed or whether such payments are acquisition costs of an intangible asset to be capitalized.
Significant assumptions and estimates are required to determine the appropriate amount of amortization of
other intangible assets. This relates in particular to the determination of the underlying useful life.
Disposals due to divestments/Reclassification to assets
11,305
97
1,058
1,096
24,169
Accumulated amortization and impairment losses as of
Jan. 1, 2022
-3,989
-10,443
-720
-659
-15,810
Depreciation, amortization, and write-downs
-602
-229
-102
-932
Impairment losses
-9
-18
-180
-3
-211
1,379
1,235
11,302
582
23,423
194
55
166
93
314
-17
-236
-11
-83
-347
0
23
-23
4
2
487
59
13
24
10,391
5
92
Disposals due to divestments/Reclassification to assets
Not yet available for use
13
583
133
729
493
thereof from the following acquisition:
Versum Materials, Inc.
135
102
115
1 Previous year has been adjusted, please refer to Note (6) "Acquisitions and Divestments".
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 275
(20) Property, plant, and equipment
Accounting and measurement policies
Recognition and initial measurement
5
102
134
8
124
580
793
0.3-9.3
212
235
447
657
thereof from the following acquisitions:
AZ Electronic Materials S.A.
0.3-9.3
87
87
170
Versum Materials, Inc.
0.8-2.8
107
107
164
2
Advance payments are disclosed together with the assets under construction.
Subsequent measurement
Subsequent measurement is based on amortized cost.
Property, plant, and equipment is depreciated using the straight-line method over the useful life of the asset
concerned, and the corresponding expenses are allocated to the respective functional costs. Depreciation of
property, plant, and equipment is based on the following useful lives:
1,754
1,905
14,810
Additions due to business combinations
48
19
4
Other Additions
182
42
77
11
1,429
82
1,730
Disposals due to divestments/Reclassification to
assets held for sale
Other Disposals
-88
-94
-95
-6
5,687
243
5,464
progress
Production buildings
Administration buildings
Plant and machinery
Operating and office equipment, other facilities
Useful life
No more than 33 years
No more than 40 years
6 to 25 years
3 to 10 years
The useful lives of the assets are reviewed regularly and adjusted if necessary.
An impairment test is performed if there are indications of impairment. External and internal information is
used in this context. In the event of impairment, an impairment loss is recognized under other operating
expenses. Impairment losses are reversed up to amortized cost and reported in other operating income if the
original reasons for impairment no longer apply.
Significant discretionary decisions and sources of estimation uncertainty
Determination of depreciation
Assumptions and estimates are required in determining the appropriate useful life and the expected residual
value in order to calculate the amount of depreciation on property, plant, and equipment. This applies in
particular to the determination of the underlying remaining useful life. In making these estimates, Merck
considers the useful lives of the property, plant, and equipment derived from past experience.
Identification of a need to recognize impairment loss and reverse impairment loss
Discretionary decisions are required in the identification of objective evidence of impairment as well as in
identifying the need to reverse impairment of property, plant, and equipment.
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 276
Other facilities,
€ million
Cost as of Jan. 1, 2022
Land, land rights,
and buildings¹
operating and Construction in
office equipment
Total¹
124
In the course of determining cost, government grants received within the scope of IAS 20 are deducted. Grants
receivable for financial support that are no longer linked to future costs are recognized in profit or loss.
Patents, licenses, and similar rights
729
395
6,551
1 Previous year has been adjusted, please refer to Note (6) "Acquisitions and Divestments".
Additions and disposals
The additions from business combinations in the previous year resulted in particular from the acquisition of
Exelead Inc., United States (see Note (6) "Acquisitions and divestments").
Additions for intangible assets not yet available for use essentially related to the Healthcare business sector and
mainly concerned the in-licensing from Jiangsu Hengrui Pharmaceuticals Co. Ltd., China, and Abbisko
Therapeutics Co. Ltd., China; see Note (7) “Collaboration and licensing agreements”. In the previous year,
this item included an upfront payment in a mid-double-digit million-euro amount in connection with the
acquisition of Chord Therapeutics SA, Switzerland, in the Healthcare business sector.
Software additions primarily related to the internal development of IT applications. The gross carrying amounts and
accumulated amortization for the capitalized software primarily related to purchased software as well as internally
generated applications and enhancements of purchased ERP programs that were already available for use.
Loss allowances
Impairment losses amounting to € 81 million (2022: € 211 million) were recognized on an ad hoc basis for
other intangible assets in fiscal 2023. These were mainly attributable to the Life Science and Electronics
business sectors. In the previous year, a high-double-digit million-euro amount related to the Healthcare
business sector for the rights to the drug candidate berzosertib.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities
274
Other significant information
As in the previous year, the currency translation effects essentially resulted from the translation of other
intangible assets denominated in U.S. dollars.
Marketing authorizations, patents, licenses, similar rights, and other items not yet available for use involved
ongoing development projects that were not yet in the commercialization phase and thus did not yet have a
defined useful life. These primarily related to the Healthcare business sector.
Overview of material other intangible assets
The carrying amounts of customer relationships, brands, and trademarks, as well as marketing authorizations,
patents, licenses, similar rights, and other items, were attributable to the business sectors as follows:
Remaining
useful life in
Total
580
€ million
4,847
265
-17,493
held for sale
213
-3
25
3
12
37
Transfers
Currency translation
-
-
156
91
2
Dec. 31, 2023
-5,196
-10,619
-908
16
-770
Net carrying amounts as of Dec. 31, 2023
Customer relationships, brands, and trademarks
Other disposals
Electronics Dec. 31, 2023
1,672
2.5-3.5
170
170
239
Brands and trademarks
thereof from the following acquisition:
0.5-3.9
296
9
305
432
Sigma-Aldrich Corporation
Marketing authorizations, patents, licenses and
3.9
281
281
366
Finite useful life¹
years Life Science Healthcare
3,175
Millipore Corporation
1,798
similar rights, and other
1,545
1,545
4,847
5,648
Customer relationships
2.5-14.8
2,879
1,663
5,216
thereof from the following acquisitions:
4,542
12.8-13.8
2,608
118
2,726
3,048
Versum Materials, Inc.
2.8-14.8
Sigma-Aldrich Corporation
Total
Dec. 31, 2022
202
Contract liabilities
252
3
282
1
249
200
126
1
163
Liabilities from non-income-related taxes
127
5
121
3
4
122
164
285
1,479
29
Other additions
Additions due to business combinations
Payroll-related liabilities¹
Jan. 1
€ million
The following table shows the development of contract liabilities in the period under review:
The reduction in accruals for personnel expenses is due in particular to lower accruals for annual bonus
payments for the past fiscal year and for the tranche of the Merck Long-Term Incentive Plan that is payable in
the months following the reporting date.
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles“.
1,805
19
1,786
1,496
17
Other non-financial liabilities¹
36
10
26
38
8
Other accruals
1,156
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
916
Significant discretionary decisions and sources of estimation uncertainty
The amount of the contingent liability is based on the best-possible estimate, which in turn is based on the
likelihood of possible outcomes of proceedings and on the applicable license rate in patent disputes.
the legal situation and current court rulings in comparable proceedings in the jurisdiction in question.
the validity of the arguments brought forward by the opposing party or the tax authority, and
•
The key factors in the identification of contingent liabilities are:
To identify contingent liabilities from litigation and tax matters, Merck draws on the knowledge of the legal
department and the tax department as well as the opinions of external consultants and attorneys.
Contingent liabilities
Contingent liabilities
Accounting and measurement policies
Operating Assets, Liabilities, and Contingent Liabilities 288
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Miscellaneous other provisions included provisions for asset retirement obligations, other tax risks not
constituting income tax in accordance with IAS 12, risks in connection with employee participation programs
and warranty obligations.
Miscellaneous other provisions
Provisions for interest and penalties related to income taxes mainly included penalties arising from tax audits as
well as interest payables associated with or resulting from tax payables.
Interest and penalties related to income taxes
1,290
Part of the provision is also attributable to the discontinuation of development projects under the strategic
alliance with GlaxoSmithKline, United Kingdom (GSK), and relates to the winding up of clinical trials. On
February 5, 2019, Merck entered into a global agreement in the field of immuno-oncology with a subsidiary of
GSK to co-develop and co-commercialize the drug candidate bintrafusp alfa. In the third quarter of 2021, it was
amicably decided with GSK that the agreement on bintrafusp alfa would end effective September 30, 2021. The
provisions recognized in a mid-double-digit million-euro amount included expected expenses for follow-on
obligations. The outflow of resources is mainly expected within the next 12 months.
(28) Contingent liabilities
The identification and the measurement of contingent liabilities are both subject to considerable uncertainty.
This applies with regard to assessing the likelihood of an outflow of resources as well as determining its amount.
Contingent liabilities in the amount of € 204 million (December 31, 2022 (adjusted): € 231 million) related
almost exclusively to litigation and tax matters.
Contingent liabilities from litigation mainly related to obligations under labor law and tort law. The contingent
liabilities from tax matters primarily related to the determination of earnings under tax law, customs
regulations, and excise tax matters.
916
Accruals for personnel expenses¹
Total
Non-current
Current
Total
Non-current
Current
€ million
Dec. 31, 2022
Dec. 31, 2023
Other non-financial liabilities comprises the following:
Contract liabilities include payments received by Merck prior to completion of contractual performance.
Accruals for personnel expenses reported in other non-financial liabilities include, in particular, liabilities
resulting from vacation entitlements, variable and performance-related compensation components, and social
security contributions.
Other non-financial liabilities
Accounting and measurement policies
(29) Other non-financial liabilities
Operating Assets, Liabilities, and Contingent Liabilities 289
In addition, there were contingent liabilities from various legal disputes with Merck & Co., Inc., Rahway, NJ,
United States (outside the United States and Canada: MSD), among other things due to breach of the
coexistence agreement entered into between the two companies and/or trademark/name right infringement
regarding the use of the designation "Merck". In this context, Merck has sued MSD in various countries and has
been sued by MSD in the United States. An outflow of resources - except costs for legal defense - was not
deemed sufficiently probable as of the balance sheet date to justify the recognition of a provision. Since the
contingent liability from these legal disputes could not be reliably quantified as of the balance sheet date, this
matter was not included in the total figure for contingent liabilities.
1,156
2023
Marketing and sales
Current
11,938
22,086
24,105
2022
2023
290
Personnel expenses
Compulsory social security contributions and other costs
11,886
Pension expenses
€ million
Personnel expenses comprised the following:
(32) Personnel expenses
Average number of employees
Other
Supply chain
Research and development
Administration
Wages and salaries
6,516
7,334
4,971
A significant proportion of the provisions for acceptance and follow-on obligations are attributable to the results
of the two Phase III clinical trials to evaluate the efficacy and safety of evobrutinib. This resulted in the
recognition of a provision for follow-on obligations in a high-double-digit million-euro amount in 2023. The
outflow of resources is predominantly expected within the next 12 months.
Personnel expenses comprised expenses of € 212 million (2022: € 200 million) for defined contribution plans,
which are funded exclusively using external funds and therefore do not represent any obligation for Merck other
than making contribution payments. In addition, employer contributions amounting to € 93 million
(2022: € 92 million) were transferred to the German statutory pension insurance system, and contributions
amounting to € 122 million (2022: € 105 million) were transferred to statutory pension insurance systems
abroad.
6,644
6,517
460
365
844
853
5,340
5,299
2022
2023
62,552
63,642
1,309
1,676
15,087
14,436
4,850
Production
The number of employees was 62,908 as of December 31, 2023 (December 31, 2022: 64,232 employees).
The following table shows the average number of employees broken down by function.
(31) Number of employees
Employees
-1,194
-1,313
-1,313
Recognition of income/reversal
Disposals due to divestments/Reclassification to
assets held for sale
1,277
1
202
3
198
1
1,276
1,290
285
3
282
Total
Non-current
Current
Total
Non-current
-1,195
2022
Cumulative catch-up adjustments to revenue
Currency translation
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
Trade and other payables as of December 31, 2023, included accrued amounts of € 775 million
(December 31, 2022: € 903 million) from outstanding invoices.
Trade and other payables are subsequently measured at amortized cost.
Trade and other payables
Accounting and measurement policies
(30) Trade and other payables
a total of € 253 million (2022: € 181 million) was recognized through profit or loss in fiscal 2023.
As of January 1, 2023, contract liabilities amounted to € 285 million (January 1, 2022: € 202 million), of which
285
3
282
252
3
249
Dec. 31
Other
-11
1
-11
Reclassification from non-current to current
Provisions for acceptance and follow-on obligations primarily related to costs in connection with discontinued
development projects in the Healthcare business sector as well as obligation surpluses from onerous contracts.
In 2023, trade accounts receivable in Italy with a nominal value of € 69 million (2022: € 68 million) were sold for
€ 69 million (2022: € 68 million). These receivables did not involve any further rights of recourse against Merck.
Provisions for environmental protection resulted in particular from obligations for soil remediation and
groundwater protection in connection with the crop protection business in Germany and Latin America that was
discontinued in 1987.
comprehensive
Total
Subsequently
income
measured at
amortized cost
Dec. 31, 2022
Subsequently
measured at fair
value through
other
Subsequently
measured at fair
value through
other
comprehensive
Total
3,945
25
3,969
4,046
22
4,069
income
Dec. 31, 2023
Subsequently
measured at
amortized cost
Gross trade accounts receivable
Gross other receivables
4,632
Measures to optimize inventory levels contributed to the reduction in inventories in the Life Science business
sector. This was offset by an increase in the Healthcare business sector and in the Electronics business sector.
Impairment losses included in the cost of sales are shown in Note (10) "Cost of sales".
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 283
(25) Trade and other receivables
Accounting and measurement policies
Trade and other receivables
Trade accounts receivable without significant financing components that are not the subject of a factoring
agreement are measured at the amount of the unconditional claim for consideration on initial recognition. For
additions to trade accounts receivable, loss allowances are recognized to allow for expected credit losses.
At initial recognition, other receivables are measured at fair value plus the direct transaction costs incurred
upon acquisition of the asset.
Trade accounts receivable that are potentially designated to be sold on account of a factoring agreement are
measured at fair value through other comprehensive income.
The measurement policies applied in determining loss allowances for trade and other receivables are shown in
Note (42) "Management of financial risks” in the "Credit risks” section.
Loss allowances and reversals of loss allowances are reported under "Impairment losses and reversals of
impairment losses on financial assets (net)" in the consolidated income statement if the asset is used in
ordinary activities and hence has an operative nature. If the asset is not used in ordinary activities and hence
can be characterized as financial, it is recognized in financial income or financial expenses.
Further information on the accounting and measurement policies governing financial assets can be found in
Note (36) "Other financial assets”.
Significant discretion and sources of estimation uncertainty
Trade and other receivables
Information on the significant discretion and estimation uncertainty concerning trade and other receivables can
be found in Note (42) "Management of financial risks".
Trade and other receivables were measured as follows:
€ million
160
Gross trade and other receivables
4,105
25
22
4,031
4,119
thereof: non-current
28
4,004
28
4,091
27
22
22
4,141
22
4,114
27
The reduction in trade and other receivables is mainly attributable to foreign exchange effects and general
operational performance.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 284
(26) Contract assets
25
4,637
3,979
25
160
4,130
136
136
4,182
22
4,204
Loss allowances on trade accounts
receivable
-97
-97
-63
-63
Loss allowances on other receivables
Net trade and other receivables
-1
-1
-1
-1
4,007
thereof: current
2,139
2,045
1,418
346
3
349
Prepaid expenses
182
37
219
210
29
239
Assets from defined benefit plans
33
33
46
46
Remaining other assets
95
325
76
2
Receivables from non-income-related taxes
Acceptance and follow-on obligations
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 281
(22) Other non-financial assets
Accounting and measurement policies
Other non-financial assets
Other non-financial assets are carried at amortized cost. Impairments are recognized for any credit risks.
Other non-financial assets are broken down as follows:
Dec. 31, 2023
Dec. 31, 2022
€ million
Current
Non-current
Total
Current
Non-current
Total
323
Accounting and measurement policies
171
67
Impairments may be due to factors relating to the sales market, qualitative reasons, a lack of usability of the
items, or their limited remaining shelf life. If the reason for impairment no longer applies, the carrying amount
is adjusted to the lower of cost or the new net realizable value.
Since inventories are, for the most part, not manufactured within the scope of long-term production processes,
borrowing costs are not included.
Inventory prepayments are reported under other non-financial assets.
Significant discretionary decisions and sources of estimation uncertainty
Identification of impairments or reversal of impairments
Discretionary decisions are required in the identification of impairment as well as in identifying the need to
reverse impairment of inventories. There are estimation uncertainties with respect to the calculation of the net
realizable value. In particular, changes in selling prices and expected costs of completion are considered in
calculating this value.
Inventories consisted of the following:
€ million
Raw materials and supplies
Work in progress
Finished goods/goods for resale
Inventories
Dec. 31, 2023
Dec. 31, 2022
1,164
1,076
1,428
Inventories are tested for impairment using a business-sector-specific method. Under this method, cost is
compared to the net realizable values. If the net realizable value is lower than the amortized cost, the asset is
written down by a corresponding amount, which is recognized as an expense in the cost of sales.
103
In addition to directly attributable unit costs, the cost of sales also includes overheads attributable to the
production process, which are determined on the basis of normal capacity utilization of the production facilities.
Goods for resale are recognized at cost. The “first-in, first-out" (FIFO) method is used to determine the
amortized cost of manufactured, finished, and unfinished materials, raw materials, and merchandise. The
weighted average cost formula is applied for items such as supplies.
Accounting and measurement policies
170
Other non-financial assets
633
115
748
705
99
804
In the previous year, payments for investments in intangible assets included an upfront payment in a mid-
double-digit million-euro amount in connection with the acquisition of Chord Therapeutics SA, Switzerland.
Payments from the disposal of intangible assets in fiscal 2023 primarily resulted from the disposal of the rights
to a non-strategic brand in the Healthcare business sector and a portfolio of licenses and patents in the
Electronics business sector.
Payments for acquisitions less acquired cash and cash equivalents in the previous year were primarily
attributable to the acquisition of Exelead Inc., United States; M Chemicals Inc., Korea; and Erbi Biosystems
Inc., United States (see Note (6) "Acquisitions and divestments”).
Net cash outflows for investments in financial assets mainly resulted from short-term investments in securities
and term deposits that did not meet the requirements for classification as cash and cash equivalents.
Net cash inflows from the disposal of other financial assets primarily resulted from repayments of short-term
investments in securities and term deposits as well as from contingent consideration (see Note (36) "Other
financial assets").
The payments made for and received from the acquisition and the disposal of non-financial assets resulted from
the short-term investment of available funds in marketable greenhouse gas emissions certificates.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 282
(24) Inventories
Inventories
Contract assets
(23) Cash flow from investing activities
The following table shows the change in contract assets:
•
the legal situation and current court rulings in comparable proceedings in the jurisdiction(s) in question.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Operating Assets, Liabilities, and Contingent Liabilities 285
The following factors are also relevant in measuring provisions for litigation:
•
the duration of proceedings in pending legal disputes,
•
the validity of the arguments brought forward by the opposing party, and
the applicable license rate plus an expected infringement surcharge,
the usual damages and fines for comparable legal disputes, and
•
the discount factor to be used.
Provisions for restructuring
Merck uses formal restructuring plans and the expectations of the affected employees concerning the
performance of the restructuring measures to assess the recognition obligation for provisions for restructuring
projects and the amount of the expected outflow of resources.
Provisions for environmental protection
To assess a recognition obligation in relation to provisions for environmental protection and to quantify future
outflows of resources, Merck draws on appraisals by independent external experts and the knowledge of in-
house specialists.
•
•
Assessing the need for recognizing provisions for litigation is based on the likelihood of possible outcomes for
proceedings. In particular, the factors influencing this likelihood are:
To assess a recognition obligation in relation to provisions for litigation and to quantify future outflows of
resources, Merck draws on the knowledge of the legal department as well as outside counsel.
thereof: current
42
139
19
166
127
82
575
thereof: non-current
17
71
130
15
45
277
Accounting and measurement policies
Provisions for litigation
The following are key parameters in calculating the present value of the future settlement amount of the
provisions for environmental protection:
the future settlement date,
the extent of environmental damage,
•
Provisions for environmental protection
The assessment of a recognition obligation and the measurement of the provisions for environmental protection
are subject to discretionary decisions and estimation uncertainties to a particular degree.
The estimation uncertainties relate in particular to the assessment of the timing and likelihood of a future
outflow of resources and the extent of necessary remediation measures as well as the related calculation of the
amount of the liability.
Provisions for acceptance and follow-on obligations
Estimation uncertainty regarding the provisions for acceptance and follow-on obligations primarily relates to
determining the amount of the expected outflow of resources.
Provisions for interest and penalties related to income taxes
Estimation uncertainty concerning the provisions for interest and penalties related to income taxes mainly
relates to the interpretation of tax codes and the effects of amended case law.
Antitrust and other proceedings
In connection with the generics business that was divested in 2007, Merck was accused of breaching EU
antitrust law through agreements entered into by its former subsidiary Generics (UK) Ltd., United Kingdom,
relating to the antidepressant Citalopram patented by Lundbeck A/S, Denmark. The European Commission
imposed a fine in June 2013. Appeals against the decision were unsuccessful. Following the payment of the fine
of around € 18 million, British health authorities brought legal claims for damages against Merck and other
companies in a mid-triple-digit million-euro amount in fiscal 2023 due to alleged infringements of competition
law. In addition, there were further claimants from various other jurisdictions who have not yet quantified their
claims. In response to the latest developments in the proceedings, the provision was adjusted as of
December 31, 2023, and is now recognized in a high-single-digit million-euro amount. A cash outflow within the
next 12 months is considered possible.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 287
Restructuring
The restructuring provisions recognized as of December 31, 2023, primarily relate to obligations for workforce
reduction measures in connection with communicated restructuring plans.
A program to continuously improve processes and align the Group functions more closely with the businesses was
launched in 2023. The implementation of this program will take until at least the end of fiscal 2024. Provisions in a
mid-double-digit million-euro amount were recognized for the program in the current fiscal year. Furthermore,
additional programs to improve efficiency and increase customer focus in the Electronics and Healthcare business
sectors were initiated during the current fiscal year. This resulted in the recognition of provisions in a mid-double-
digit million-euro amount that are largely expected to be utilized within the next two years.
Contract assets represent contractual claims to receive payment from customers for whom the contractual
performance obligation has already been fulfilled, although an unconditional claim to payment has yet to arise.
Environmental protection
Estimation uncertainty about the provisions for restructuring primarily relates to determining the amount of the
expected outflow of resources. This is largely influenced by the assumptions made concerning the change in or
termination of the employment relationships of the affected employees and the planned implementation date of
the restructuring plan.
852
Provisions for restructuring
Provisions for litigation
the applicable remediation methods,
•
the associated future costs, and
the discount factor.
Provisions for acceptance and follow-on obligations
The assessment of the recognition obligation for provisions for acceptance and follow-on obligations and the
quantification of future outflows of resources is based on internal project plans as well as on the assessment of
the respective matters by in-house and external specialists.
The main parameters in determining the amount of the provision are:
the ability to use or potential for modification of secured manufacturing capacities at third-party providers,
particularly for pharmaceutical compounds,
the number of affected patients and the expected duration of their continued treatment in clinical
development programs,
•
the expected date or period of the outflow of resources, and
•
Provisions for interest and penalties related to income taxes
Objective assessments are performed to determine the need to recognize provisions for interest and penalties
related to income taxes not covered by IAS 12.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Operating Assets, Liabilities, and Contingent Liabilities 286
Significant discretion and sources of estimation uncertainty
Like the measurement of provisions, the assessment of a recognition obligation for provisions for litigation is to
a particular extent subject to a degree of estimation uncertainty. The uncertainties relate, in particular, to the
assessment of the likelihood and the amount of the outflow of resources.
127
the expectations concerning future events influencing the obligations.
181
128
Contract assets resulted in particular from rendering services and manufacturing of products in the Life Science
and Electronics business sectors.
(27) Other provisions
Other provisions developed as follows:
Interest and
€ million
Jan. 1, 2023
Additions
Utilizations
Release
Interest effect
Currency translation
Litigation
Restructuring
Environmental
protection
Acceptance
and follow-on
obligations
penalties
related to
income taxes
104
Other
1
-451
Jan. 1
€ million
127
2023
2022
128
207
Additions due to business combinations
10
Other additions
339
360
thereof: attributable to performance obligations satisfied in prior periods
Disposals due to divestments/Reclassification to assets held for sale
Reclassification to trade accounts receivable
2
Currency differences
Dec. 31
-361
-3
1
Total
Other
134
-25
-51
-3
-59
-39
-29
-205
5
-1
-1
-2
-4
Changes in scope of consolidation/Other
Dec. 31, 2023
85
59
149
-95
-22
6
-12
148
127
88
-1
91
672
10
173
3
210
-4
80
124
89
479
-45
-10
20222
2023
-5.6%
Reconciliation EBITDA pre¹
-5.6%
Merck Group
EBITDA pre is the main performance indicator measuring ongoing operational profitability and is used internally
and externally. To permit a better understanding of the underlying operational performance, the operating
result is adjusted to exclude depreciation and amortization, impairment losses and reversals of impairment
losses, as well as adjustments. These adjustments are restricted to the following categories: integration
expenses, IT expenses for certain projects, restructuring expenses, gains/losses on the divestment of
businesses, acquisition expenses, and other adjustments. The classification of specific income and expenses as
adjustments follows clear rules and is subject to strict governance at the Group level. Within the scope of
internal performance management, EBITDA pre permits process efficiency increases without influencing the
performance of the operating business through exceptional items or restructuring expenses. The following table
shows the composition of EBITDA pre in fiscal 2023 compared with the previous year. The IFRS figures have
been modified to reflect the elimination of adjustments included in the respective functional costs.
EBITDA pre
30
Combined Management Report_ Fundamental Information about the Group. Internal Management System
Change
€ million
Elimination
of
adjustments
IFRS
pre¹
IFRS
Elimination
of
adjustments
pre¹
20,993
20,993
22,232
22,232
Cost of sales
-8,600
Net sales
pre¹
29
€ million
-1,239
EBITDA pre-margin¹ = Earnings before interest, income tax, depreciation and amortization as well as adjustments in percent of the net sales.
EPS = Earnings per share.
EPS pre¹ = Earnings per share before adjustments.
MEVA¹ = Merck value added.
43
OCF1 = Operating cash flow.
ROCE¹ Return on capital employed.
NPV1 = Net present value.
IRR¹ Internal rate of return.
eNPV1 = Expected net present value.
POS¹
Probability of success.
M&A Mergers and acquisitions.
1 Not defined by International Financial Reporting Standards (IFRS).
%
Combined Management Report_ Fundamental Information about the Group Internal Management System
The three key performance indicators of net sales, EBITDA pre, and operating cash flow (OCF) are the most
important financial factors for assessing operational performance. Accordingly, we refer to these KPIs in the
"Report on Economic Position", the "Report on Risks and Opportunities", and the "Report on Expected
Developments". As the most important indicators of financial business performance, the KPIs are key
elements of our performance management system.
Net sales
Net sales are defined as the revenues from the sale of goods, services rendered to external customers, and
commission income and profit sharing from collaborations, net of value-added-tax, and after sales deductions
such as rebates or discounts. Net sales are the main indicator of our business growth and therefore an
important parameter of external as well as internal performance measurement. In addition, organic sales
growth compared with the target is used for internal performance management. Organic sales growth shows
the percentage change in net sales versus a comparative period, adjusted for exchange rate and portfolio
effects. Exchange rate effects may arise as a result of foreign exchange fluctuation between the functional non-
euro currency of a consolidated company and the reporting currency (euro). By contrast, portfolio effects reflect
sales changes due to acquisitions and divestments of consolidated companies or businesses.
Merck Group
Net sales
€ million
Net sales
Change
2023
2022
20,993
22,232
Key performance indicators of the Group and its businesses
-8,558
-6
32
-2,521
75
-2,446
-0.3%
-51
-51
0
-6
> 100.0%
impairment losses on financial
assets (net)
Other operating income and
-385
138
-247
-685
323
-361
-31.6%
expenses
Operating result (EBIT)¹
3,609
Depreciation/amortization/
EBITDA pre¹ = Earnings before interest, income tax, depreciation and amortization as well as adjustments.
4,474
-2,438
7
-2,445
Research and development costs
Impairment losses and reversal of
-8,496
0.7%
Gross profit
12,392
43
12,435
13,705
32
13,737
-9.5%
Marketing and selling expenses
-4,510
-8,527
44
-4,714
32
-4,681
-4.6%
Administration expenses
-1,392
246
-1,146
-1,306
115
-1,191
-3.8%
-4,466
Abbreviations
Our Life Science business sector is a global leader in the approximately € 230 billion life sciences industry. We
continue to consistently deliver long-term profitable growth despite near-term headwinds, including a decline in
Covid-19-pandemic-related demand, destocking by key customers and softening of funding for early-stage
biotech companies. Our long-term market growth outlook remains unchanged at approximately 5% to 7%
C AGR, fueled by increasing demand for commercial medicines and the essential nature of R&D across customer
segments. We are well-positioned to weather challenging market conditions and emerge as an even more
integral partner to our customers.
NPV, IRR,
23
Combined Management Report
Fundamental Information about the Group_
Strategy
Business strategies
Life Science
Our strategy builds on the transformation we began last year, with a sharpened focus on differentiating both
our core and high-growth portfolios and capitalizing on the unique capabilities of our company. We are doing
this by leveraging our distinctive breadth of offerings to customers in academia, the biopharmaceutical industry
and the industrial sector, including food & beverage, to advance leading edge science. We aspire to
comprehensively address customers' scientific needs and serve as a partner across products and services with a
focus on enabling novel modalities. We amplify customer value by proactively addressing future customer
needs to create lasting differentiation beyond the breadth and performance of our offerings. Our multichannel
commercial approach, e-commerce platform and focus on sustainability set us apart. We enhance
competitiveness by pursuing operational and commercial excellence and building future-oriented capabilities
and ways of working.
This course we have set directs our focus and resources to pursuing opportunities that financially and
technologically "move the needle" while deprioritizing those that may distract from our focused ambition to
continue to be a global science & technology leader. For example, our Process Solutions business unit is
optimizing its go-to-market approaches to address shifting customer behaviors, including expanding access to
Process Solutions products via sigmaaldrich.com, our e-commerce platform. Our growing Life Science Services
Contract Testing and Development Manufacturing Organization (CTDMO) business is building an end-to-end
offering for novel modalities with a focus on anti-drug conjugates (ADCs), mRNA and viral vectors, where
customers are seeking greater technical expertise and collaboration.
The diverse customer and portfolio base of our Science and Lab Solutions business provides a stable foundation
while continuing to build positions in higher-growth segments. Our Integrated Supply Chain Organization's
evolution to become more agile, resilient, and customer-centric is an essential foundation for continued
profitable growth. To this end, we have implemented new processes to more closely connect our sales and
production plans, using digital tools to align with customers on lead times and other supply expectations,
standardizing operations across sites and regionalizing our network - especially in Asia-Pacific (APAC) - to meet
local needs and balance risk. We have also embedded sustainability criteria in R&D and operations, providing
customers with an expanded range of greener alternatives and data, such as product carbon footprints, to help
reach their sustainability goals.
-
Our strategy reflects our purpose - to impact life and health with science and allows us to deliver customer
and shareholder value now and into the future. We are prepared to address short-term challenges and emerge
from the post-Covid-19-pandemic era with deeper customer relationships, high-value innovations and a more
resilient and cost-effective operating network.
24
Combined Management Report Fundamental Information about the Group_
Strategy
Healthcare
Despite external volatility in recent years, the pharmaceutical industry has proven its resilience and remains
attractive with solid growth expectations. Global megatrends such as growing and aging populations as well as
better access to healthcare continue to drive the need for our products. At the same time, the macroeconomic
and geopolitical environment has become more uncertain. Our mixed portfolio and our diverse geographic
footprint build a resilient foundation to meet these demands and respond appropriately to the dynamics of our
markets, paving the way for the future success of our Healthcare business.
Following our successes over the past years, we continue to drive pipeline projects with the aim of bringing
groundbreaking medicines to patients, maximizing our existing portfolio and continuing our expansion in growth
markets. We are resolute in our ambition to become a global specialty innovator with a high-growth future in
oncology as well as neurology and immunology. This ambition is built on a firm foundation and continues to
foster sustainable and profitable growth in the Cardiovascular, Metabolism & Endocrinology franchise while
further strengthening our leadership position in fertility. We pursue this ambition with a focused leadership
approach, concentrating investments on decorrelated opportunities in our pipeline and across therapeutic areas,
regions and payer types.
The first pillar of our strategy is to reinforce and expand our global footprint, bringing the innovation of our
pipeline to patients and growing our presence in the United States and in China, for example. Driven by well-
known demographic trends, the expected absolute global pharma market growth contribution will remain
highest in established markets, while the emerging markets are expected to grow faster than developed
markets in relative terms as a result of rapidly developing pharma infrastructure. With our diversified portfolio
of specialty and mature product businesses, we are benefiting from these trends. While our solid base within
established markets (France, Germany, Italy, Japan, Spain, the United Kingdom, and the United States)
enables us to achieve growth with our specialty portfolio, the emerging markets will be a large growth driver for
many of our established products in the future. Managing the balance between delivering innovative new
medicines with first-in-class and/or best-in class potential while leveraging our strengths in other markets and
ensuring the profitable growth of the existing business will be one of the strategic imperatives.
The second pillar of our strategy is the focus on specialty medicine franchises. Here, we expect the oncology,
neurology and immunology markets to remain highly attractive in terms of size, growth prospects and
profitability. Within each specialty franchise, our approach is to develop deep internal expertise and insight,
from internal research to commercialization, through external talent searches and strategic partnerships.
In order to optimize the holistic value and focus of our pipeline, we continuously monitor and assess the
potential of our pipeline candidates, based on clinical data, strategic fit and financial criteria, to determine the
best way forward.
The third strategic pillar is innovation. We aim to develop potential first-in-class and best-in-class therapies.
We have streamlined our pipeline and expanded our innovation capabilities with strong investigational drug
candidates and technologies. In order to maximize the output of our R&D investments and to ensure long-term
sustainability, we are focusing our expertise on specific franchises. Further, we increase our intake of external
innovation, in line with industry practice, to meet our ambition of launching a new product every 18 months.
We are investing in assets with the most promising value generation outlook as well as digital technologies and
novel modalities such as antibody-drug conjugates to drive pipeline growth.
Combined Management Report
Fundamental Information about the Group_
Strategy
25
Electronics
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
We are an innovation leader within the electronics industry, targeting the most critical materials segments of the
semiconductor wafer processing as well as OLED and LC display panels. Our diversified portfolio proves to be resilient
in a dynamic market environment. We partner with leading experts around the world to enable the next generation
of electronic devices, innovating with leading-edge customers and being a local partner for their global presence.
The long-term growth prospects of the industry remain very attractive, despite the current downcycle. We believe
in the long-term growth drivers of digitalization and its visualization, fueled by an exponential increase in data
volumes. Semiconductors will thus continue to be a critical component in many industries. The main accelerator in
the industry is and will remain AI. Although the number of AI chips is still small, the high growth rates and the
high value of these chips as well as the required materials will fuel the growth of the semiconductor industry. This
trend will be supported by technologies such as 5G networks, autonomous driving, electric vehicles, and IoT.
Merck will benefit from the high material requirements of these AI chips in terms of value and volume.
Active portfolio management is an integral part of our strategy. This has enabled us to transform over the last
decades and our evolution into a global science and technology pioneer. In this sense, inorganic growth is a
relevant element to accelerate strategic plans and to leverage business opportunities in our attractive end
markets. Strengthening our key growth businesses remains the highest priority for which mergers and
acquisitions (M&A) could serve as appropriate tools.
Through our multi-industry business model, we serve attractive global markets with secular growth trends as a
trusted partner to advance human progress. Our diversified portfolio benefits from key megatrends. In
Life Science, this includes a growing market for complex and novel modalities. In Healthcare, we develop and
commercialize specialty pharmaceuticals in the Oncology and Neurology & Immunology franchises. These
include the medicines Erbitux® (cancer), Bavencio® (cancer) and MavencladⓇ (multiple sclerosis). In addition,
we are conducting clinical trials with late-stage xevinapant (head and neck cancer) and further drug candidates
in oncology, neurology and immunology in earlier stages of clinical development. With our comprehensive
portfolio of semiconductor materials, we expect to benefit in the medium and long term from continuously
increasing demand for chips due to the exponential growth of data volumes as well as the further
implementation of artificial intelligence (AI) and the Internet of Things (IoT).
Combined Management Report
impairment losses/reversals of
Fundamental Information about the Group Merck
21
In fiscal 2023, we integrated the chemical business of Mecaro Co. Ltd., which we acquired in 2022, into our
Semiconductor Solutions business. We also strengthened our business in thin films technology and our footprint
in Korea. In February 2023, we broke ground for a new integrated facility in Kaohsiung, Taiwan. Here we will
produce a comprehensive portfolio of semiconductor materials in one single site.
In April 2023, we announced our plans to expand manufacturing capacities at our site in Hometown,
Pennsylvania, USA, thus increasing domestic production capacity for electronics components. The roughly
€ 300 million investment in the Hometown site is intended to further develop our largest integrated specialty
gases facility. In June 2023, we commissioned a new production facility for DS&S in Chandler, Arizona, USA.
Display Solutions
Our Display Solutions business unit includes the businesses with liquid crystals (LC), display patterning
materials (materials for surface treatment), organic light-emitting diodes (OLED), photoresists, reactive
mesogens, smart antenna (LC-based antennas), and liquid crystal glazing (LC-based windows). We support our
customers in developing novel display technologies for TV, IT, mobile devices, automotive, gaming, and other
applications. Together with our customers we are working in the field of AR/VR to expand the application
scenarios of LC & OLED materials and enhance the user experience in small and micro-sized displays. We are
working very closely with leading panel makers to develop next-generation products with LCD (liquid crystal
display) technology for the electronics market.
While lockdowns and working from home pulled forward demand for TVs and IT devices during the Covid-19
pandemic, this trend has meanwhile reversed. The industry saw a significant reduction in demand during 2023,
resulting in a decline in customer factory utilization.
The Covid-19 pandemic has accelerated the shift of the liquid crystals industry towards China and increased
competition. In 2023, we maintained our position as manufacturer of innovative LC materials with our
XtraBright™ products, winning new projects for large-area displays as well as high-resolution mobile devices.
Our OLED and photoresist materials are used in multiple free-form display products. In addition, we are actively
working with customers on both LC-on-silicon (LCOS) and OLED-on-silicon solutions for AR/VR displays.
With our OLED materials, we are also supporting our customers in making sustainable OLED structures, which
are important for new OLED applications such as IT screens. In 2023, we developed deuterated materials for
next-generation OLED displays. They have the potential to more than double the lifetime of OLED stacks
without compromising on efficiency and voltage, enabling displays with higher brightness.
Real estate investors use our product eyrise® s350 solar shading (sun protection at the touch of a button) to
deliver on ESG (environment, social, governance) objectives. For example, a large real estate investor in
Switzerland has already installed eyrise® on all facades of its flagship project in the center of Zurich. More
commercial projects are currently in installation.
Surface Solutions
In our Surface Solutions business, we provide our customers with solutions that help them to create functional
and decorative surfaces of all kinds. We focus on markets for automotive coatings, cosmetics, and, to a smaller
extent, industrial applications. With our portfolio of active ingredients, we enable cosmetics manufacturers to
enrich their skin care products with moisturizing, protecting and anti-aging effects. Moreover, our functional
solutions serve many innovative applications, from dirt-repellent and easy-care surfaces to laser markings of
plastic parts and cables.
Despite the current challenging economic environment, Surface Solutions is continuing to implement its
strategic transformation. We continued to invest in digitalizing and modernizing our production plants around
the globe while adjusting our capacities to the changing demands in our different markets.
Combined Management Report
Fundamental Information about the Group_
Strategy
22
22
Strategy*
Strategy fundamentals and ambition
We are curious minds dedicated to human progress. We believe that scientific exploration and responsible
entrepreneurship are key to technological advances that benefit us all. Our values courage, achievement,
-
responsibility, respect, integrity, and transparency - guide us in every step we take and in every decision we
make. Our company has a firm foundation with convictions and principles that the Merck family has lived by for
generations. We always take them into consideration when discussing and deciding on our enterprise strategy.
Compared to last year, we face greater challenges as the increasingly complex global situation has also
impacted some of our end markets. This poses challenges for the global economy and society. With a history of
more than 355 years and a truly global footprint today, we have established a solid, resilient foundation that
continues to bolster our confidence in our ambition for the future to become the global 21st century science
and technology pioneer. To achieve this, we continue to focus on our key growth drivers: Process Solutions,
Life Science Services, Science & Lab Solutions, and Semiconductor Solutions as well as developing specialty
drugs in our Healthcare business. Our must-win battles include building an organization with comprehensive
data expertise and strengthening our ability to innovate. For instance, in our "Data & Digital" initiatives, we
focus on identifying, prioritizing, and implementing technical capabilities across our businesses to promote
future growth.
-
We strive to make a positive impact in our communities and on the planet while assessing and considering the
ESG (environmental, social, governance) impact of our growth ambition. Since the launch of our sustainability
strategy, we have achieved essential milestones in integrating sustainability as a foundational element of our
overall governance and decision-making frameworks. We are diligently striving to achieve human progress for
more than one billion people through sustainable science and technology by 2030. Fully integrating
sustainability into our value chains by 2030 is at the forefront of our priorities. In addition, we are committed to
achieving climate neutrality and minimizing resource consumption by 2040.
In the short term, AI alone cannot offset the current market decline in the electronics industry, which results
from weak demand after the Covid-19 pandemic and associated excess inventory along the value chain.
However, in the medium and long term, the fundamental growth drivers, such as AI, are expected to accelerate
the market development through the next decade. To produce ever more powerful and energy-efficient chips,
innovation in novel materials will be even more essential.
To benefit from the strong electronics industry growth, we are continuously expanding our capacities and our
capabilities. We are continuing to invest significantly more than € 3 billion in innovation and capacities, which are
aligned with the customers and regions we serve. These investments are an essential part of our ongoing Level Up
growth program, which we kicked off at the end of 2021. The investments are made in lockstep with the capacity
expansions of our customers in order to support their growth and new fabs with a reliable supply of innovative
materials and systems. We will continue to invest in our geographic proximity to our customers while boosting
R&D and innovation. Electronics also seeks to exploit attractive external growth opportunities through acquisitions.
Our ability to systematically use data and digital methods across the entire value chain differentiates in the
market, enabling us to meet and exceed the increasing requirements regarding quality, speed and reliability.
Furthermore, we are accelerating important initiatives to transform the industry towards sustainability and
investing even further in safety.
After substantial investments in improving our processes and expanding our production capacities in Surface
Solutions, we remain confident of successfully implementing our strategic transformation within that business.
We are pursuing a sustainable dividend policy. Provided the economic environment develops in a stable
manner, the current dividend represents the minimum level for future dividend proposals. Our dividend policy
will follow business development and earnings increases over the coming years. However, dividend growth
could deviate, for example, within the scope of restructuring or in the event of significant global economic
developments. We aim for a target corridor of 20% to 25% of earnings per share pre.
28
Combined Management Report_ Fundamental Information about the Group.
Internal Management System
Internal Management System
As a global company with a diverse portfolio of products and services, we use a comprehensive framework of
indicators to manage performance. The most important key performance indicator (KPI) for measuring
performance is EBITDA pre¹.
The Value Creation and Financial KPI Pyramid, which summarizes our important financial performance
measures, reflects the comprehensive framework of financial KPIs to steer the businesses and prioritize the
allocation of cash resources. It consists of three managerial dimensions: Merck Group, Business, and Projects,
each of which requires the use of different indicators.
Business
Merck Group
Projects
M&A
NPV, IRR,
EBITDA pre margin,
EPS, EPS pre,
ROCE, MEVA
Net Sales,
EBITDA pre,
OCF, Net income,
EPS, EPS pre,
Dividend ratio,
Net financial debt,
Credit rating, ROCE, MEVA
Net sales,
EBITDA pre,
OCF
Net sales growth,
EBITDA pre margin
ROCE, MEVA
Licensing
eNPV, IRR,
EBITDA pre margin,
POS, ROCE
Capex
Sustainable dividend policy
In November 2023, our ratings were confirmed by Moody's (A3, stable outlook) and Standard & Poor's (A,
stable outlook). We discontinued our Scope rating (previously: A, stable outlook) in December 2023.
The rating of our creditworthiness by external rating agencies is an important indicator of financial stability.
A strong investment-grade rating is an important cornerstone of our financial policy as it safeguards access to
attractive financial conditions on the capital markets.
Maintaining long-term and reliable business relations with a core group of banks
We work mainly with a well-diversified, financially stable, and reliable group of banks. Due to our long-term
business approach, bank relationships typically last for many years and are characterized by professionalism
and trust. The banking group consists of banks with strong capabilities and expertise in various products and
geographical regions. We regard these banks as strategic partners and involve them in important financing
transactions accordingly.
Data & Digital strategy
Going forward, we will further identify transformative technologies to serve as pivotal enablers for our growth
and innovation ambition. Therefore, we will look into novel technologies beyond our core products and markets
while maintaining strategic proximity to our business sectors so as to leverage our existing assets and core
competencies. Our Group Science & Technology Office and the newly established Merck Data & AI Organization
are leading the implementation of our combined strategy for innovation and "data & digital". They promote
innovation within and between business areas by bringing transformative technology trends into the company
and exploiting the potential of high-quality data and state-of-the-art digital capabilities. In addition, we are
investing in building smart manufacturing capabilities, across our business sectors thus leveraging synergies
across business sectors while also exploring digital business models as a separate growth opportunity.
Furthermore, we are deploying a company-wide harmonized data and analytics operating model and ecosystem. This
enables us to derive actionable insights from data, support informed decision-making and scale related activities
across the company to solve real business challenges with machine learning and AI.
Data culture is fundamental for our digital transformation. Through targeted measures to improve data literacy
activities, we are strengthening the ability of our employees to identify, understand, create, model, analyze, interpret
data as well as, communicate and argue with data. We foster generative AI literacy by giving employees the
possibility to test AI in a secure environment. With myGPT@Merck, our employees have access to an AI assistant to
use when working with confidential and internal information.
Combined Management Report
Fundamental Information about the Group_
Strategy
26
26
Sustainability strategy
Leveraging science and technology
In our view, sustainable entrepreneurship and profitable growth go hand in hand; we can remain competitive
only by creating added value for society. Through our innovative and high-quality products, we want to help
meet global challenges. At the same time, these types of products secure our financial performance capability.
Responsible action is an integral part of our company culture. This also includes respecting the interests of our
employees, customers, investors, and society.
Safety and ethics matter just as much to us as business success. We mitigate ethical, economic, environmental,
and social risks as far as possible. From the early stages of development through to disposal, we keep an eye
on the entire life cycle of a product. We apply strict sustainability standards to our procurement activities.
During product manufacture, it is important to us to keep the environmental impact as low as possible, which is
why safe production, high environmental standards and strict quality management are of course so important
to us. By supplying products that meet extensive sustainability criteria, we also help other companies to
achieve their sustainability goals.
Payback period,
EBITDA pre margin, ROCE
Sustainability is an essential element of our enterprise strategy. We have set ourselves three strategic
sustainability goals: In 2030, we will achieve progress for more than one billion people through sustainable
science and technology. By 2030, we will fully integrate sustainability into our value chains. By 2040, we will be
climate neutral and reduce our resource consumption. With these goals, we are helping to achieve the UN
Sustainable Development Goals (SDGs). Overall, our sustainability strategy is centered on seven focus areas
within which we are realizing numerous initiatives and projects today and tomorrow, measuring our progress as
we go.
In 2023, we revised our sustainability strategy, which we had communicated in 2020. In particular, we
sharpened the second goal: Under the new heading "Partnering for sustainable business impact", we want to
strengthen our focus on the social aspects in our value chains and embed sustainability more comprehensively
into our decision-making processes. Therefore, in addition to the existing focus area "Sustainable and
transparent supply chain", we are now also working on the new focus areas "Sustainability in our ways of
working and decision-making" and "Our people and communities; providing a diverse and inclusive
environment". For the third goal, "Reducing our ecological footprint", we modified two of our key indicators for
waste and water. The two new indicators, which are valid as of 2024, use more common metrics and also
include circular economy criteria.
We use 14 key indicators to record and assess our progress towards achieving our sustainability goals. Our
annual Long-Term Incentive Plan (LTIP) for Executive Board members and senior executives contains a
sustainability factor. We use it to measure performance over a period of three years based on selected key
indicators for each of our three sustainability goals. Details on how this sustainability factor is calculated can be
found in the "Compensation Report". In 2023, the company tied 15% of variable employee compensation to
sustainability parameters for the first time.
We are in the process of transforming the company and are integrating sustainability into the innovation
process and all parts of the value chain. It is our aim to decouple the growth of our businesses from negative
environmental impacts. More information on sustainability topics can be found in the "Non-Financial
Statement", which is also part of the management report.
27
Combined Management Report Fundamental Information about the Group_
Strategy
Strategic finance and dividend policy
We pursue a conservative financial policy characterized by the following aspects:
Financial flexibility and a conservative funding strategy
We ensure that we meet our obligations at all times and adhere to a conservative and proactive funding
strategy that involves the use of various financial instruments. Our diversified and profitable business activities
form the basis for our strong and sustainable cash flow generation capacity. Moreover, we have several funding
resources in place. A € 2.5 billion syndicated loan facility is in place until 2028 to cover unexpected cash needs.
This credit line is a backup facility that is intended to be used in exceptional circumstances only.
We also agreed upon several bilateral loan facilities. In addition, we have a commercial paper program with a
volume of € 2.5 billion at our disposal. Within the scope of this program, we can issue short-term commercial
paper with a maturity of up to one year.
The bond market also represents an important source of financing. The most recent bond issue took place in
June 2022 (€ 1.0 billion bond issue). The use of various instruments provides a broad financing basis and
addresses different investor groups.
Refining the sustainability strategy
1,880
Strong investment-grade rating
1,792
-18
29
-29
Other adjustments
56
-56
68
-68
5,879
5,879
6,849
6,849
thereof: organic growth¹
-14.2%
-9.0%
thereof: exchange rate effects
-4.9%
thereof: acquisitions/divestments
-0.3%
1 Not defined by International Financial Reporting Standard (IFRS).
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
-87
18
Acquisition-related adjustments
EBITDA pre¹
38
divestment of businesses
-232
1,798
-0.3%
impairment losses
EBITDA²
5,489
Restructuring expenses
249
-249
198
6,504
2,030
-198
51
-51
Gains (-)/losses (+) on the
-88
-38
-118
118
Integration expenses/IT expenses
88
19
607
175
21
19
27
108
170
21
27
95
171
29
18
25
99
160
24
17
24
151
103
103
22
994
153
103
20
22
99
20
22
95
19
22
91
165
38
19
23
85
Total
United Kingdom Other countries
Switzerland
Germany
Expected payments of undiscounted benefits
133
22
The expected payments of undiscounted benefits under the plans were as follows:
26
594
2,040
2,848
646
2,202
Fair value of the plan
assets
64
5
59
62
62
Other
64
64
61
61
Insurance contracts
344
204
140
439
2,634
Plan assets did not directly include financial instruments issued by Group companies or assets used by Group
companies.
Employer contributions to plan assets and direct payments to plan beneficiaries for the next year are expected
to amount to € 48 million (2022: € 42 million) and € 96 million (2022: € 95 million) respectively.
21
88
Total
Other countries
United Kingdom
Expected payments of undiscounted benefits
Switzerland
Germany
2028-2032
2027
2026
2025
17
2024
€ million
December 31, 2022
2029-2033
2028
2027
2026
2025
2024
€ million
December 31, 2023
2023
583
Release
116
10%
-10%
10%
Change in the DAX®
Variation of Merck share price
€ million
The measurement of long-term share-based compensation programs implies extensive estimation uncertainty.
The following overview shows the amounts by which the non-current provisions from share-based
compensation programs (carrying amount as of December 31, 2023: € 7 million/carrying amount as of
December 31, 2022: € 97 million) would have been impacted by changes in the DAX® or the closing price of the
Merck share on the balance sheet date. The amounts stated would have led to a corresponding reduction or
increase in profit before income tax.
Share-based payments
Significant discretionary decisions and sources of estimation uncertainty
299
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
Changes to the intrinsic value of share-based compensation programs are allocated to the respective functional
costs according to the causation principle. Time value changes are recognized in financial income or finance
costs.
The expected volatilities are based on the implicit volatility of Merck shares and the DAX® in accordance with
the remaining term of the respective tranche. The dividend payments incorporated into the valuation model are
based on medium-term dividend expectations.
The fair value of the obligations is calculated by an external expert using a Monte Carlo simulation as of the
balance sheet date. The main parameters in the measurement of the share-based compensation programs with
cash settlement are long-term indicators of company performance and the price movement of Merck shares in
relation to the DAX®. A sustainability factor is also included in the valuation parameters for tranches issued
from fiscal 2022 onward.
Provisions are recognized for the share-based compensation program with cash settlement at Merck ("Merck
Long-Term Incentive Plan”) and reported in other employee benefit provisions.
Share-based payments
Accounting and measurement policies
Share-based payments
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles".
299
83
-10%
217
Increase (+)/decrease (-) of the provision
Dec. 31, 2022
300
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
40%
"Reducing our ecological footprint"
•
30%
"Partnering for sustainable business impact"
•
30%
"Dedicated to human progress"
•
The weighting of the three sustainability criteria for the 2023 LTIP tranche is as follows:
For tranches issued from fiscal 2022 onward, the MSUs measured on the basis of financial targets are multiplied
by a sustainability factor composed of the three sustainability criteria: "Dedicated to human progress",
"Partnering for sustainable business impact", and "Reducing our ecological footprint".
These share-based compensation programs with cash settlement in place at Merck are aligned with target
achievement based on key performance indicators as well as the long-term performance of Merck shares.
Certain employees are eligible to receive a certain number of virtual shares - Merck share units (MSUS) - at the
end of a three-year performance cycle. The number of MSUs that could be received depends on the individual
grant defined for the respective person and the average closing price of Merck shares in Xetra® trading during
the last 60 trading days prior to January 1 of the respective performance cycle (reference price). When the
three-year performance cycle ends, the number of MSUs to then be granted is determined based on the
development of defined financial key performance indicators (KPIs). In addition to the financial KPIs, a
sustainability factor is included in performance measurement for tranches issued from fiscal 2022 onward.
The calculation is based on the performance of the Merck share price compared to the performance of the DAX®
with a weighting of 50%, the development of the EBITDA pre margin during the performance cycle as a
proportion of a defined target value with a weighting of 25%, and the development of organic sales growth as a
proportion of a defined target value, also with a weighting of 25%. Depending on the development of these
financial KPIs, at the end of the respective performance cycle the eligible participants are granted between 0%
and 150% of the MSUs they could be eligible to receive.
Sensitivities were determined on the basis of the respective parameters in question, with all other
measurement assumptions remaining unchanged. The 2021 tranche will not be subject to any value
fluctuations between December 31, 2023, and the payout date, and was therefore excluded from the sensitivity
analysis (December 31, 2022: exclusion of 2020 tranche).
8
-10
-18
-1
20
1
Dec. 31, 2023
Dec. 31, 2023
Changes in scope of consolidation/Other
-57
Utilizations
Additions
Jan. 1, 2023
€ million
Other employee benefit provisions developed as follows:
Obligations for partial retirement programs and other severance payments not recognized in connection with
restructuring programs, as well as obligations in connection with long-term working hour accounts and
anniversary bonuses, are also included in other employee benefit provisions.
Other employee benefit provisions include obligations from share-based compensation programs. However,
they do not contain the tranche of the Merck Long-Term Incentive Plan (LTIP) that is payable in the months
following the reporting date, as this is no longer subject to value fluctuations following the reporting date. More
information on these compensation programs can be found below.
Other employee benefit provisions
Accounting and measurement policies
Other employee benefit provisions
298
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
The weighted duration of defined benefit obligations amounted to 17 years (2022: 16 years).
940
168
164
163
26
155
22223
130
392
Interest effect
Currency translation
Reclassification from non-current to current/liabilities¹
32
-90
-9
-3
-5
2
2
-130
-89
-41
112
-125
-26
239
161
78
380
81
299
Total
Current other
employee benefit
provisions¹
Non-current other
employee benefit
provisions
-99
48
market
500
Employees
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Interest expense
Current service cost
January 1, 2023
€ million
2023
-1,685
-33
2,634
-4,287
December 31, 2022
-11
-1
-4
-6
Other
-1
1
-2
Other changes
296
-10
Present value of
the defined
benefit
obligations
-4,287
Interest income
Gains (+) or losses
Past service cost
-168
123
-291
5
-3
89
-150
-109
-1,685
Net defined
benefit liability
Effects of
asset ceilings
-33
37
-37
-3
89
-150
2,634
-109
Fair value of the
plan assets
-6
-3
Currency translation recognized in equity
Provisions for other employee benefits included provisions for share-based payments, which are discussed in
greater detail in the section on share-based payments in this note.
2,111
2,275
81
83
2,030
Dec. 31, 2022
1,731
299
217
2,192
Dec. 31, 2023
1,975
1 Previous year's figures have been adjusted, see Note (2) "Reporting principles".
Provisions for employee benefits
Current provisions for employee benefits¹
Non-current provisions for employee benefits
Non-current other employee benefit provisions
Provisions for pensions and other post-employment benefits
€ million
(33) Provisions for employee benefits
Provisions for employee benefits are composed as follows:
291
Employees
Consolidated Financial Statements Notes to the Consolidated Financial Statements
9
Provisions for pensions and other post-employment benefits
Accounting and measurement policies
Provisions for pensions and other post-employment benefits
In addition to retirement benefit obligations, provisions for pensions and other post-employment benefits
include obligations for other post-employment benefits, such as medical care.
1
-1
Changes in the scope of consolidation
2022
2023
2022
2023
2022
2023
2022
Plan administration costs recognized in income
2023
United Kingdom
Switzerland
Germany
The calculation of the defined benefit obligations was based on the following actuarial parameters and
durations:
292
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
Apart from the net balance of interest expense for the defined benefit obligations and interest income from the
plan assets, which is reported in financial income and financial expenses, the expenses for defined benefit plans
are allocated to the individual functional areas in the consolidated income statement.
The other actuarial assumptions used as the basis for calculating the defined benefit obligation, such as rates of
salary increases and pension trends, were determined on a country-by-country basis in line with the economic
conditions prevailing in each country. The latest country-specific mortality tables are also applied (Germany:
Heubeck 2018G; Switzerland: BVG 2020G; United Kingdom: S3PA).
The discount rates for defined benefit pension plans are generally determined by reference to discount rates for
similar durations and currencies calculated by external actuaries. This was based on bonds with ratings of at
least "AA" or a comparable rating from at least one of the leading rating agencies as of the reporting date.
The present value of the defined benefit obligation is determined by expert third parties according to the
actuarial projected unit credit method.
Other countries
on settlement
Currency effects recognized in income
Other effects recognized in income
Equity instruments
Cash and cash equivalents
€ million
Quoted market
price in an active
Dec. 31, 2022
Dec. 31, 2023
The fair value of the plan assets was allocated to the following categories:
297
Employees
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Covering the benefit obligations with financial assets represents a means of providing for future cash outflows,
which are required by law in some countries (for example, Switzerland and the United Kingdom) and voluntarily
in other countries (for example, Germany).
The actual income from plan assets amounted to € 147 million in the year under review (2022: loss of
€ 395 million).
-1,943
2,848
-4,787
December 31, 2023
5
16
-11
Other
1
market
No quoted market
price in an active
market
Quoted market
price in an active
Total
321
179
373
193
180
Real estate
968
968
1,219
1,219
-4
Debt instruments
636
620
620
58
58
74
74
Total
No quoted market
price in an active
market
The sustainability factor can range from 0.8 to 1.2. This means that, depending on the result of the financial
KPIs (0% to -150%) and the sustainability factor, the eligible participants are granted between 0% and 180%
of the MSUS they could be eligible to receive at the end of the respective performance cycle.
636
Investment funds
5
4
Actuarial gains (+)/losses (-)
58
10
-350
17
58
Changes in the effects of the asset ceilings
arising from experience adjustments
Actuarial gains (+)/losses (-)
Remeasurements of plan assets
arising from experience adjustments
10
Actuarial gains (+)/losses (-)
arising from changes in financial assumptions
-350
Actuarial gains (+)/losses (-)
arising from changes in demographic assumptions
17
Actuarial gains (+)/losses (-)
Remeasurements of defined benefit obligations
Items recognized in income
Actuarial gains (+)/losses (-)
29
29
-323
20
-16
Currency translation recognized in equity
Changes in the scope of consolidation
142
-1
57
86
17
125
Other changes
21
57
-61
147
Payment transactions
Employee contributions
Employer contributions
Pension payments
-236
29
58
-22
A cash payment is made based on the MSUs granted after the three-year performance cycle has ended. The
value of a granted MSU, which is relevant for payment, corresponds to the average closing price of Merck
shares in XetraⓇ trading during the last 60 trading days prior to the end of the performance cycle. The payout
amounts of the respective tranches are limited to two and a half times the individual grant.
Dec. 31, 2021
Performance cycle
3.76%
3.81%
4.49%
4.52%
4.95%
4.80%
2.15%
2.70%
1.34%
3.84%
2.76%
2.75%
Future salary increases
3.74%
3.32%
Discount rate
In order to minimize fluctuations of the net defined benefit liability, Merck, in managing its plan assets, also
pays attention to potential fluctuations in liabilities. The portfolio is structured in such a way that, in the ideal
scenario, the impact of exogenous factors on the plan assets and the defined benefit obligations offset each
other.
Depending on the legal, economic, and fiscal circumstances prevailing in each country, different retirement
benefit systems are provided for employees. Newly hired employees are only offered plans whose benefits are
based on contributions and the return on their investments. Some of these plans require the employer to
guarantee a minimum return on investment. Other plans are generally based on the employee's years of
service and salary. Pension obligations comprise both obligations from current pensions and accrued benefits
for pensions payable in the future.
The value recognized in the consolidated balance sheet for pensions and other post-employment benefits was
derived as follows:
€ million
Present value of all defined benefit obligations
Fair value of the plan assets
Dec. 31, 2023
Future pension increases
Duration
Dec. 31, 2022
2.14%
0.02%
Switzerland
Germany
Increase (+)/decrease (-) in present value of
all defined benefit obligations if
€ million
December 31, 2023
The following overview shows how the present value of all defined benefit obligations would have been
impacted by changes to relevant actuarial assumptions:
The determination of the present value of the obligation from defined benefit pension plans primarily requires
discretionary judgment regarding the selection of methods to determine the discount rate, the selection of
suitable mortality tables, and estimates of future salary and pension increases.
Provisions for pensions and other post-employment benefits
Significant discretionary decisions and sources of estimation uncertainty
These were average values weighted by the present value of the respective defined benefit obligation.
The lower interest rate level in the euro area and Switzerland resulted in an increase in the present value of the
defined benefit obligations as well as in the duration of the obligations.
11
12
2.20%
1.75%
2.89%
15
2.90%
13
0.03%
15
16
17
19
2.14%
4,787
4,287
-2,848
Benefit based on final salary
Annuity
2,429
1
354
Lump sum
Installments
1
72
127
2,856
127
1
Benefit not based on final salary
Annuity
613
1,060
59
1,732
Lump sum
10
29
Total
Other countries
United Kingdom
Switzerland
-2,634
Funded status
Effects of the asset ceilings
Net defined benefit liability
1,939
1,652
4
1,943
33
1,685
Assets from defined benefit plans
United Kingdom
33
1,975
46
1,731
294
Consolidated Financial Statements Notes to the Consolidated Financial Statements
Employees
The increase in provisions was mainly due to the reduction in the discount rates in the euro area and
Switzerland.
The defined benefit obligations were based on the following types of benefits provided by the respective plan:
Dec. 31, 2023
€ million
Germany
Provisions for pensions and other post-employment benefits
43
Other countries
the discount rate were 50 basis points lower
the discount rate were 50 basis points higher
☑
74
the expected rate of future salary increase
were 50 basis points higher
-80
-9
-5
-66
-325
-17
-24
-61
-224
370
18
26
69
256
the discount rate were 50 basis points lower
the discount rate were 50 basis points higher
the expected rate of future salary increase
were 50 basis points lower
Total
Other countries
United Kingdom
5
Switzerland
I
89
Both the benefit obligations and the plan assets are subject to fluctuations over time. The reasons for such
fluctuations could include changes in market interest rates and thus the discount rate, as well as adjustments
to other actuarial assumptions (such as life expectancy or expected future increases in pension). This could lead
to - or cause an increase in - underfunding. Depending on statutory regulations, it may become necessary in
some countries to reduce underfunding and provide additional funding.
Sensitivities are determined on the basis of the respective parameters in question, with all other measurement
assumptions remaining unchanged.
9
21
95
-9
-22
-96
the life expectancy were 1 year lower
the life expectancy were 1 year higher
197
5
16
35
140
the expected rate of future pension increase
were 50 basis points higher
-148
-5
-12
-2
-128
the expected rate of future pension increase
were 50 basis points lower
10
Germany
Increase (+)/decrease (-) in present value of
all defined benefit obligations if
€ million
were 50 basis points higher
109
9
18
82
the expected rate of future salary increase
-98
-9
-17
-73
the expected rate of future salary increase
were 50 basis points lower
-373
-16
-21
-80
-256
426
18
23
91
295
the expected rate of future pension increase
-141
-3
-8
293
Notes to the Consolidated Financial Statements Employees
Consolidated Financial Statements
December 31, 2022
10
27
109
the life expectancy were 1 year higher
-10
-28
Total
-110
were 50 basis points higher
212
5
9
44
155
the expected rate of future pension increase
were 50 basis points lower
-157
-5
the life expectancy were 1 year lower
Installments
4
4
Actuarial gains (+)/losses (-)
-429
-429
arising from experience adjustments
Changes in the effects of the asset ceilings
Actuarial gains (+)/losses (-)
Actuarial gains (+)/losses (-)
Pension payments
Employer contributions
Employee contributions
Payment transactions
-32
-32
1,901
-429
-32
1,440
140
-52
88
42
Remeasurements of plan assets
42
arising from experience adjustments
2,099
Currency effects recognized in income
Other effects recognized in income
Items recognized in income
-30
30
1
-2
-306
59
-247
-1
Remeasurements of defined benefit obligations
Actuarial gains (+)/losses (-)
7
7
arising from changes in demographic assumptions
Actuarial gains (+)/losses (-)
2,099
arising from changes in financial assumptions
Actuarial gains (+)/losses (-)
-205
-205
-20
19
-1
Paid out
41,813
685,700
Forfeited
Potential number offered for the first time in 2021
Potential number of MSU
13,722.30
173.46
3 Years
2023 tranche
Jan. 1, 2023 -
Dec. 31, 2025
15,684.57
12,995.23
DAX® value (60-day average of the DAX® prior to the start of the
performance cycle)
212.16
3 Years
132.43
3 Years
Reference price of Merck shares in € (60-day average Merck share
price prior to the start of the performance cycle)
Term
2022 tranche
Jan. 1, 2022 -
Dec. 31, 2024
2021 tranche
Jan. 1, 2021 -
Dec. 31, 2023
643,887
Potential number offered for the first time in 2022
509,033
Forfeited
120
The value of the provisions as of December 31, 2023, was € 7 million (December 31, 2022: € 97 million). Net
income of € 35 million was generated in fiscal 2023 (2022: net expenses of € 70 million). The three-year
tranche issued in fiscal 2020 ended at the end of fiscal 2022; an amount of € 160 million was paid out in fiscal
2023. The three-year tranche issued in fiscal 2021 ended at the end of 2023 and was reclassified from current
provisions for employee benefits to other current non-financial liabilities as of December 31, 2023. The tranche
is expected to result in a payout of € 54 million in fiscal 2024. At the reporting date, the average closing price
of Merck shares in Xetra® trading over the last 60 trading days was € 149.40.
651,200
1,266
1,673
464,022
573,459
Dec. 31, 2023
19,901
22,829
26,455
2,016
Gains (+) or losses (-) on settlement
Paid out
672,367
Potential number offered for the first time in 2023
488,524
601,930
Dec. 31, 2022
227
1,253
Paid out
20,282
40,704
Forfeited
Past service cost
-1
-1
E
Annuity
Lump sum
Installments
Other
Medical plan
obligations
2
555
4
5
Germany
Switzerland
Dec. 31, 2022
United Kingdom
Other countries
Total
1
327
72
2,586
130
130
2,186
Benefit not based on final salary
Installments
Lump sum
Other
4
4
Medical plan
18
18
Present value of defined benefit
obligations
3,058
1,061
358
2
310
Fair value of the plan assets
1,281
1,022
384
160
2,848
Present value of defined benefit
€ million
Benefit based on final salary
Annuity
4,787
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:
879
1,496
January 1, 2022
Current service cost
Interest expense
Interest income
Plan administration costs recognized in income
Present value of
the defined
benefit
obligations
Fair value of the
plan assets
Effects of
asset ceilings
Net defined
benefit liability
-5,995
2,999
-2,996
-203
-203
-73
-73
34
34
-3
-3
€ million
2022
The development of the net defined benefit liability was as follows:
Pension obligations in the United Kingdom resulted primarily from benefit plans which are based on years of
service and final salary and were closed to newly hired employees from 2006 onward. The agreed benefits
comprised retirement, disability, and surviving-dependent benefits. The employer and the employees made
contributions to the plans. Statutory minimum funding obligations existed.
33
41
5
5
5
22
22
2,752
881
332
62
323
Fair value of the plan assets
1,202
909
372
152
2,634
The vast majority of defined benefit obligations of German entities were attributable to plans that encompass
old-age, disability, and surviving-dependent pensions. These obligations were based on benefit rules comprising
benefit commitments dependent on years of service and final salary, as well as two different direct
commitments for employees newly hired since January 1, 2005, that are not based on final salary. The benefit
entitlement for new members from January 1, 2005, to December 31, 2020, resulted from the cumulative total
of annually determined pension components calculated on the basis of a defined benefit expense and an age-
based annuity table. The benefit entitlement for new members from January 1, 2021, resulted from the
performance of salary-based employer contributions and voluntary employee contributions, topped up by the
employer, to an external fund. A minimum return on contributions has been guaranteed by Merck. There were
no statutory minimum funding obligations in Germany.
Pension obligations in Switzerland mainly comprised retirement, disability, and surviving-dependent benefits
regulated by law. The employer and the employees made contributions to the plans. Statutory minimum
funding obligations existed.
Consolidated Financial Statements Notes to the Consolidated Financial Statements Employees
295
4,287
129
Dec. 31, 2022
<15
Subsequent measurement at
Subsequent measurement at
amortized cost
Operational
Asset type
Category
Measurement effects of debt instruments are reported in the consolidated balance sheet and the consolidated
income statement as follows:
Recognition
Financial assets are derecognized if the claim for compensation is fulfilled by the other counterparty, if there is no
longer a reasonable expectation that the counterparty will fulfill its contractual obligations, or if Merck transfers
the contractual rights including all material risks and rewards of the financial asset to another counterparty.
fair value through other
comprehensive income
Derecognition
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Financial assets are only reclassified in the rare event of Merck changing its business model with regard to the
management of financial assets.
Equity instruments not subject to mandatory subsequent measurement at fair value through profit or loss are
measured at fair value through other comprehensive income in subsequent periods and if they are intended to
be held for the longer term. Further details on the measurement of equity instruments at fair value are
presented in Note (43) "Information on fair value measurement”.
Except for derivative financial instruments with positive market value, Merck only applies subsequent
measurement at fair value through profit or loss for debt instruments with contractual properties resulting in
cash flows that do not exclusively represent principal repayments and interest payments on the outstanding
capital amount. In particular, this includes contingent consideration that was contractually agreed with the
acquirer within the context of the disposal of businesses within the meaning of IFRS 3 (see Note
(43) "Information on fair value measurement”). Merck does not utilize the option of the subsequent
measurement of debt instruments at fair value through profit or loss.
This classification is based on the business model and the structure of contractual payment flows. Financial
assets subsequently measured at amortized cost are accounted for using the effective interest method and
considering any impairment losses. The procedure for calculating impairment losses is described in Note
(42) "Management of financial risks”. Financial assets of this class are held in order to collect their
contractual cash flows, which are exclusively principal repayments and interest payments on the outstanding
capital amount.
subsequent measurement at fair value through profit or loss.
subsequent measurement at fair value through other comprehensive income, or
subsequent measurement at amortized cost,
Capital Structure, Investments, and Financing Activities 306
Financial
Operational
Impairment
Financial income
and expenses
Other operating
income or other
operating expenses
Foreign currency
gains or losses
Group equity (upon
derecognition:
reclassification to
financial income
and expenses)
Other operating
income or other
operating expenses
Financial income
and expenses
operating
expenses)
derecognition:
reclassification to
other operating
income or other
Financial income
and expenses
Group equity (upon
Other operating
income or other
operating expenses
Net gain and net
loss on
disposal/value
adjustments
Financial
loss
fair value through profit or
Operational
Subsequent measurement at
Financial income
and expenses
Financial
and reversals of
impairment losses
of financial assets
(net)
Financial income
and expenses
Impairment losses,
losses/reversals of
impairment losses
Impairment losses,
and reversals of
impairment losses
of financial assets
(net)
•
•
On initial recognition, financial assets are assigned to one of the following measurement categories which also
correspond to the financial instrument classes as defined in IFRS 9:
Classification and subsequent measurement
Cash and cash equivalents comprised the following items:
Cash and cash equivalents comprise short-term investments with a maximum maturity of up to three months,
which can be readily converted to a determined amount of cash.
Cash and cash equivalents
Accounting and measurement policies
(35) Cash and cash equivalents
The non-controlling interests in consolidated equity and profit or loss essentially related to the non-controlling
interests in Versum Materials Taiwan Co., Ltd., Taiwan; Merck Ltd., Thailand; and in the listed company
PT Merck Tbk., Indonesia.
The calculation of non-controlling interests was based on the reported equity of the subsidiaries concerned.
Non-controlling interests
(€ -90 million) and was paid to E. Merck KG in fiscal 2023. Merck & Cie KmG is a partnership under Swiss law that
is controlled by Merck KGaA but distributes its operating result directly to E. Merck KG. This distribution is a
payment to shareholders and is therefore also presented under changes in equity.
Based on the proposed appropriation of profits, the profit transfer to E. Merck KG for fiscal 2023, including changes
in reserves, amounted to € -746 million. This consisted of the profit/loss transfer to E. Merck KG (€ -692 million),
the profit transfer to Merck KGaA (€ -4 million), the change in profit carried forward by E. Merck KG (€ 1 million)
and the profit transfer from Merck & Cie KmG, Switzerland, to E. Merck KG (€ -52 million). In the previous year, the
profit transfer to E. Merck KG including changes in reserves amounted to -868 million. This consisted of the profit
transfer to E. Merck KG (€ -684 million), the profit transfer to Merck KGaA (€ 7 million), the change in profit carried
forward by E. Merck KG (€ -100 million) and the profit transfer from Merck & Cie KmG to E. Merck KG
withdrawal by E. Merck KG
-801
-90
-682
-52
Profit transfer to E. Merck KG/
transfer adjusted for trade tax
23
-12
€ million
Other operating
Cash, bank balances and cheques
Cash and cash equivalents
Detailed information on the measurement methods for financial assets measured at fair value are presented in
Note (43) "Information on fair value measurement”.
Financial assets are initially measured at fair value and recognized as of the settlement date. For financial
assets not subsequently measured at fair value through profit or loss in subsequent periods, initial
measurement also includes directly attributable transaction costs. Any difference between the fair value of a
financial instrument on initial recognition (Level 2 and 3) and the transaction price is recognized in income
using the straight-line method over the duration.
Recognition and initial measurement
This section does not cover the accounting and measurement policies for derivative financial instruments. They
are presented separately in Note (39) "Derivative financial instruments”.
Other financial assets
Accounting and measurement policies
(36) Other financial assets
Capital Structure, Investments, and Financing Activities 305
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
€ 456 million). This mainly related to cash and cash equivalents at subsidiaries that are subject to capital controls.
The maximum default risk was equivalent to the carrying amount of cash and cash equivalents.
Cash and cash equivalents included restricted cash amounting to € 404 million (December 31, 2022:
Changes in cash and cash equivalents as defined by IAS 7 are presented in the consolidated cash flow statement.
1,854
1,982
610
1,244
1,481
501
Dec. 31, 2022
Dec. 31, 2023
Short-term cash investments (up to 3 months)
Result of E. Merck KG before reciprocal profit
income or other
operating expenses
Other operating
income or other
operating expenses
Financial income
and expenses
517
80
842
644
198
Subsequent measurement at fair value through
other comprehensive income
122
122
597
200
Other
4
4
4
4
1
Loans against third parties
126
200
Equity instruments
643
643
125
Contingent consideration
502
436
66
396
333
63
63
Subsequent measurement at fair value through
profit and loss
81
1
80
199
1
198
Debt instruments
516
516
4
122
204
4
Results recognized directly in equity
(value adjustments)
Reclassification of the cumulative results
previously recognized directly in equity in
the retained earnings when asset is
disposed
Financial
income
Other operating
Foreign currency
gains and losses
recognized directly
in equity
Dividend income
gains or losses
Value adjustments
Results recognized directly in equity
(value adjustments)
Reclassification of the cumulative results
previously recognized directly in equity in
the retained earnings when asset is
disposed
Operational
Asset type
Foreign currency
Subsequent measurement
at fair value through other
comprehensive income
Category
The following table provides details on the measurement effects of equity instruments on the consolidated
balance sheet and the consolidated income statement:
The recognition of income from the unwinding of discounts and income and expenses from interest rate-induced
changes in contingent considerations measured at fair value through profit or loss subsequent to initial
recognition are reported in financial income and expenses.
Financial income
and expenses
Financial income
and expenses
Financial income
and expenses
(applying the
effective interest
method)
Interest income or
expenses
Foreign currency
gains and losses
recognized directly
in equity
Financial income
and expenses
Financial income
Operational
201
Subsequent measurement at amortized cost
Total
non-current
current
Total
non-current
current
€ million
Dec. 31, 2022
Dec. 31, 2023
At the reporting date, other financial assets were composed as follows:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 307
Financial income
Other operating
income
Other operating
income or other
operating expenses
Financial income
and expenses
Financial income and expenses
Financial
Other operating income or other operating
expenses
Subsequent measurement
at fair value through profit
or loss
125
changes in reserves
-778
E. Merck KG
2022
2023
Result of E. Merck KG before reciprocal profit
transfer, adjusted for trade tax
€ million
The reciprocal net profit/loss transfer between E. Merck KG and Merck KGaA as stipulated by the Articles of
Association was as follows:
The allocation of net profit/loss is based on the net income of both E. Merck KG and Merck KGaA, determined in
accordance with the provisions of the German Commercial Code. These figures are adjusted for trade tax
and/or corporation tax and create the basis for the allocation of net profit/loss. The adjustment for corporation
tax is made to compensate for the difference in the tax treatment between the general partner and the limited
liability shareholders. Corporation tax is only calculated on the income received by the limited liability
shareholders. Its equivalent is the income tax applicable to the partners of E. Merck KG which must be paid by
them directly. The adjustment thus ensures that the share in net profit corresponds to the respective interests
held by the two shareholder groups.
E. Merck KG and Merck KGaA engage in reciprocal net profit transfers. This makes it possible for E. Merck KG,
the general partner of Merck KGaA, and the shareholders to participate in the net profit/loss of Merck KGaA in
accordance with the ratio of the general partner's equity interest and the subscribed capital (70.274% or
29.726% of the equity capital).
Merck KGaA
2,073
-7
-56
-5
-5
E. Merck KG's share of net profit
Dec. 31, 2023
Tax effect
Reclassification to assets
2,136
E. Merck KG
Merck KGaA
-12
partner's equity to equity capital)
-684
684
-692
692
(70.274%)
Profit transfer to E. Merck KG (ratio of general
974
23
985
-12
(100%)
Basis for appropriation of profits
54
4
Corporation tax
919
980
Net income of Merck KGaA before reciprocal
profit transfer
-88
-920
-1,001
-15
-1,013
-71
16
194
1,117
1,230
-15
-98
1,261
1,159
11
91
1,824
1,992
-23
-145
equity
difference
recognized in
Gains/losses
139
Profit/loss transfer to Merck KGaA (ratio of
subscribed capital to equity capital)
-5
5
-1,016
3,086
3,151
2522
-95
Reclassification to profit or loss
-17
98
Fair value adjustment
-2
Gains/losses recognized in equity
Jan. 1, 2023
-12
-54
3,086
3,151
-12
-54
Dec. 31, 2022
10
-868
(29.726%)
-4
Merck & Cie
KMG
Total
Merck KGaA
KMG
€ million
Merck & Cie
2022
2023
Merck KGaA
Appropriation of profits and changes in reserves
€ 284 million (2022: € 284 million), the profit carried forward of the shareholders after the dividend payment
would amount to € 34 million (2022: € 34 million). Based on the proposed dividend payment to the
shareholders, E. Merck KG would be entitled to withdraw € 682 million (2022: € 801 million), meaning that
E. Merck KG would be entitled to a profit brought forward of € 81 million (2022: € 80 million).
A dividend of € 2.20 per share was distributed for fiscal 2022. The dividend proposal for fiscal 2023 is
unchanged at € 2.20 per share. With the proposed dividend payment to shareholders amounting to
34
-284
318
34
-284
80
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 304
Total
Profit transfer to E. Merck KG
-52
-90
-746
-694
-52
Profit transfer to E. Merck KG including
7
-100
-100
1
1
Change in profit carried forward of E. Merck KG
7
-4
-4
Profit/loss transfer to Merck KGaA
-774
-684
-90
-743
-692
-801
319
Profit carried forward of limited liability shareholders
(preliminary)
Dividend proposal
2022
2023
Net income
€ million
The profit distribution to be resolved by shareholders also defines the amount of that portion of net profit/loss
freely available to E. Merck KG. If the shareholders resolve to carry forward or to allocate to retained earnings a
portion of Merck KGaA's net retained profit to which they are entitled, E. Merck KG shall be obliged to allocate
to the profit carried forward/retained earnings of Merck KGaA a comparable sum determined according to the
ratio of subscribed capital to general partner's equity. This ensures that the retained earnings and the profit
carried forward by Merck KGaA correspond to the ownership ratios of the shareholders on the one hand and
E. Merck KG on the other hand. Consequently, for distributions to E. Merck KG, the available amount is the
amount that results from netting the profit transfer of Merck KGaA with the amount either allocated or
withdrawn by E. Merck KG from retained earnings/profit carried forward. This amount corresponds to the sum
paid as a dividend to the shareholders and reflects their pro rata shareholding in the company.
Based on the profit transfer, the appropriation of profits by Merck KGaA was as follows:
Appropriation of profits
€ 692 million to E. Merck KG (2022: € 684 million). In addition, an expense from corporation tax charges was
reported in the amount of € 4 million (2022: expense of € 54 million).
The result of E. Merck KG adjusted for trade tax, on which the appropriation of profits is based, amounted to
€ -12 million (2022: € 23 million). This resulted in a profit/loss transfer to Merck KGaA of € -4 million
(2022: € 7 million). Merck KGaA's net income adjusted for corporation tax, on which the appropriation of its
profit is based, amounted to € 985 million (2022: € 974 million). Merck KGaA transferred a profit of
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 303
242
700
285
683
Net income
-54
-4
Corporation tax
7
-7
Portion limited
4
Portion
liability
shareholders
81
Profit carried forward E. Merck KG
-682
Withdrawal by E. Merck KG
Retained earnings limited liability shareholders
Transfer to revenue reserves
Withdrawal from revenue reserves
Profit carried forward previous year
76
180
34
80
242
700
285
683
Portion limited
liability
shareholders
E. Merck KG
Portion
E. Merck KG
14
235
250
797
Eurobond 2019/2031
€
500
2,375
July 2030
497
497
797
Eurobond 2022/2030
750
0.500
July 2028
747
748
Eurobond 2020/2028
€
600
€
July 2031
0.875
800
June 20793
749
632
Hybrid bond 2019/2079
€
500
1.625
June 20792
498
499
Hybrid bond 2019/2079
€
500
3,375
Dec. 2074¹
499
499
Hybrid bond 2014/2074
€
0.375
July 2027
598
598
702
Current financial debt
125
122
Lease liabilities (IFRS 16)
transactions)
30
77
Liabilities from derivatives (financial
11
20
Loans from third parties and other financial debt
259
206
Liabilities to related parties
203
277
Bank loans
600
1,228
2.875
USD bond 2015/2025
1,498
Eurobond 2019/2027
€
500
1.875
July 2026
498
499
Eurobond 2022/2026
€
750
0.125
July 2025
747
748
Eurobond 2020/2025
USD
1,600
3.250
March 2025
1,444
Bonds (current)
750
Hybrid bond 2020/2080
2,500
375
financing
commitments
Interest
Utilization
Financing
commitments
from banks
Utilization
commitments
from banks
Bilateral credit agreement
2,500
Syndicated loan
Financing
Maturity of
Dec. 31, 2022
Dec. 31, 2023
Loan agreements represent another major source of financing for Merck. On the balance sheet date, the
financing commitments from banks in respect of Merck were as follows:
Traditionally, the capital market represents a major source of financing for Merck, for instance via bond issues.
As of December 31, 2023, there were liabilities of € 3.9 billion from a debt issuance program most recently
renewed in fiscal 2023 (December 31, 2022: € 4.5 billion). In addition, Merck had access to a commercial paper
program to meet short-term capital requirements with a volume of € 2.5 billion (December 31, 2022:
€ 2 billion), none of which was utilized as of December 31, 2023, or the prior-year reporting date.
The objective of capital management is to ensure the necessary financial flexibility in order to maintain long-
term business operations and realize strategic options. Maintaining a stable investment grade rating, ensuring
liquidity, limiting financial risks, as well as optimizing the cost of capital are the objectives of our financial policy
and set important framework conditions for capital management. In this context, net financial debt as well as
gearing, calculated as the ratio of EBITDA pre to net financial debt, are important capital management
indicators at Merck.
Capital management
€ million
variable
2027
375
There were no indications that the availability of extended credit lines was restricted.
203
3,078
284
3,158
2027
fix
7
7
< 1 year
variable
203
203
277
277
Various bank credit lines
Project financing
with banks
<3 Jahre
variable
Information on liabilities to related parties can be found in Note (45) "Related party disclosures”.
Non-current liabilities to related parties in the amount of € 990 million (December 31, 2022: € 660 million)
consisted of liabilities to E. Merck Beteiligungen KG.
The financial debt was not secured by liens or similar forms of collateral. The loan agreements do not contain
any financial covenants. The average borrowing cost on December 31, 2023, was 2.1% (December 31, 2022:
1.9%).
A partial buyback of the nominal volume of € 275 million of hybrid bonds issued in 2019 and 2020 took place
on November 20, 2023.
transactions)
Liabilities from derivatives (financial
48
47
Loans from third parties and other financial debt
660
990
Liabilities to related parties
7
Bank loans
8,126
7,802
Bonds (non-current)
€
1,000
1.625
Sep. 20804
998
840
Lease liabilities (IFRS 16)
€
Non-current financial debt
less:
A partial buyback of the nominal volume of € 250 million of a hybrid bond issued in 2019 took place on
September 9, 2022.
The hybrid bonds issued by Merck KGaA are bonds for which the leading rating agencies have given equity
credit treatment to half of the issuances, thus making the issuances more favorable to Merck's credit rating
than traditional bond issues. The bonds are recognized in full as financial liabilities in the balance sheet.
Although Merck intends to repay them at the earliest possible date, these bonds are principally reported as non-
current financial debt for accounting purposes.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 310
5 Excluding current derivatives (operational) and contingent considerations, which are recognized in the context of business combinations according to IFRS 3.
6 Not defined by International Financial Reporting Standard (IFRS).
4 Merck has the right to prematurely repay this hybrid bond issued in September 2020 for the first time in September 2026.
3 Merck has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in June 2029.
2 Merck has the right to prematurely repay this tranche of the hybrid bond issued in June 2019 for the first time in December 2024.
1 Merck has the right to prematurely repay this tranche of the hybrid bond issued in December 2014 for the first time in December 2024.
247
8,328
1,854
1,982
459
7,500
Net financial debt6
Current financial assets5
Cash and cash equivalents
10,428
9,941
366
9,200
9,239
393
Financial debt
€
600
0.005
Level 1
<50
Level 1
<50
Level 1
<50
Level 1
<50
<25
Level 3
Level 3
<50
422
436
Fair Value:
hierarchy level
IFRS 13
Fair value as of
Fair Value:
hierarchy level
IFRS 13
Dec. 31, 2023
<50
Level 3
<50
Level 3
Level 3
<15
Level 3
<15
Storm Therapeutics Limited, UK
Level 3
<50
Level 3
<25
Mosa Meat B.V., Netherlands
Level 3
<15
Level 3
<25
Celestial AI Inc., United States
Level 3
<25
Level 3
<25
Artios Pharma Limited, UK
Wiliot Ltd., Israel
Precigen, Inc., United States
Vera Therapeutics, Inc., United States
DNA Script S.A.S., France
7
50
47
3
Derivatives without a hedging relationship
16
16
16
27
27
182
154
28
194
161
33
32
Derivatives without a hedging relationship
(financial transactions)
Other debt instruments
46
Asceneuron SA, Switzerland
53
Derivatives with a hedging relationship
M Ventures portfolio
€ million
Fair value as of
Equity interests with subsequent measurement at fair value through other comprehensive income mainly
related to shares in the following companies in particular:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 308
As in the previous year, contingent consideration primarily included claims arising from the sale of the
biosimilars business to Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, in 2017. The reduction in
contingent consideration was mainly attributable to payments received.
The increase in other current financial assets with subsequent measurement at amortized cost related to
deposits with banks. Debt instruments with subsequent measurement at fair value through other
comprehensive income increased in the year under review due to the purchase of commercial papers.
1,278
957
321
1,480
981
499
53
53
37
37
Financial assets
(operational)
(operational)
Level 3
<15
Level 3
18
Level 3
14
Level 1
Level 1
2
Level 3
10
Level 3
9
Level 3
22
Level 3
13
InfraServ GmbH & Co. Wiesbaden KG, Germany
Level 3
10
Level 3
17
Level 3
Total
643
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 309
Dec. 2023
600
Eurobond 2019/2023
Currency
million
%
Maturity
€ million
€ million
Interest rate
Dec. 31, 2022
Dec. 31, 2023
Nominal value
The composition of financial debt as well as a reconciliation to net financial debt are presented in the following
table:
The accounting and measurement policies for lease liabilities and derivatives are presented in Notes
(21) "Leasing" and (39) "Derivative financial instruments".
Except for lease liabilities and derivatives with negative market values, financial debt is initially recognized at
fair value and subsequently measured at amortized cost using the effective interest method.
Financial debt/capital management
Accounting and measurement policies
(37) Financial debt/Capital management
516
Currency
translation
Other (no notation in an active market)
Telios Pharma, Inc., United States
Other (notation in an active market)
Level 3
<15
Level 3
<15
Level 3
<15
Level 3
<15
Level 3
<15
Plexium Inc., United States
Nouscom AG, Switzerland
Formo Bio GmbH, Germany
Level 3
<15
Level 3
<15
ElectronInks Inc., United States
1
Other (notation in an active market)
Level 1
Level 1
IDRX, Inc., United States
Level 1
34
Level 1
0
MoonLake Immunotherapeutics AG, Switzerland
Level 1
0
Level 1
152
MoonLake Immunotherapeutics Ltd., Cayman Islands
94
207
Other minority interests
Level 3
181
Level 3
200
Other (no notation in an active market)
4
Cost of cash flow
hedge reserve
23
Cash flow hedge
16,610
-1,539
63
15,134
3,326
3,326
1,140
-31
1,109
3,326
1,140
-31
4,435
-239
-239
-868
Transactions with no change of control
Change in scope of consolidation/Other
Dec. 31, 2022
Jan. 1, 2023
Profit after tax
earnings
Retained
for equity
instruments
plans
reserve
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 301
Capital Structure, Investments, and Financing
Activities
(34) Equity
Accounting treatment of the general partner's equity
As a partnership limited by shares, Merck KGaA has two different shareholder groups who have contributed to
the company: the general partner E. Merck KG, as the personally liable partner; and the shareholders.
From an accounting perspective, the contributions of both shareholder groups are treated as equity, regardless
of the general partner's option to terminate its capital share. This treatment is based on the provision in the
Articles of Association of Merck KGaA stating that the limited liability shareholders may decide on the
conversion of the company into a stock corporation and thus limit the general partner's settlement claim to
fulfillment in equity instruments.
Equity capital/Capital reserves
The equity capital of the company consisted of the subscribed capital composed of shares and the equity
interest held by the general partner E. Merck KG (general partner's equity). As of the balance sheet date, the
company's subscribed capital amounting to € 168 million was divided into 129,242,251 no-par value bearer
shares plus one registered share. Each share therefore corresponded to € 1.30 of the subscribed capital. The
amount resulting from the issue of shares by Merck KGaA exceeding the nominal amount was recognized in the
capital reserves. The equity interest held by the general partner amounted to € 397 million. As in the previous
year, there were no changes in subscribed capital in fiscal 2023.
Retained earnings
Gains/losses recognized in equity
Retained earnings developed as follows:
Jan. 1, 2022
Profit after tax
Gains/losses recognized in equity
Comprehensive income
Dividend payments
Capital increases
Profit transfer to/from E. Merck KG including changes in reserves
-868
Retained
earnings/net
retained profit
Remeasurement Fair value reserve
of defined benefit
€ million
Comprehensive income
Accounting and measurement policies
-19
-1
-746
-1
Change in scope of consolidation/Other
31
Dec. 31, 2023
20,635
-4
-592
-27
186
Transactions with no change of control
20,228
Capital Structure, Investments, and Financing Activities 302
Gains/losses recognized in equity
Gains/losses recognized in equity developed as follows (see also Note (39) “Derivative financial
instruments"):
€ million
Jan. 1, 2022
Profit after tax
Gains/losses recognized in equity
Reclassification to profit or loss
Reclassification to assets
Dividend payments
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
-746
Fair value adjustment
Capital increases
-2
Profit transfer to/from E. Merck KG including changes in reserves
21
18,811
-401
53
18,463
18,811
-401
53
18,463
Tax effect
2,824
2,824
-284
2,796
160
-284
2,824
-28
-187
160
-187
7,412
current non-current
current non-current
non-current
current
Currency
Cash flow hedge
€ million
Financial transactions
Financial transactions
Negative market values
Positive market values
current non-current
December 31, 2023
The fair values of the derivatives were as follows:
1 The virtual power purchase agreements do not have fixed nominal amounts.
10,014
9,487
5,255
Transactions in operating
business
non-current
No hedge accounting
5
47
40
5,255
27
agreements
18
2
47
3
37
Virtual power purchase
27
Currency
2
77
47
3
27
5
37
77
18
Other financial
liabilities
Other financial
assets
Financial debt
4,760
Derivatives without a
hedging relationship
Financial
transactions
Currency
operating
business
hedging relationship
Currency
Derivatives with a cash flow
Other financial
assets
Positive market
values
Virtual power
purchase
agreements
Transactions in
during the term
Presentation on
the balance
sheet
Market value
item
Type of Type of hedged
collateral
Hedging relationship
Changes in fair value in the
consolidated income statement
and the consolidated statement of
comprehensive income
77
Derivative financial instruments are recognized in the consolidated balance sheet, the consolidated income
statement, and the consolidated statement of comprehensive income - with the exception of the balance sheet
treatment of amounts included directly from the reserve in the initial cost or in the other carrying amount of a
non-financial asset or liability - as follows:
Fair value
Transactions in
operating
business
Negative
market values
Positive market
values
Negative
market values
Positive market
values
Negative
market values
adjustments
(in equity)
Fair value
adjustments
(in equity)
2,075
4,760
2,075
current
non-current
current
Virtual power purchase agreements¹
No hedge accounting
Cash flow hedge
€ million
Currency
Currency
Dec. 31, 2022
Dec. 31, 2023
The nominal amounts of the derivatives held by Merck at the respective reporting dates were as follows:
Other operating income
Other operating expenses
Other financial
assets
Other financial
liabilities
Financial income and expenses
Other
operating
expenses
at maturity
Other
operating
income
7,412
7
The following table presents the potential netting volume of the reported derivative assets and liabilities:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
123
-83
123
-83
Net presentation
Netting
presentation
Gross
-102
-102
114
Potential netting volume
114
presentation
Gross
Derivative liabilities
Derivative assets
€ million
December 31, 2022
Derivative liabilities
Derivative assets
€ million
Netting Net presentation
December 31, 2023
due to master
netting
agreements
Potential net
amount
of currency
forwards
options
Time value of
€ million
Spot
component
Intrinsic
Cash flow hedge reserve
Forward
component
Cost of cash flow hedge reserve
due to financial
collateral
The reserves for cash flow hedges and the cost of cash flow hedging of the Group related to the following
hedging instruments (see also Note (34) "Equity"):
63
60
-60
amount
Potential net
due to financial
collateral
due to master
netting
agreements
Potential netting volume
74
-62
40
-40
-23
18
Merck has concluded virtual power purchase agreements. As these agreements are designed as contracts for
difference, they fulfill the definition of contracts to buy non-financial items that can be settled net in cash with
the characteristics of derivative financial instruments and are measured at fair value through profit or loss in
accordance with IFRS 9. As no physical electricity is purchased, the own use exemption that allows certain
derivative financial instruments to be treated as executory contracts does not apply.
19
current
non-current
current
current non-current
non-current
current
No hedge accounting
Currency
Cash flow hedge
non-current
€ million
Financial transactions
business
Financial transactions
Transactions in operating
Transactions in operating
Negative market values
Positive market values
December 31, 2022
Capital Structure, Investments, and Financing Activities 313
business
As in the previous year, all hedging relationships were transaction related. Netting of derivatives from an
economic perspective was possible due to the existing framework agreements on derivatives trading that Merck
had entered into with commercial banks. Actual netting only takes place in the case of insolvency of the
contract partner. Derivatives were not offset on the face of the balance sheet.
53
53
34
30
46
60
16
19
4
46
7
30
Virtual power purchase
agreements
16
Currency
19
4
30
46
7
16
30
30
Capital Structure, Investments, and Financing Activities 312
With the exception of liabilities from derivatives and contingent considerations, which are recognized in the
context of business combinations according to IFRS 3, other financial liabilities are initially measured at fair
value and in subsequent periods at amortized cost, applying the effective interest method. The accounting and
measurement policies of derivatives are presented in Note (39) "Derivative financial instruments".
Hedging ineffectiveness may occur in the timing of forecast cash flows or if hedged items are dissolved.
Derivatives that do not or no longer meet the documentation or effectiveness requirements for hedge
accounting, whose hedged item no longer exists, or for which hedge accounting rules are not applied are
classified as financial assets or liabilities at fair value through profit or loss depending on their balance.
Where options are used as hedging instruments, only their intrinsic value is designated as the hedging
instrument. Changes in the fair value of the time value component of options that are used for hedge
accounting are recognized in other comprehensive income and in the reserve for the cost of cash flow hedging
within equity. The subsequent accounting of these amounts depends on the type of hedged transaction.
Where forward contracts are used as hedging instruments, only the spot element is designated as the hedging
instrument. Changes in the fair value of the forward element in forward contracts are recognized in other
comprehensive income in the reserve for the cost of cash flow hedging within equity. The subsequent
accounting of these amounts depends on the type of hedged transaction.
In this presentation, effects of cash flow hedges are taken into consideration in the equity of the Group. The net
exposure of each of the above currencies consisted of the following components:
planned cash flows in the next 12 months in the respective currency, less
the nominal values of hedging instruments of these planned cash flows.
The planned cash flows in the next 12 months are analyzed and divided into subsets in accordance with the risk
management strategy. In the first subset, 25% of a regularly reviewed basket of currencies is hedged. The
second subset hedges a more flexible basket of currencies selected on the basis of hedging costs and
correlation with the euro. The hedging strategy achieves an economic hedge ratio of at least 40% across all
hedging subsets. Depending on scenario analyses, this can be increased to up to 90% using a rule-based
approach. As in the previous year, balance sheet items in the above currencies were economically hedged by
derivatives in full if they did not correspond to the functional currency of the respective Group company.
Accordingly, they do not affect the net exposure presented above.
The impact of cash flow hedge accounting for forecast transactions in foreign currency was as follows for the
major currencies:
December 31, 2023
€ million
Notional amount
CNY
141
JPY
TWD
USD
922
114
78
52
839
922
114
KRW
78
12
7
-59
100
16
22
15
87
-61
-9
-17
14
-15
Exchange rate +10%
(depreciation vs. €)
Consolidated income statement
Equity (other comprehensive income)
59
-100
42
-16
-22
-15
-87
-182
Consolidated income statement
Equity (other comprehensive income)
52
thereof: current
January 2024 -
December 2024
1:1
Change in value of outstanding hedging
instruments since January 1, 2023
22
5
1
6
Change in value of hedged item used to
determine hedge effectiveness since
-22
-5
January 2024 -
December 2024
1:1
-1
-6
January 1, 2023
Weighted average hedging rate
7.63
146.50
1,415.00
33.26
1.10
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
0
839
1:1
January 2024 -
December 2024
1:1
thereof: non-current
Fair Value of the hedging instrument
22
5
1
6
thereof: positive market values
23
5
January 2024 -
December 2024
1
8
thereof: negative market values
-2
-2
January 2024 -
Maturity profile
December 2024
Hedge ratio¹
1:1
1
Exchange rate -10%
(appreciation vs. €)
867
151
47
thereof: interest accruals
861
861
732
1,241
122
1,119
1,127
47
129
Total
Non-current
Current
Total
Non-current
Current
thereof: liabilities to related parties
Miscellaneous other financial liabilities¹
in Mio. €
998
732
Dec. 31, 2022
50
Liabilities from derivatives (operational)
Merck only uses derivatives as hedging instruments. Merck uses the dollar offset method as well as regression
analyses to measure hedge effectiveness.
The IFRS 9 provisions are applied for hedge accounting. Hedging transactions are entered into for highly
probable forecast transactions in foreign currencies and for hedging fair values of assets on the balance sheet.
Cash flow hedge accounting for forecast transactions in foreign currency means the hedged item is recognized
at a fixed exchange rate on a net basis instead of being recognized at the spot exchange rate at the transaction
date. As a result of hedging fair values of assets on the balance sheet, the compensating changes in value of
the corresponding hedged item and hedging instrument offset each other.
Derivative financial instruments
Accounting and measurement policies
(39) Derivative financial instruments
The liabilities to related parties primarily consist of liabilities to E. Merck KG.
1 Previous year has been adjusted, please refer to Note (2) "Reporting principles".
1,294
141
50
1,153
147
1,005
Other financial liabilities¹
53
19
34
25
18
7
1,152
Dec. 31, 2023
Other financial liabilities comprised the following:
Total
-42
-2
77
9
7
5
52
December 31, 2022
€ million
-12
Net exposure
CNY
JPY
KRW
TWD
USD
-591
997
163
216
CHF
-29
-3
-47
Other financial liabilities
Accounting and measurement policies
(38) Other financial liabilities
294
117
420
Consolidated income statement
Equity (other comprehensive income)
-59
47
3
29
12
42
2
-93
-10
-9
-6
-58
Consolidated income statement
Equity (other comprehensive income)
59
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
value of
options
-12
swaps
The option to recognize dividend payments and profit withdrawals in the cash flows from financing activities is
exercised in determining the cash flows from financing activities.
Financing cash flow
Accounting and measurement policies
(41) Financing cash flow
Capital Structure, Investments, and Financing Activities 316
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
The currency result from equity instruments with subsequent measurement at fair value through other
comprehensive income was recognized in other comprehensive income.
In the table above, interest income or expenses relating to derivatives without a hedging relationship, with the
exception of the virtual power purchase agreements, are reported as a component of fair value adjustments.
31
Furthermore, the net reporting option has been exercised to report cash receipts and payments for items in
which the turnover is quick, the amounts large, and the maturities short. This primarily relates to rolling
financing by way of commercial paper and short-term bank loans reported under "Payments from new
borrowings of other current and non-current financial debt" and "Repayment of other current and non-current
financial debt".
3
-5
29
1
79
-51
-27
-27
-18
-18
34
30
The change in financial debt was as follows:
Cash
financial liabilities
Other current and non-current
1,195
-420
697
918
E. Merck Beteiligungen KG
Financial liabilities to E. Merck KG and
2023
2023
Changes
in scope
of
consoli- Dec. 31,
dation
Fair
value
adjust-
ment
effects
Ex-
change
rate
Change
in lease
liabilities
Lease
interest
Cash Repay-
inflows
ments
Jan. 1,
2023
€ million
Non-cash
Other
9,510
30
1
2023
Subsequent measurement at fair
2
2
2022
Debt Instruments
2023
2022
thereof: investments held
95
2023
derecognized
2023
thereof: investments
2022
Equity Instruments
2023
income
value through other comprehensive
Subsequent measurement at fair
2022
1
95
2022
2022
Total
2023
2022
relationship (net)
2023
Derivatives without a hedging
(without derivatives)
2022
value through profit or loss
value through profit or loss
Subsequent measurement at fair
2022
amortized cost
2023
Subsequent measurement at
Financial debt
(without derivatives)
30
30
2023
-5
Financial debt
519 -1,973
1,216 -2,394
Foreign exchange risks
The Report on Risks and Opportunities included in the combined management report provides further
information on the management of financial risks.
Merck uses marketable forward exchange contracts, options and interest swaps as hedging instruments. The
strategy to hedge interest rate and foreign exchange rate fluctuations arising from forecast transactions and
transactions already recognized in the balance sheet is set by a risk committee, which meets on a regular basis.
The use of derivatives is regulated by extensive guidelines and subject to ongoing risk controls by Group
Treasury. Speculation is prohibited. The strict separation of functions between trading, settlement and control
functions is ensured. Derivatives are only entered into with banks that have a good credit rating. Related
default risks are continuously monitored.
Market fluctuations with respect to foreign exchange and interest rates represent significant profit and cash flow
risks for the Group. Merck aggregates these Group-wide risks and steers them centrally, partly by using
derivative financial instruments. To estimate existing risks of foreign exchange and interest rate fluctuations,
Merck uses scenario analyses. Merck is not subject to any material risk concentration from financial
transactions.
(42) Management of financial risks
The amount of unused credit lines that could be employed for future operating activities and to meet obligations
and information on changes in financial debt can be found in Note (37) "Financial debt/Capital
management".
Fair value adjustments of other current and non-current financial liabilities were entirely attributable to
liabilities from derivatives. In the consolidated cash flow statement, cash changes of assets from derivatives of
€ 609 million (2022: € 711 million) were reported together with repayments of other current and non-current
financial debt of € 1,973 million (2022: € 2,604 million) in the item “Repayments of other current and non-
current financial debt" with a net amount of € 1,364 million (2022: € 1,893 million). In the above reconciliation,
changes of assets from derivatives were reported separately, as they did not form part of financial liabilities.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 317
Interest payments for leases were recognized in operating cash flow but served as a reconciliation item in the
above table as the underlying lease liabilities were a component of financial debt. Changes in lease liabilities
included additions and retirements of right-of-use from leases and the effects from unwinding of the discount
on lease liabilities.
Owing to the international nature of its business, Merck is exposed to transactional foreign exchange risks
within the scope of both its business activities and financing activities. Foreign exchange risks are continuously
analyzed, and different hedging strategies used to limit or eliminate these risks.
1 The previous year's figures have been adjusted, see consolidated cash flow statement.
-691
711
-37
Derivative assets (current and non-
current)
7 10,428
7 9,510
-13
-13
663
663
97
-16
187
The entire foreign exchange exposure is divided into several defined subsets with different risk profiles and
systematically hedged using suitable hedging instruments. Hedging is performed based on a regularly reviewed
basket of currencies. The maximum time horizon for hedging is 12 months.
.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 319
-593
USD
TWD
KRW
JPY
CNY
CHF
Exchange rate +10%
(depreciation vs. €)
Foreign exchange risks from the following transactions are economically hedged through the use of foreign
exchange contracts and currency options:
Exchange rate -10%
(appreciation vs. €)
€ million
The following table shows the net exposure and the effects of transactional exchange rate movements of the key
currencies against the euro in relation to the net income and equity of the Group on the balance sheet date:
December 31, 2023
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 318
firm purchase commitments over the next 12 months in non-functional currency.
forecast transactions in non-functional currency, the expected probability of which is very high for the next
12 months, and
Foreign exchange risks from the following transactions are hedged using foreign exchange contracts and
currency options applying hedge accounting:
receivables from and liabilities to third parties in non-functional currency.
•
intragroup financing in non-functional currency, and
Net exposure
10,428
-12
187
Cash
€ million
2022
-27
-620
609
-16
Derivative assets (current and non-
current)
9,941
Non-cash
-15
-83
201
-14
8,746
-15
603
-83
201
-14
603
97
Changes
Jan. 1,
2022
-12
9,906 1,281 -2,604
10,801 2,917 -4,217
Financial debt
financial liabilities¹
Other current and non-current
918
1,637 -1,613
894
E. Merck Beteiligungen KG
Change
Financial liabilities to E. Merck KG and
in scope
of
consoli-
dation
Other
Fair
value
adjust-
ment
effects
Ex-
change
rate
in lease
liabilities
Lease
interest
Repay-
ments
Cash
inflows
Dec. 31,
2022
1
-50
1
-46
-10
474
-7
-5
-4
-6
Dec. 31, 2023
Tax effect
-56
Reclassification to assets
-59
-36
22
22
98
67
31
-17
22
-95
Reclassification to profit or loss
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 314
Finance income and expenses were as follows:
-319
Interest expense and similar expenses
Finance income
90
197
2
19
7
Income from the change of the fair value of share-based compensation programs
Other interest income
(40) Finance income and expenses/Net gains and losses from financial
instruments
10
1
1
Capital gain from disposal of debt instruments with subsequent measurement at amortized cost
Income from fair value changes from debt instruments with subsequent measurement at fair
value through profit or loss
69
153
2022
2023
Interest income and similar income
€ million
25
-235
-5
Fair value adjustment (directly
106
16
16
Reclassification to profit or loss
-98
-26
-73
-15
-26
74
11
-145
-11
-93
-40
-23
-12
-11
Jan. 1, 2022
Total
Fair value adjustment (directly
recognized in equity)
recognized in equity)
13
Reclassification to assets
-54
-54
-5
-50
-4
-12
-11
-1
-50
194
-4
-11
-5
2
10
11
Jan. 1, 2023
31
Dec. 31, 2022
Tax effect
-12
Capital loss from disposal of debt instruments with subsequent measurement at amortized cost
Expenses from fair value changes from debt instruments with subsequent measurement at fair
value through profit or loss
2
-15
6
4
Other intangible assets
10
18
Property, plant and equipment
17
22
Capitalized borrowing costs for
Interest income/expenses and similar income and expenses
-30
-9
24
Other interest income/expenses and similar income and
expenses
-2
-5
Other non-current provisions
-7
12
-50
25
39
153
69
-6
-51
-4
2022
amortized cost
-3
2023
Subsequent measurement at
Financial assets
-319
Total
Fair value
adjustments
Net gains and losses
Impairment
losses/reversal of
impairment losses
(net)
Dividends
Currency
differences
€ million
The following table shows the development of net gains and losses, currency differences as well as dividend
income from financial instruments (excluding items recognized in other comprehensive income) by
measurement category:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 315
-235
Disposal
gains/losses
Tax items
-39
-61
Interest income
2022
2023
Subsequent measurement at fair value at amortized cost
thereof: Financial assets
Financial instruments
€ million
Interest and similar income and expenses arose as follows:
-187
Interest
expenses
-125
-322
-2
Financial result
Finance costs
Other interest expenses
-26
-1
-2
Expenses from fair value changes of share-based compensation programs
Currency differences from financing activities
-277
Interest income
Interest
expenses
90
Pension provisions
-13
-14
Leases
-1
Subsequent measurement at fair value through profit or loss
-155
-202
Subsequent measurement at fair value at amortized cost
-2
11
14
Subsequent measurement at fair value through profit or loss
thereof: Financial debt
1
Subsequent measurement at fair value through other
comprehensive income
-3
22
76
-161
33
-203
of currency Interest rate
forwards
December 31, 2022
Transactions in operating
business
Notional amount
In financial terms, the most important agreement is the one concluded between Merck and a wind energy
project developer in the United States for an installed capacity attributable to Merck of 68 megawatts. The wind
farm was commissioned in fiscal 2022. The fair value of the agreement was € 44 million as of the end of the
reporting period (2022: € 50 million). The electricity price of around 40% of the expected production volume
under this virtual power purchase agreement is hedged by a separate hedging instrument. Consequently, the
net effect of the fixed price for the virtual power purchase agreement is zero for this quantity. The accounting
provisions on hedge accounting were not applicable.
In total, the agreements including the hedging instrument resulted in a net gain on fair value measurement of
€ 3 million (2022: € 16 million) that was recognized in other operating income.
A change in the material valuation parameters would have had the following impact on the fair value of the
agreements excluding the hedging instrument:
December 31, 2023
Change in expected future electricity Change in expected annual production
prices
volume
As part of the implementation of its sustainability strategy, Merck has concluded so-called virtual power purchase
agreements in order to cover the purchased electricity volumes in Europe and the United States with energy
certificates from renewable sources. At the reporting date, agreements were in place with wind and solar farm
operators in the United States and Spain. With the exception of a wind farm in the United States, the other wind
and solar farms in Spain and the United States were still under construction. The fundamental structure of all of
the agreements was identical, involving a fixed exercise price for Merck and the assumption of the exposure from
variable spot energy prices in the respective market regions. Merck receives green electricity certificates for the
volumes of electricity produced and attributed to Merck. Merck uses the certificates it receives solely for itself. The
agreements have remaining terms of between 10 and 17 years as of the reporting date.
Change in cost of capital after tax
percentage points
percentage points
€ million
+10
-10
+10
percentage points
-10
Electricity price risks
-100 basis
points
-17
1,778
855
The effects of a parallel shift in the yield curve by +100 or -100 basis points on the consolidated income
statement, as well as on equity relative to all short-term or variable monetary deposits and monetary
borrowings within the scope of IAS 32, except contingent considerations, are presented in the following table.
In the event of a downward shift, the interest rate for instruments subject to a contractual interest rate floor of
zero percent was limited accordingly:
€ million
Change in market interest rate
Effects on consolidated income statement
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 320
Effects on equity (other comprehensive income)
2022
+100 basis
points
21
-100 basis
points
-21
+100 basis
points
17
2023
2,083
-1,228
+1
Change in the fair value of
the virtual power purchase
agreements
Change in cost of capital after tax
percentage points
+1
-1
9
-9
-10
5
-2
2
The risk that Merck cannot meet its payment obligations resulting from financial liabilities is limited by
establishing the required financial flexibility and by Group-wide cash management. Information on issued bonds
and other sources of financing can be found in Note (37) “Financial debt/Capital management”.
Liquidity risks are monitored and reported to management on a regular basis.
Capital Structure, Investments, and Financing Activities 311
€ million
-5
-1
+10
+10
19
-19
6
-6
-3
3
-10
December 31, 2022
Change in the fair value of
the virtual power purchase
agreements
Liquidity risks
Change in expected future electricity Change in expected annual production
prices
volume
percentage points
percentage points
€ million
-625
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Dec. 31, 2023
2,403
3,408
8
2
-3
5
10
134
10
5
45
thereof: negative market values
-2
-3
-34
2
Maturity profile
92
3,408
Dec. 31, 2022
thereof: current
thereof: non-current
Fair value of the hedging instrument
thereof: positive market values
CNY
933
JPY
TWD
USD
933
92
158
134
KRW
January 2023 -
December
2023
158
January 2023 -
3
-5
-10
Weighted average hedging rate
7.32
1,373.00
31.16
1.07
1 The hedging instruments and the corresponding hedged items were denominated in the same currency, therefore the hedge ratio was 1:1.
In addition to the transactional foreign exchange risks described previously, currency translation risks resulted
from the fact that many of Merck's subsidiaries are located outside the euro area and have functional currencies
other than the reporting currency. Exchange differences resulting from translation of the assets and liabilities of
these companies into euro, the reporting currency, are recognized in equity.
Interest rate risks
The Merck Group's net exposure to interest rate changes comprised the following:
January 2023 -
December
2023
Short-term or variable interest rate monetary deposits
Short-term or variable interest rate monetary borrowings
Net interest rate exposure
€ million
-2
-8
136.00
10
2023
January 2023 –
December
2023
January 2023 -
December
2023
Hedge ratio¹
December
1:1
1:1
1:1
1:1
Change in value of outstanding hedging
instruments since January 1, 2022
Change in value of hedged item used to
determine hedge effectiveness since
January 1, 2022
8
2
-3
5
1:1
Jan. 1 Additions
Utilizations
Reclassifica-
tion within
levels
Effects of
currency
translation
Changes in
scope of
consolidation
Dec. 31
-59
(including current leasing receivables)
4
-2
-63
-23
thereof: Level 1/2
Trade and other receivables
-7
€ million
1
-99
-7
2
7
-20
-31
-50
11
Net
-7
-74
-2
-3
-64
-51
11
-1
2
-1
Equity instruments
thereof: Level 3
-64
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Capital Structure, Investments, and Financing Activities 327
(43) Information on fair value measurement
Accounting and measurement policies
Information on fair value measurement
The measurement techniques and main input factors used to determine the fair value of financial instruments
are as follows:
Changes in the expected credit loss rates used in the simplified impairment model did not result in any
significant changes in the additions to and reversals of impairment losses in Level 2.
Fair value determined by official prices and quoted market values (Level 1)
Subsequent measurement at fair
value through other comprehensive
income
-31
Financial instruments concerned
Description of the measurement
technique
Main input factors used to
determine fair values
Shares
Financial assets
-31
1 Purchased or originated credit-impaired receivables.
Loss allowances for financial assets
-34
-1
4
-1
-31
thereof: POCI¹
Contract Assets
-1
-61
-2
thereof: Level 1/2
thereof: Level 3
Other Receivables
(including non-current leasing receivables)
thereof: Level 1
thereof: Level 2
thereof: Level 3
-1
-97
Merck limits credit risks from other financial assets by entering into contracts almost exclusively with contract
partners whose creditworthiness is good. The credit risk from financial contracts is monitored daily on the basis
of market information on credit default swap rates and regularly on the basis of rating information.
11
64
64
4,069
5
1
3
27
36
-9
-4
-2
-12
-35
-63
-3
75
472
3,394
Total
Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2022, were
as follows:
December 31, 2022
€ million
Expected loss rate
Trade accounts receivable before loss
allowances
thereof: credit impaired
-3
Loss allowances
accounts receivable
Not yet due
0.3%
0.8%
Up to 90 days Up to 180 days
past due
past due
3.2%
Up to 360 days
past due
19.6%
More than 360
days past due
54.6%
thereof credit impaired trade
4
-26
Credit risks from other receivables
thereof: Level 3
Loss allowances for financial assets
1 Purchased or originated credit-impaired receivables.
2022
Net
Reclassifica-
tion within
Effects of
Changes in
Jan. 1 Additions
Utilizations
currency
levels translation
scope of
consolidation
Dec. 31
-63
-50
thereof: Level 2
thereof: Level 1
(including non-current leasing receivables)
Other Receivables
Gross other receivables amounted to € 160 million as of December 31, 2023 (December 31, 2022:
€ 136 million). Other receivables of € 157 million were allocated to Level 1 of the three-level impairment model
(December 31, 2022: € 126 million), meaning that the credit loss expected in the next 12 months was used to
determine the amount of impairment when examining the individual credit risk of the respective contract
partner. In addition, non-current leasing liabilities amounting to € 3 million (December 31, 2022: € 2 million)
were allocated to Level 2 of the simplified impairment model. The next table shows the impairment losses
recognized for other receivables.
Credit risks from other financial assets
Bonds
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 326
Impairment losses on financial assets developed as follows:
2023
-32
€ million
(including current leasing receivables)
thereof: Level 1/2
thereof: Level 3
thereof: POCI¹
Contract Assets
thereof: Level 1/2
thereof: Level 3
Trade and other receivables
Derived from active market
Derivatives (without a hedging and currency options
Quoted prices in an active
market
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
Counterparty credit risk is taken into consideration for measurements of financial instruments at fair value. In
the case of non-derivative financial instruments, such as other liabilities or interest-bearing securities, this is
reflected using risk premiums on the discount rate, while discounts on market value (credit valuation
adjustments and debit valuation adjustments) are used for derivatives. Transfers between the individual
hierarchy levels at fair value are made at the end of the month in which the triggering event - for example an
initial public offering - took place.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 330
Assets from contingent considerations (Level 3)
The fair values of assets from contingent considerations are calculated by weighting the expected future cash
flows from milestone payments and royalties using their probability of occurrence and discounting them. The
main parameters when determining contingent considerations are:
•
the estimated probability of reaching the individual milestone events,
the underlying sales planning used to derive royalties, and
.
the discount factor used.
When determining the probability of occurrence of the individual milestone events in connection with the
development of drug candidates, the focus is on empirically available probabilities of success of development
programs in comparable phases of clinical development in the relevant therapeutic areas. To determine the
sales plan, internal sales plans and sales plans of external industry services are used. The discount rate (after
tax) of 6.6% as of December 31, 2023 (December 31, 2022: 6.3% to 7.3%) was calculated using the weighted
average cost of capital.
Income and expenses from the discounting of probability-weighted future milestone payments and license fees
and from changes in discount rates are reported in the financial result.
Significant discretionary decisions and sources of estimation uncertainty
Equity investments in unlisted companies
Determining the parameters that are to be included in discounted cash-flow-methods and deriving the fair value
from observable prices within the scope of equity refinancing are both subject to discretionary decisions and
estimation uncertainty.
Electricity future price
curves, expected electricity
production volumes, discount
factors
Discounting of probability-
weighted future milestone
payments and license fees
Use of recognized actuarial
methods
Contingent considerations
from the purchase of
businesses
Nominal value less factoring
fees
Discounting of expected
future cash flows
Discounting of probability-
weighted future milestone
payments and license fees
Discounting of expected
future cash flows
Consideration of the fair
value of companies in which
the funds are invested
Use of recognized actuarial
methods
Acquisition cost
Nominal value of potentially
sold trade accounts
receivable, average fees for
sales of trade accounts
receivable
Assets from contingent consideration
Electricity future price
curves, expected electricity
production volumes, discount
factors
Net asset values of the fund
interests
Interest rates observable on
the market
Financial liabilities
Subsequent measurement at fair
value through profit or loss
Derivatives (without a hedging
relationship)
Hedging instrument for
virtual power purchase
agreements
Contingent consideration
Sales planning, milestone
payments, probabilities of
regulatory and commercial
events, discount rates
Expected cash flows from
recent business planning,
discount rates
The calculation of the fair value of assets from contingent considerations is subject to significant discretionary
judgment.
The most significant contingent consideration was the future purchase price claim from the sale of the biosimilars
business to a subsidiary of Fresenius SE & Co. KGaA, Bad Homburg vor der Höhe, Germany, on August 31, 2017.
It was calculated by an external valuation expert on initial recognition in 2017 and continued on this basis. As of
December 31, 2023, the carrying amount was € 118 million (December 31, 2022: € 219 million).
If, in the context of determining the fair value of this contingent consideration at the balance sheet date, the
probability of approval as well as the discount factor of the most important development programs had been
estimated to be lower or higher, this would have led to the following changes in the measurement and the
corresponding effects on the profit before income tax:
Change in probability of regulatory approval
€ million
-10%
unchanged
10%
5.8%
-18
3
3
6.3%
Change of discount rate
-21
20
(unchanged)
6.8%
-24
24
Bonds with embedded
settlement option for equity
in an unlisted company
-3
7.1%
December 31, 2023
€ million
Change of discount rate
December 31, 2022
Change in probability of regulatory approval
-10%
unchanged
-8
10%
-3
3
9
6.6%
-6
6
(unchanged)
6.1%
Other debt instruments
Interests in unlisted funds
Contingent considerations
from the sale of businesses
or shares in corporations
Description of the measurement
technique
Forward exchange contracts
Derivatives (without a hedging and currency options
relationship)
Interest rate swaps
Derivatives (with a hedging
relationship)
Forward exchange contracts
and currency options
Financial liabilities
Subsequent measurement at fair
value through profit or loss
Forward exchange contracts
-78
relationship)
Interest rate swaps
Derivatives (with a hedging
relationship)
Financial instruments concerned
Subsequent measurement at fair
value through profit or loss
Financial assets
Fair value determined using input factors observable in the market (Level 2)
Other short-term cash
investments
Subsequent measurement at fair
value through profit or loss
Other debt instruments
Financial liabilities
Subsequent measurement at
amortized cost
Forward exchange contracts
and currency options
Financial debt
Derived from active market
Bonds
Derived from active market
Quoted prices in an active
market
Quoted prices in an active
market
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Capital Structure, Investments, and Financing Activities 328
Publicly-traded funds
Other short-term cash
investments
Subsequent measurement at
amortized cost
Financial liabilities
Liabilities to banks and other
loan liabilities
Description of the measurement
technique
Equity instruments
Equity investments in
unlisted companies
Discounting of expected
future cash flows
Main input factors used to
determine fair values
Expected cash flows from
recent business planning,
average cost of capital,
expected long-term growth
rate
Derived from observable
prices within the scope of
equity refinancing sufficiently
close to the balance sheet
date, considered risk
allowances
Financial instruments concerned
Cost-based determination
Trade and other receivables
Subsequent measurement at fair
value through profit or loss
Derivatives (without a hedging
relationship)
Contingent consideration
Other debt instruments
Trade accounts receivable
that are intended for sale
due to a factoring agreement
Virtual power purchase
agreements
Observable prices derived
from equity refinancing
Loans with variable
repayments
Subsequent measurement at fair
value through other comprehensive
income
Fair value determined using input factors unobservable in the market (Level 3)
Main input factors used to
determine fair values
Use of recognized actuarial
methods
Use of recognized actuarial
methods
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
Interest rate curves available
on the market
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
Financial assets
Use of recognized actuarial
methods
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
Interest rate curves available
on the market
Spot and forward rates
observable on the market as
well as exchange rate
volatilities
Discounting of future cash
flows
Interest rates observable on
the market
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Capital Structure, Investments, and Financing Activities 329
Use of recognized actuarial
methods
-46
Trade accounts receivable before loss
-4
Bonds and commercial paper¹
8,726
-147
-600
-363
-5,352
-111
-2,801
Bank loans
203
-5
-203
Trade accounts payable²
2,499
-2,499
amortized cost
Subsequent measurement at
Repayment
Interest
-256
-5,885
-15
-113
-137
-2,521
1 For the hybrid bonds, repayment is assumed at the earliest possible date.
December 31, 2022
Cash flows
<1 year
Liabilities to related parties
Cash flows
Cash flows
>5 years
Carrying
€ million
amount
Interest Repayment
Interest Repayment
1-5 years
-370
1,780
-1,121
53
-34
-4
-7
-12
relationship
Derivatives with a hedging
relationship
Refund liabilities
Finance lease liabilities
30
-30
912
-912
491
-9
4
Derivatives without a hedging
Contingent considerations
value through profit or loss
-81
-110
-53
-550
Other financial liabilities²
376
-258
-25
-118
59
59
-5
-10
-10
-48
Subsequent measurement at fair
Loans from third parties and other
financial debt
-6,127
-225
14,515
7,802
Bank loans
283
-164
-8
-1,000
-241
-277
-1
-4,888
-7
-63
-1,934
Trade accounts payable
2,545
-2,545
Liabilities to related parties
Bonds and commercial paper¹
amortized cost
Repayment
Interest
-3
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Capital Structure, Investments, and Financing Activities 321
The following liquidity risk analysis presents the undiscounted, contractually fixed cash flows such as
repayments and interest on financial liabilities and the net cash flows of derivatives with a negative fair value:
December 31, 2023
€ million
Subsequent measurement at
1,928
Cash flows
< 1 year
Cash flows
> 5 years
Carrying
amount
Interest
Repayment
Interest
Repayment
Cash flows
1-5 years
-37
-938
-97
-79
-8
-10
relationship
Derivatives with a hedging
relationship
Refund liabilities
96
Lease liabilities
-5
877
-877
515
-11
-120
-22
5
-123
Derivatives without a hedging
2
-550
-35
-440
Other financial liabilities
393
-266
-127
-2
Loans from third parties and other
financial debt
-5
-20
-9
-47
Subsequent measurement at fair
value through profit or loss
Contingent considerations
68
15,134
-191
-5,790
994
648
7
3,012
302
17
471
60
521
4
585
1,575
1,817
669
7
1,363
153
Group
Other
Electronics
565
10
2,838
280
15
454
66
4,069
2
1,484
1,892
582
10
3,969
Life Science
Healthcare
676
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 325
Goods were generally sold under retention of title so that a reimbursement claim existed in the event of default.
Other guarantees generally were not demanded. The scope of credit-insured receivables was immaterial for
Merck.
Loss allowances based on expected credit losses for trade accounts receivable as of December 31, 2023, were
as follows:
73
3,969
10
1
4
18
46
55
80
-3
-5
-22
-53
-97
-9
-1
-15
1,003
67
3,342
December 31, 2023
€ million
Expected loss rate
allowances
thereof: credit impaired
Loss allowances
thereof credit impaired trade
432
accounts receivable
0.4%
0.8%
Up to 90 days Up to 180 days Up to 360 days
past due
past due
past due
39.0%
More than 360
7.4%
days past due
72.4%
Total
Not yet due
-18
1,260
158
Other
When a country's rating changes, the historical default rates of the rating group to which the respective country
has been reallocated have to be applied accordingly, rather than the historical default rates of the previous
rating group.
If there is objective evidence that certain trade accounts receivable or contract assets are fully or partially
impaired, additional loss allowances are recognized to account for expected credit losses.
A default generally exists when the debtor cannot fully meet its liabilities.
A debtor's creditworthiness is assumed to be impaired if there are objective indications that the debtor is in
financial difficulties, such as the disappearance of an active market for its products or impending insolvency.
The nominal amounts of trade accounts receivable considered as originated credit-impaired financial assets are
recognized using the risk-adjusted effective interest rate, which reflects the expected credit losses over the
original lifetime.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 323
Impairment of other receivables
When recognizing impairment losses, the general three-stage impairment model is used for financial
instruments included in other receivables, and the simplified approach is used for non-current leasing
receivables. The individual credit rating of the contract partner is used to determine the impairment loss of
other receivables. If there is considered to be a substantially increased risk of default, the expected credit loss
is calculated over the entire lifetime.
Individual cases are also analyzed to ascertain whether objective findings suggest that the value of other
receivables is impaired. Such suggestions may include, for example, economic difficulties of the debtor,
contractual breaches, or the renegotiation of contractual payment obligations.
Impairment of other financial assets
Investments in debt instruments subsequently measured either at amortized cost or at fair value through other
comprehensive income are fundamentally considered to be investments with low risk, meaning that the
expected credit loss in the upcoming 12 months is used to determine the impairment loss.
For financial assets with only a minimal default risk, the rules concerning the mandatory recognition of a risk
provision for the lifetime expected credit loss are not applied at initial recognition or during subsequent
measurement. Therefore, no assessment of whether there has been a significant increase in the credit risk is
carried out for such assets. Merck does not presume an increased credit risk as of the balance sheet date if the
contract partner has an investment grade rating.
If there are indications that the debtor's creditworthiness has worsened but that this is not yet reflected in its
existing credit rating, the credit risk assessment is adjusted and the impairment allowances recognized for
expected credit losses are increased. In all other cases, there are no new risk assessments as of the balance
sheet date and the risk profile initially assumed is maintained.
Wherever a considerable increase in the default risk is assumed, the lifetime expected credit loss of the
financial asset is considered.
On the balance sheet date, the theoretical maximum default risk for all items referenced above corresponds to
the net carrying amounts less any compensation from credit insurance.
Significant discretionary decisions and sources of estimation uncertainty
The expected credit loss rates used in the simplified impairment model are derived on the basis of past default
rates and current macroeconomic expectations. In doing so, country-specific ratings are taken into
consideration since many of Merck's customers depend directly or indirectly on the economic trends in the
country where their place of business is located (public and private healthcare systems, universities, and
research companies from within the pharmaceutical industry, as well as industries subsidized under
development plans, particularly in Asia). These country ratings are aggregated into three separate rating
groups. Under the impairment model, past default rates and country ratings are used as an approximation of
the defaults to be expected in the future.
The customer groups with comparable default risks to be considered are determined according to the specific
business sector and the place of business of the respective customers.
Merck uses the simplified impairment model for trade accounts receivable and contract assets, pursuant to
which any credit losses expected to occur over the entire lifetime of an asset are taken into account. In order to
measure expected credit losses, the assets are grouped based on the existing credit risk structure and the
respective maturity structure.
Impairment of trade accounts receivable and contract assets
-17
-471
-264
-5,904
-9
-173
-101
-3,463
1 For the hybrid bonds, repayment is assumed at the earliest possible date.
Credit risks
2 Previous year has been adjusted, please refer to Note (2) "Reporting Principles".
Capital Structure, Investments, and Financing Activities 322
Credit risks
Credit risk for Merck means the risk of a financial loss if a customer or other contract partner is not able to
meet its contractual payment obligations. Merck is exposed to credit risks mainly due to existing trade accounts
receivable, other receivables, other debt instruments, derivatives and contract assets.
Credit risks are monitored on an ongoing basis. The risks arising from extending credit to customers and in the
course of other business relationships are also managed.
Merck analyzes all trade accounts receivable that are more than 90 days past due in order to establish whether
default exists. In addition, all other financial instruments that are more than 30 days past due are examined in
order to establish whether there has been a significant increase in the credit risk. Both methods are used to
examine whether there is objective evidence of an impairment requiring the recognition of additional loss
allowances.
Accounting and measurement policies
Credit risks
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Impairment of trade accounts receivable and contract assets
In terms of the impairment of trade accounts receivable and of contract assets, there is significant discretion
and estimation uncertainty regarding:
the identification of customer groups with identical default risks,
of debt instruments subsequently measured at fair value through other comprehensive income
The loss allowances and reversals recognized for trade accounts receivable as shown above applied entirely to
receivables resulting from contracts with customers. The increase in loss allowances for trade accounts
receivable was mainly attributable to a distribution partner in the Healthcare business sector in a mid-double-
digit million-euro amount.
Credit risks from trade accounts receivable
The credit risk from trade accounts receivable is largely impacted by the specific circumstances of individual
customers. Merck also considers additional factors such as the general default risk in the respective industry
and country in which the customer operates.
The credit risk of customers is assessed using established credit management processes. This is done in
particular by analyzing the aging structure of trade accounts receivable.
Merck continuously reviews and monitors the open positions of all its customers in the corresponding countries
and takes steps to mitigate credit risks if necessary.
The tables below contain an overview of the credit risk by business sector and country rating as established by
leading rating agencies:
1
December 31, 2023
External rating of at least A- or comparable
External rating of at least BBB- or comparable
External rating lower than BBB- or comparable
Trade accounts receivable before loss
allowances
December 31, 2022
€ million
External rating of at least A- or comparable
External rating of at least BBB- or comparable
External rating lower than BBB- or comparable
Trade accounts receivable before loss
allowances
Life Science
Healthcare
Electronics
€ million
Group
-1
-50
the identification of impaired creditworthiness, and
•
the calculation of the expected credit losses.
Impairment of other financial assets
Discretionary judgment is applied in determining individual impairment allowances.
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 324
The following table shows impairments for financial assets from operative transactions and contract assets as
well as gains from their reversals recognized in the consolidated income statement:
-7
€ million
of trade accounts receivable
of contract assets
of debt instruments subsequently measured at amortized cost
2023
2022
-51
-6
Impairment losses
609
17
Gernsheim
436
25
-5
-307
-3
-62
-20
710
of Dec. 31, 2023
Disposals during the reporting period related in particular to payments received in connection with the
contingent consideration arising from the sale of the biosimilars business to Fresenius SE & Co. KGaA, Bad
Homburg vor der Höhe, as well as trade accounts receivable under factoring agreements. The reclassification of
the fair value of Calypso Biotech B.V., Netherlands, to assets held for sale is included in the "Other" line item.
The gains and losses from Level 3 assets recognized in other comprehensive income were reported in the
consolidated statement of comprehensive income under the item "Fair value adjustments".
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 335
The following equity instruments measured at fair value through other comprehensive income were disposed of
in 2023 and 2022:
€ million
20231
50
Fair value on the date
of derecognition
M Ventures Portfoliogesellschaften
Moon Lake Immunotherapeutics Ltd.,
Cayman Islands
2022¹
Portfolio
adjustment/restructuring
and full acquisition by
The cumulative gain
(+) or loss (-) on
disposal recognized in
other comprehensive
income
Transfer of the
cumulative gains (+)
or losses (-) within
group equity to
retained earnings
29
18
17
third parties
Reasons for the disposal
125
95
Net carrying amounts as
assets/liabilities held as
of the balance sheet
date
5
10
I
14
Gains (+)/losses (-)
recognized in other
47
47
comprehensive income
Currency translation
-2
-3
-1
I
difference
Disposals
-51
-11
Other
into Level 1/Level 2
I
-3
Partial sale
Transfers out of Level 3
2
-69
-29
-2
-190
-21
3
thereof: attributable to
11
10
(%)
Registered office
Steinheim
Sigma-Aldrich Biochemie GmbH
Company
Germany
Country
Equity interest
340
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
Footnotes follow at the end of the table.
Grundstücksverwaltungsgesellschaft mbH A)
100.00
100.00
Darmstadt
thereof:
Merck KGaA (%)
Germany
Merck Vierte Allgemeine Beteiligungsgesellschaft mbH Gernsheim
Merck Wohnungs- und
Germany
100.00
Gernsheim
Merck Surface Solutions GmbH A)
Germany
100.00
100.00
Gernsheim
Merck Site Management GmbH A)
Germany
100.00
Hohenbrunn
Merck Schuchardt OHG
100.00
100.00
Germany
Sigma-Aldrich Chemie GmbH
10
Portfolio
M Ventures Portfoliogesellschaften
adjustment/restructuring
and full acquisition by
third parties
Merck Chemicals and Life Science GesmbH
Austria
countries
Other European
100.00
Darmstadt
Versum Materials Germany GmbH
Germany
100.00
100.00
Steinheim
Sigma-Aldrich Verwaltungs GmbH
Germany
Steinheim
100.00
Germany
Sigma-Aldrich Chemie Holding GmbH
Taufkirchen
100.00
10
Germany
Steinheim
100.00
Germany
Sigma-Aldrich Logistik GmbH
Steinheim
100.00
Sigma-Aldrich Grundstücks GmbH & Co. KG
income and expenses)
statement (financial
14
6
of the balance sheet
date
Gains (+)/losses (-)
recognized in other
-11
-11
comprehensive income
Currency translation
2
2
-1
I
-3
difference
1
Disposals
-46
-4
-1
-68
10
-131
Transfers out of Level 3
I
-11
I
-11
into Level 1/Level 2
Other
-7
-21
9
-4
assets/liabilities held as
recognized in the
consolidated income
17
15
30
30
-13
79
statement (other
operating result)
thereof: attributable to
assets/liabilities held as
17
7
30
4
-13
thereof: attributable to
income and expenses)
statement (financial
16
-1
1
7
10
consolidated income
recognized in the
Gains (+)/losses (-)
date
of the balance sheet
44
-4
Net carrying amounts as
93
250
806
21
59
72
152
Transfers into Level 3 from
Level 1/Level 2
Fair value changes
Gains (+)/losses (-)
recognized in the
consolidated income
10
56
2
1
69
statement (other
10
5
consolidated income
recognized in the
Gains (+)/losses (-)
date
-23
of the balance sheet
1
16
10
assets/liabilities held as
thereof: attributable to
operating result)
16
Germany
-4
415
53
415
22
-4
-23
806
of Dec. 31, 2022
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 334
The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated
to Level 3 and measured at fair value were as follows in fiscal 2023:
2023
Financial assets
Financial liabilities
Subsequent measurement at fair value
through profit or loss
Subsequent measurement
at fair value through other
comprehensive income
Subsequent measurement
at fair value through profit
or loss
Other debt
€ million
53
250
93
Total
Derivatives
without a
hedging
relationship
other Contingent
receivables consideration
22
Trade and
Derivatives
without a
hedging
relationship
Contingent
consideration
instruments
Additions
of Jan. 1, 2023
Net carrying amounts as
Equity
instruments
Gains (+)/losses (-)
100.00
Darmstadt
0.2
0.4
1 The owner of Engel-Apotheke, Darmstadt, is a member of the Supervisory Board of Merck KGaA.
As in the previous year, the liabilities of Group companies in respect of E. Merck KG primarily resulted from
mutual profit transfers between Merck KGaA and E. Merck KG as well as the profit transfer by Merck & Cie
KMG, Switzerland, to E. Merck KG. They included financial debt of € 94.7 million (December 31, 2022:
€ 258.0 million), subject to standard market interest rates. The financial debt in respect of E. Merck
Beteiligungen KG in the amount of € 1,100.0 million (December 31, 2022: € 660.0 million) were also subject to
standard market interest rates. There was no collateral or guarantees either in favor of or at the expense of
Merck.
Loss allowances on receivables from non-consolidated subsidiaries recognized in the reporting period and
previous periods amounted to € 19.0 million in total as of December 31, 2023 (December 31, 2022:
€ 12.0 million). The expense from impairment losses recognized in 2023 amounted to € 7.0 million
(2022: € 0.0 million).
Information on pension funds that are classified as defined benefit plans in accordance with IAS 19 can be
found in Note (33) "Provisions for employee benefits".
Information on Executive Board and Supervisory Board compensation can be found in Note (46) "Executive
Board and Supervisory Board compensation". Above and beyond this, no material activities between
companies of the Merck Group and members of the Executive Board or the Supervisory Board of Merck KGaA,
the Executive Board or the Board of Partners of E. Merck KG, or members of their immediate families took place
in either fiscal 2023 or the previous year.
337
Consolidated Financial Statements Notes to the Consolidated Financial Statements Other Disclosures
(46) Executive Board and Supervisory Board compensation
The compensation of the Executive Board of Merck KGaA is recognized by the general partner, E. Merck KG,
which is not included in these consolidated financial statements. It was composed as follows:
€ million
Fixed compensation
Variable compensation
1.8
Other compensation
Short-term benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payments
Total compensation pursuant to IAS 24.17
2023
2022
6.3
6.3
18.5
17.7
0.6
0.4
Additional benefits
2.9
0.6
0.6
Joint ventures
2.3
3.2
0.0
0.0
0.6
0.5
0.0
0.0
Associated companies
0.9
0.1
0.0
0.0
19.5
3.0
0.0
0.1
0.2
Non-consolidated subsidiaries
companies
1.2
0.9
0.2
6.7
0.0
0.0
0.4
0.3
Majority interest in non-controlled
0.0
0.0
0.0
0.2
24.6
Total
2023
thereof: Deloitte
GmbH
Wirtschafts-
prüfungs-
gesellschaft,
Group
Germany
10.6
3.9
0.4
0.3
11.0
4.2
The expenses for other audit-related services to Deloitte GmbH Wirtschaftsprüfungsgesellschaft primarily arose
for the audit of the non-financial statement and the sustainability report.
Consolidated Financial Statements
Notes to the Consolidated Financial Statements Other Disclosures
Other services
339
(48) List of shareholdings
The shareholdings of Merck KGaA as of December 31, 2023, are presented below:
Country
Company
I. Fully consolidated companies
Equity interest
Registered office
(%)
thereof:
Merck KGaA (%)
Germany
Parent
Germany
Germany
Merck KGaA
Scope of Consolidation
Audits of financial statements
Other audit-related services
Tax consultancy services
€ million
The auditor of the consolidated financial statements changed to Deloitte GmbH Wirtschaftsprüfungsgesellschaft,
Germany, in fiscal 2023. The costs for the auditor of the consolidated financial statements were composed as
follows:
2.6
2.4
0.7
0.0
0.0
0.0
3.8
5.8
32.7
32.7
The total compensation granted to members of the Executive Board as referred to by section 314 (1) no. 6 a)
HGB amounted to € 30.1 million in fiscal 2023 (2022: € 30.4 million). In addition to the short-term benefits
shown in the table above, this also includes compensation under the standalone long-term incentive plan for
the Executive Board, the structure of which is essentially as described in Note (33) "Provisions for employee
benefits", and other long-term benefits. On the basis of the long-term incentive plan, 57,164 virtual shares,
also referred to as Merck Share Units (MSU), were made potentially available in fiscal 2023 (2022: 43,436
MSU).
Payments to former members of the Executive Board and their surviving dependents in accordance with
section 314 (1) no. 6 b) HGB were made as pension payments, as profit sharing, under the long-term incentive
plan and waiting allowance for a post-contractual non-competition clause. These payments amounted to
€ 14.4 million in fiscal 2023 (2022: € 21.7 million). Provisions for defined benefit pension commitments carried
by E. Merck KG amounted to € 123.8 million as of December 31, 2023 (December 31, 2022: € 123.1 million).
The compensation of the Supervisory Board in accordance with section 314 (1) no. 6 a) HGB and IAS 24.17 was
composed as follows:
€ thousand
Fixed portion
Meeting attendance fees
Committee membership compensation
Total compensation granted in the fiscal year
(47) Auditor's fees
338
Consolidated Financial Statements Notes to the Consolidated Financial Statements Other Disclosures
As in the previous year, no compensation was paid to former members of the Supervisory Board in fiscal 2023.
As in the previous year, the members of the Executive Board and the Supervisory Board did not receive any
advances or loans in fiscal 2023 from companies included in the consolidated financial statements. As in the
previous year, no contingent liabilities were entered into for the benefit of these persons in fiscal 2023.
Further individualized information and disclosures, as well as a presentation of the compensation system for the
members of the Executive Board and the Supervisory Board, can be found in the compensation report.
968
961
25.6
105
48
58
815
808
2022
2023
95
0.0
0.0
0.0
Darmstadt
Merck International GmbH
Germany
100.00
100.00
Gernsheim
Merck Holding GmbH
Germany
100.00
Darmstadt
Merck Healthcare KGaA A)
Germany
100.00
100.00
100.00
Darmstadt
Germany
100.00
100.00
Weiterstadt
Merck Healthcare Germany GmbH A)
Germany
100.00
Darmstadt
Merck Gernsheim Holding GmbH A)
Germany
4
-19
-19
1 Disposals due to liquidations are not included.
Merck Healthcare Holding GmbH
100.00
Germany
Merck Internationale Beteiligungen GmbH
Merck Real Estate GmbH A)
Germany
100.00
100.00
Darmstadt
Merck Performance Materials Holding GmbH
Germany
100.00
Wiesbaden
Merck Performance Materials GmbH
Germany
100.00
Darmstadt
Merck Patent GmbH A)
Germany
100.00
100.00
Darmstadt
100.00
Germany
Merck Life Science Holding GmbH
Darmstadt
100.00
M Ventures portfolio companies mainly include minority interests in listed and unlisted companies. The mandate
of M Ventures is to invest in innovative technologies and products.
100.00
Merck Life Science KGaA A)
Darmstadt
100.00
Germany
Merck LS RTU GmbH A)
Darmstadt
Germany
(44) Other financial obligations
Other financial obligations comprised the following:
€ million
Receivables
Liabilities
€ million
2023
2022
2023
2022 Dec. 31, 2023
Dec. 31, 2022 Dec. 31, 2023 Dec. 31, 2022
E. Merck KG
2.3
1.9
11.3
4.0
0.1
0.0
826.5
1,118.8
0.2
0.0
0.1
0.1
Engel-Apotheke, Darmstadt¹
660.1
Expenses
1,100.1
0.0
0.6
32.4
0.5
0.4
E. Merck Beteiligungen KG
0.0
100.00
Income
Related parties in respect of the Merck Group are E. Merck KG, Emanuel-Merck-Vermögens-KG and E. Merck
Beteiligungen KG. Furthermore, direct or indirect subsidiaries of Merck KGaA, associates of the Merck Group,
joint ventures of the Merck Group, as well as pension funds that are classified as defined benefit plans in
accordance with IAS 19 are also related parties within the meaning of IAS 24. Members of the Executive Board
and the Supervisory Board of Merck KGaA, the Executive Board and the Board of Partners of E. Merck KG as
well as close members of their families are also related parties, as are companies controlled or jointly controlled
by this group of persons.
Acquisition of intangible assets
Acquisition of property, plant, and equipment
Other financial obligations
Dec. 31, 2023
1,431
Dec. 31, 2022
483
1,914
1,050
280
1,330
Obligations to acquire intangible assets existed in particular owing to contingent considerations within the scope
of in-licensing and research and development collaborations. In these agreements, Merck has entered into an
obligation to make milestone payments once specific targets have been reached. In the unlikely event that all
of the milestones are achieved, Merck would be obligated to pay up to € 1,431 million (December 31, 2022:
€ 1,050 million) for the acquisition of intangible assets. The table above does not contain any other financial
obligations from possible future sales-based license fees and milestone payments.
The expected maturities of the obligations to acquire intangible assets were as follows:
€ million
Within 1 year
In 1-5 years
After more than 5 years
Obligations to acquire intangible assets
Other financial obligations were recognized at nominal value.
Dec. 31, 2023
Dec. 31, 2022
Related party disclosures
Accounting and measurement policies
(45) Related party disclosures
Other Disclosures
Consolidated Financial Statements Notes to the Consolidated Financial Statements Other Disclosures
336
Transactions were conducted with related parties as follows:
1,050
676
604
326
548
48
278
1,431
AmpTec GmbH A)
Fair value changes
Transfers into Level 3 from
Carrying amount
Fair value¹
Fair value
determined
by official
prices and
quoted
market
Fair value
determined
using input
factors
observable
in the
market
(Level 2)
Fair value
determined
using input
factors not
observable
in the
market
(Level 3)
Total
Consoli-
dated
notes
cost
Current
values
Total
(Level 1)
Cash and cash equivalents
35
1,982
1,982
Trade and other receivables (excluding
25
3,973
25
3,998
leasing receivables)
Other debt instruments
Non-
current
Subsequent measurement at amortized
Financial assets
€ million
Croatia
100.00
Sofia
Merck Bulgaria EAD
Bulgaria
100.00
Hoeilaart
Merck NV/SA
Belgium
100.00
Hoeilaart
Merck Life Science BV
Belgium
100.00
Hoeilaart
Merck Chemicals NV/SA
Belgium
December 31, 2023
The following table presents the carrying amounts and the fair values of the individual financial assets and
liabilities as of December 31, 2023, for each individual financial instrument class pursuant to IFRS 9:
Capital Structure, Investments, and Financing Activities 331
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
Vienna
100.00
36
Austria
Vienna
100.00
Austria
Sigma-Aldrich Handels GmbH
Vienna
100.00
Merck Gesellschaft mbH
Merck d.o.o.
201
204
194
98
95
194
Derivatives without a hedging
36, 39
30
47
77
relationship
Derivatives with a hedging relationship
36, 39
37
37
161
WN
50
77
37
37
Lease receivables (measured in
25
6
3
9
accordance with IFRS 16)²
Total
6,485
1,008
7,493
27
33
36
Other debt instruments
Subsequent measurement at fair value
through other comprehensive income
Equity instruments
Trade and other receivables
Other debt instruments
323
36
643
643
207
436
643
25
25
25
25
25
125
125
125
125
36
Contingent considerations
4
through profit or loss
199
199
199
1
198
36
Subsequent measurement at fair value
Zagreb
100.00
Czech Republic
Merck Serono (Ireland) Ltd.
Ireland
100.00
Carrigtwohill
Merck Millipore Ltd.
Ireland
100.00
Arklow
Merck Life Science Limited
Ireland
100.00
Carrigtwohill
Merck Finance Limited
Ireland
Dublin
100.00
Merck Life Science Kft.
Hungary
100.00
Budapest
Merck Kft.
Hungary
100.00
Maroussi
Merck Commercial Industrial Pharmaceutical Chemical
Single Member S.A.
Greece
Fallavier
100.00
Sigma-Aldrich Holding S.a.r.l.
France
Budapest
100.00
Ireland
Millipore Cork Unlimited Company
Footnotes follow at the end of the table.
100.00
Milan
Versum Materials Italia S.r.l.
Italy
99.74
Rome
Merck Serono S.p.A.
Italy
100.00
Milan
Merck S.r.l.
Italy
100.00
Milan
Merck Life Science S.r.l.
Italy
Carrigtwohill
100.00
Ireland
Sigma-Aldrich Ireland Ltd.
Arklow
100.00
Saint Quentin
Ireland
Dublin
100.00
Italy
Istituto di Ricerche Biomediche Antoine Marxer RBM
S.p.A.
Colleretto Giacosa
100.00
Versum Materials Ireland Limited
Fallavier
100.00
Saint Quentin
100.00
Lyon
Gonnon S.A.S.
France
100.00
Espoo
Merck OY
Finland
100.00
Espoo
Merck Life Science OY
Finland
100.00
Tallinn
Merck Serono OÜ
Estonia
100.00
Merck Life Science spol. s r.o.
Prague
100.00
Czech Republic
Merck spol. s r.o.
Prague
France
100.00
Merck A/S
Soborg
100.00
Denmark
Merck Life Science A/S
Soborg
Denmark
505
Merck Biodevelopment S.A.S.
100.00
Sigma-Aldrich Chimie SNC
France
Fallavier
100.00
Saint Quentin
Sigma-Aldrich Chimie S.a.r.l.
France
100.00
Molsheim
Millipore S.A.S.
France
100.00
Lyon
Merck Serono S.A.S.
France
100.00
Lyon
France
Merck Chimie S.A.S.
Fontenay s/Bois
100.00
France
Merck Performance Materials S.A.S.
Lyon
Trosly Breuil
France
Merck S.A.
Lyon
99.86
France
Merck Santé S.A.S.
100.00
Level 1/Level 2
65
1,300
833
1,174
Financial liabilities
Subsequent measurement at amortized
cost
Trade accounts payable³
30
2,499
2,499
Financial debt
37
1,073
8,834
9,907
7,989
70
1,188
Other financial liabilities4
38
1,119
118
1,237
Subsequent measurement at fair value
through profit or loss
Contingent consideration
38
4
4
4
4
Derivatives without a hedging
9,177
271
7,273
984
Other debt instruments
36
28
154
182
89
93
182
Derivatives without a hedging
36, 39
23
46
69
17
53
69
relationship
6,289
Total
measured in accordance with IFRS 16)²
7
2
5
37, 38,
25
53
53
53
53
36,39
Derivatives with a hedging relationship
Finance lease receivables (to be
250
34
53
Financial assets
Financial liabilities
Subsequent measurement at fair value
through profit or loss
Subsequent measurement
at fair value through other
comprehensive income
Subsequent measurement
at fair value through profit
or loss
Other debt
€ million
instruments
Contingent
consideration
Derivatives
without a
hedging
relationship
Trade and
Equity
instruments
other Contingent
receivables consideration
Derivatives
without a
hedging
relationship
2022
Total
78
271
24
345
20
-39
-10
689
of Jan. 1, 2022
Additions
27
87
70
184
Net carrying amounts as
The changes in financial assets and liabilities for each of the individual classes of financial instruments allocated
to Level 3 and measured at fair value were as follows in the previous year:
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements Capital Structure, Investments, and Financing Activities 333
4 Previous year's figures have been adjusted, see Note (2) "Reporting Principles".
30
23
53
relationship
39
Derivatives with a hedging relationship
38, 39
30
30
30
30
Refund liabilities
9
912
912
Finance lease liabilities (to be measured
37
3 Previous year's figures have been adjusted, see Note (6) "Acquisitions and Divestments".
2 Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values. IFRS 7.29(d) explicitly does not require disclosure of the
fair value of lease liabilities.
9,265
27
1,248
19
7,989
5,792
Total
in accordance with IFRS 16)²
491
366
125
9,342 15,134
250
250
235
Derivatives with a hedging relationship
38, 39
5
5
5
2
2
20
96
5
Refund liabilities
9
877
877
20
Lease liabilities (measured in accordance
with IFRS 16)²
122
393
515
Total
5,129
9,387
14,515
7,367
2,747
22
10,136
1 The simplification option under IFRS 7.29(a) was used for disclosures of certain fair values. IFRS 7.29(d) explicitly does not require disclosure of the
fair value of lease liabilities.
2 Measurements within the scope of IFRS 16 are exempted from the requirements of IFRS 13 (IFRS 13.6(b)).
Consolidated Financial Statements_ Notes to the Consolidated Financial Statements
37
39
relationship
77
Financial liabilities
Subsequent measurement at amortized
cost
Trade payables and other liabilities
30
2,545
2,545
Financial debt
37
503
8,846
9,349
7,367
2,665
10,032
Other financial liabilities
38
96
18
79
37, 38,
Derivatives without a hedging
2
Capital Structure, Investments, and Financing Activities 332
2
Contingent considerations
through profit or loss
Subsequent measurement at fair value
1,125
127
998
38
The following table presents the carrying amounts and the fair values of the individual financial assets and
liabilities as of December 31, 2022, for each individual financial instrument class pursuant to IFRS 9:
December 31, 2022
€ million
122
4
126
Subsequent measurement at fair value
through other comprehensive income
Equity instruments
36
516
516
102
415
516
Trade accounts receivable and other
25
22
22
22
14
36
Contingent consideration
through profit or loss
Subsequent measurement at fair value
81
36
81
1
80
36
Debt instruments
receivable
22
81
731
Other debt instruments
4,112
Financial assets
Subsequent measurement at amortized
cost
Carrying amount
Fair value¹
Fair value
determined
by official
prices and
Fair value
determined
using input
factors
observable
in the
market
(Level 2)
Fair value
determined
using input
factors not
observable
in the
market
(Level 3)
Total
quoted
Consoli-
dated
market
notes
25
4,087
100.00
receivable (excluding leasing
Trade accounts receivable and other
1,854
receivables)
1,854
Cash and cash equivalents
(Level 1)
Total
values
Non-
current
Current
35
Darmstadt
25
Darmstadt
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
100.00
Darmstadt
Merck 12. Allgemeine Beteiligungs-GmbH A)
Merck 13. Allgemeine Beteiligungs-GmbH
Merck 15. Allgemeine Beteiligungs-GmbH
Merck 16. Allgemeine Beteiligungs-GmbH A)
Merck 20. Allgemeine Beteiligungs-GmbH A)
Merck 21. Allgemeine Beteiligungs-GmbH
Merck 24. Allgemeine Beteiligungs-GmbH A)
Merck Chemicals GmbH A)
Germany
Merck Consumer Health Holding Germany GmbH
Darmstadt
100.00
Merck Financial Trading GmbH
Germany
100.00
100.00
Darmstadt
Merck Financial Services GmbH
Germany
100.00
100.00
Germany
Darmstadt
Germany
100.00
Darmstadt
Merck Electronics KGaA A)
Germany
100.00
Darmstadt
Merck Display Trading GmbH A)
100.00
Merck Export GmbH A)
Germany
Germany
Germany
Germany
company
Hamburg
100.00
Germany
Darmstadt
100.00
Germany
Biochrom GmbH A)
Berlin
100.00
Germany
AZ Electronic Materials GmbH A)
Germany
100.00
100.00
Germany
Emedia Export Company mbH
Gernsheim
100.00
Germany
Germany
Germany
Chemitra GmbH A)
Buchs
100.00
Merck Serono SA
Sigma-Aldrich Chemie GmbH
Buchs
Switzerland
Sigma-Aldrich (Switzerland) Holding AG
Switzerland
100.00
Eysins
SeroMer Holding SA
100.00
Aubonne
100.00
Switzerland
Footnotes follow at the end of the table.
Sigma-Aldrich International GmbH
342
Buchs
Epichem Group Limited
BioReliance Limited
Merck Ilac, Ecza Ve Kimya Ticaret Anonim Sirketi
Sigma-Aldrich Production GmbH
Switzerland
Company
Switzerland
United Kingdom
United Kingdom
Türkiye
Switzerland
Country
thereof:
Equity interest
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
100.00
100.00
Merck Performance Materials (Suisse) SA
Madrid
100.00
Sweden
Merck AB
Solna
100.00
Sweden
Merck Life Science AB
Solna
100.00
Switzerland
Ares Trading SA
Aubonne
Registered office
Buchs
100.00
Merck, S.L.U.
Eysins
Spain
Madrid
Switzerland
100.00
Zug
Merck (Schweiz) AG
Switzerland
51.63
51.63
Altdorf
Merck & Cie KmG
Switzerland
Eysins
Chord Therapeutics SA
Switzerland
Spain
Merck Life Science S.L.U.
100.00
(%)
Feltham
100.00
North America
100.00
Feltham
Versum Materials UK Limited
United Kingdom
100.00
Canada
Gillingham
United Kingdom
100.00
Gillingham
SAFC Hitech Limited
United Kingdom
100.00
Sigma-Aldrich Company Limited
Canada
EMD Crop BioScience Canada Inc.
EMD Inc.
Toronto
100.00
St. Louis
Aldrich Chemical Foreign Holding LLC
United States
100.00
Milwaukee
Aldrich Chemical Co. LLC
United States
100.00
Oakville
MilliporeSigma Canada Ltd.
Canada
100.00
Mississauga
100.00
Gillingham
SAFC Biosciences Limited
United Kingdom
100.00
100.00
Feltham
Merck Investments Ltd.
United Kingdom
100.00
Feltham
Merck Holding Ltd.
United Kingdom
100.00
Gillingham
100.00
Aberdeen
100.00
Istanbul
100.00
United Kingdom
Merck KGaA (%)
Merck Life Science UK Limited
100.00
100.00
100.00
Feltham
Millipore (U.K.) Limited
Merck Serono Ltd.
United Kingdom
United Kingdom
100.00
Feltham
Merck Serono Europe Limited
United Kingdom
100.00
Feltham
Merck Performance Materials Limited
United Kingdom
Gillingham
Madrid
Warsaw
Spain
Netherlands
100.00
Amsterdam
Merck Chemicals B.V.
Netherlands
100.00
Merck Europe B.V.
Schiphol-Rijk
Netherlands
100.00
100.00
Veldhoven
100.00
Pietà
Merck B.V.
Amsterdam
100.00
Netherlands
21.54
Schiphol-Rijk
Serono Tri Holdings B.V.
Netherlands
100.00
Amsterdam
Merck Ventures B.V.
Netherlands
100.00
Amsterdam
Merck Life Science N.V.
Netherlands
100.00
Schiphol-Rijk
Merck Holding Netherlands B.V.
eyrise B.V.
Merck Capital Limited
Netherlands
Malta
Luxembourg
Merck Re S.A.
Luxembourg
100.00
Luxembourg
Merck Invest SCS
Luxembourg
100.00
Luxembourg
Merck Holding S.à r.l.
Luxembourg
100.00
Luxembourg
Merck Finanz S.à.r.l.
Luxembourg
100.00
100.00
100.00
Millipore International Holdings S.à r.l.
50.29
100.00
Pietà
Merck Capital Holding Limited
Malta
100.00
Luxembourg
Sigma-Aldrich S.a.r.l.
Luxembourg
100.00
Luxembourg
Sigma-Aldrich Global S.a.r.l.
Luxembourg
100.00
Luxembourg
Luxembourg
Netherlands
Sigma-Aldrich B.V.
Amsterdam
Moscow
Merck LLC
Merck Life Science LLC
Russia
Russia
100.00
Bucharest
Merck Romania S.R.L.
Romania
100.00
Algés
Merck, S.A.
Portugal
100.00
United States
100.00
Merck Sp. z o.o.
Moscow
Serbia
100.00
Ljubljana
Merck d.o.o.
Slovenia
100.00
Bratislava
Merck spol. s r.o.
Slovakia
100.00
Bratislava
Merck Life Science spol. s r.o.
Slovakia
100.00
Belgrade
Merck d.o.o. Beograd
100.00
Merck Chemicals and Life Science S.A.U.
Poland
Poznan
Versum Materials Netherlands B.V.
Netherlands
100.00
Amsterdam
Versum Materials International B.V.
Netherlands
100.00
Amsterdam
Versum Materials Holdings Nederland B.V.
Netherlands
100.00
Amsterdam
Versum Materials Asia B.V.
Netherlands
100.00
Amsterdam
100.00
100.00
Netherlands
Merck Life Science Sp. z o.o.
Poland
100.00
Wroclaw
Merck Business Solutions Europe Sp. z o.o.
Poland
100.00
Oslo
Merck Life Science AS
Norway
100.00
Amsterdam
100.00
Amsterdam
Versum Materials Netherlands International B.V.
Versum Materials Pacific B.V.
Netherlands
100.00
Aldrich-APL, LLC
100.00
100.00
New Zealand
New Zealand
Philippines
Philippines
Merck Ltd.
Auckland
100.00
Sigma-Aldrich New Zealand Co.
Auckland
100.00
Merck Business Solutions Asia Inc.
Taguig
99.99
Merck Inc.
Taguig
100.00
Republic of Korea
Merck Performance Materials Hong Kong Ltd.
Merck Pharmaceutical (HK) Ltd.
China
Kuala Lumpur
China
Versum Materials Malaysia Sdn Bhd
Petaling Jaya
Consolidated Financial Statements.
Notes to the Consolidated Financial Statements Other Disclosures
344
Equity interest
Country
Japan
Malaysia
Merck Sdn Bhd
Malaysia
Malaysia
Company
Versum Materials Japan Inc.
Sigma-Aldrich (M) Sdn Bhd
Registered office
(%)
thereof:
Merck KGaA (%)
Tokyo
100.00
Petaling Jaya
100.00
100.00
100.00
Hong Kong
100.00
100.00
Macquarie Park
Suzhou
Suzhou
Merck Innovation Hub (Guangdong) Co., Ltd.
Merck Display Materials (Shanghai) Co., Ltd.
Merck Electronic Materials (Suzhou) Ltd.
Merck Electronics (Zhangjiagang) Co., Ltd.
Merck Holding (China) Co., Ltd.
Merck Chemicals (Shanghai) Co., Ltd.
Sigma-Aldrich Pty. Ltd.
Sigma-Aldrich Oceania Pty. Ltd.
Merck Pty. Ltd.
Merck Healthcare Pty. Ltd.
Versum Materials, Inc.
Asia-Pacific (APAC)
China
China
China
China
China
China
Bayswater
100.00
Macquarie Park
100.00
Nantong
Merck Life Science Technologies (Nantong) Co., Ltd.
Merck Ltd.
China
China
100.00
Hong Kong
Merck Life Science Ltd.
China
100.00
Footnotes follow at the end of the table.
Guangzhou
Shanghai
100.00
100.00
100.00
Shanghai
100.00
Shanghai
100.00
Macquarie Park
100.00
Australia
100.00
Sigma-Aldrich Japan G.K.
Shanghai
100.00
Shanghai
100.00
China
Sigma-Aldrich (Shanghai) Trading Co., Ltd.
Shanghai
100.00
Sigma-Aldrich (Wuxi) Life Science & Technology Co.,
China
Wuxi
100.00
Ltd.
China
Versum Materials (Dalian) Co., Ltd.
Dalian
100.00
China
Versum Materials (Shanghai) Co., Ltd.
Merck Testing and Certification (Shanghai) Co., Ltd.
SAFC Hitech (Shanghai) Co., Ltd.
Shanghai
China
100.00
Hong Kong
100.00
China
China
Merck Pharmaceutical Distribution (Jiangsu) Co., Ltd.
Merck Pharmaceutical Manufacturing (Jiangsu) Co.,
Ltd.
Nantong
100.00
Nantong
100.00
China
Merck Serono (Beijing) Pharmaceutical Distribution
Co., Ltd.
Beijing
100.00
China
China
Merck Serono (Beijing) Pharmaceutical R&D Co., Ltd.
Merck Serono Co., Ltd.
Beijing
100.00
Beijing
China
100.00
India
Merck Life Science Pvt. Ltd.
Tokyo
100.00
Japan
Merck Electronics Ltd.
Tokyo
100.00
Japan
Merck Holdings G.K.
Tokyo
100.00
Japan
Merck Ltd.
Tokyo
100.00
Japan
Merck Performance Materials G.K.
Tokyo
100.00
Japan
Merck Biopharma Co., Ltd.
Japan
86.65
Jakarta
Mumbai
100.00
India
Merck Performance Materials Pvt. Ltd.
Mumbai
100.00
India
Merck Specialities Pvt. Ltd.
Mumbai
Tokyo
100.00
Sigma-Aldrich Chemicals Private Limited
Bangalore
100.00
Indonesia
P.T. Merck Chemicals and Life Sciences
Jakarta
100.00
Indonesia
P.T. Merck Tbk.
India
Urbana
Australia
Australia
Exelead Inc.
United States
100.00
Rockland
EMD Serono, Inc.
United States
100.00
Billerica
EMD Serono Research & Development Institute, Inc.
United States
100.00
Rockland
EMD Serono Holding, Inc.
United States
100.00
Wilmington
EMD Performance Materials Corp.
United States
100.00
Wilmington
Burlington
100.00
United States
100.00
Wilmington
100.00
Glendale
100.00
Wilmington
100.00
Wilmington
Research Organics, LLC
MilliporeSigma Distribution LLC
Millipore Asia Ltd.
Intermolecular, Inc.
FloDesign Sonics, Inc.
United States
Ormet Circuits, Inc.
United States
United States
United States
J.C. Schumacher Company
United States
United States
EMD Millipore Corporation
United States
100.00
West Trenton
Electron Transfer Technologies, Inc.
United States
100.00
Round Rock
Cerilliant Corporation
United States
100.00
Rocklin
Cell Marque Corporation
United States
100.00
Rockville
BioReliance Corporation
United States
100.00
Wilmington
BioControl Systems, Inc.
United States
100.00
United States
EMD Accounting Solutions & Services America, Inc.
Rockland
Wilmington
100.00
Rockland
EMD Invest LLC
EMD Holding Corp.
United States
United States
100.00
Wilmington
Wilmington
EMD Group Holding, Inc.
100.00
Wilmington
EMD Finance LLC
United States
100.00
Burlington
EMD Digital Inc.
United States
100.00
United States
Australia
100.00
100.00
100.00
The Woodlands
100.00
Madison
100.00
Laramie
100.00
100.00
100.00
St. Louis
100.00
St. Louis
Merck KGaA (%)
(%)
Registered office
Wilmington
St. Louis
Sigma-Genosys of Texas LLC
Sigma-Aldrich, Inc.
United States
Sigma-Aldrich Research Biochemicals, Inc.
Sigma-Aldrich RTC, Inc.
Supelco, Inc.
100.00
100.00
Wilmington
United States
100.00
Wilmington
Versum Materials US, LLC
United States
100.00
Wilmington
Versum Materials US International, Inc.
United States
100.00
Wilmington
Versum Materials Technology LLC
United States
100.00
Wilmington
Versum Materials Manufacturing Company, LLC
United States
Bellefonte
Sigma-Aldrich Missouri Insurance Company
Sigma-Aldrich Manufacturing LLC
Sigma-Aldrich Corporation
Sigma Chemical Foreign Holding LLC
United States
100.00
Rockland
Serono Laboratories, Inc.
United States
100.00
Madison
100.00
Carlsbad
SAFC Carlsbad, Inc.
SAFC, Inc.
United States
United States
100.00
Lenexa
SAFC Biosciences, Inc.
United States
100.00
Cleveland
St. Louis
100.00
United States
Sigma Redevelopment Corporation
Company
United States
United States
United States
United States
United States
United States
United States
Country
San Diego
thereof:
343
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
Footnotes follow at the end of the table.
100.00
St. Louis
Sigma-Aldrich Co. LLC
United States
100.00
St. Louis
Equity interest
Luxembourg
CAM AG Chemie-Erzeugnisse und
Luxembourg
100.00
100.00
Darmstadt
100.00
Darmstadt
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
Darmstadt
100.00
100.00
Darmstadt
Germany
Germany
Germany
Germany
GreenTech Accelerator Gernsheim GmbH
Merck 25. Allgemeine Beteiligungs-GmbH
Merck 26. Allgemeine Beteiligungs-GmbH
Merck 27. Allgemeine Beteiligungs-GmbH
Merck 28. Allgemeine Beteiligungs-GmbH
Merck 29. Allgemeine Beteiligungs-GmbH
Merck 37. Allgemeine Beteiligungs-GmbH
Merck 38. Allgemeine Beteiligungs-GmbH
Merck 39. Allgemeine Beteiligungs-GmbH
Merck 40. Allgemeine Beteiligungs-GmbH
Merck 41. Allgemeine Beteiligungs-GmbH
Merck 42. Allgemeine Beteiligungs-GmbH
Merck 43. Allgemeine Beteiligungs-GmbH
Merck 44. Allgemeine Beteiligungs-GmbH
Merck 45. Allgemeine Beteiligungs-GmbH
Merck 46. Allgemeine Beteiligungs-GmbH
Merck 47. Allgemeine Beteiligungs-GmbH
Merck 48. Allgemeine Beteiligungs-GmbH
Merck 49. Allgemeine Beteiligungs-GmbH
Gernsheim
20.00
20.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
100.00
Germany
Darmstadt
100.00
Leuven-Heverlee
25.72
France
France
France
Netherlands
Netherlands
MERCK 8ème S.A.S.
MERCK Holding S.A.S.
Scipio Bioscience S.A.S.
Calypso Biotech B.V.
iOnctura B.V.
Lyon
Lyon
100.00
100.00
Montrouge
21.69
Amsterdam
27.49
ReWind Therapeutics NV
100.00
Belgium
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
100.00
Darmstadt
100.00
Other European countries
Amsterdam
Germany
Germany
South Africa
Merck (Pty) Ltd.
Modderfontein
100.00
South Africa
Merck Life Science (Pty) Ltd.
Modderfontein
100.00
Tunisia
Merck Promotion SARL
Tunis
100.00
Tunisia
Merck SARL
Tunis
100.00
United Arab
100.00
Merck Serono Middle East FZ-Ltd.
Riyadh
Saudi Arabia
90.91
Israel
QLight Nanotech Ltd.
Jerusalem
100.00
Israel
Sigma-Aldrich Israel Ltd.
Rehovot
100.00
Israel
Versum Materials Israel Ltd.
Tel Aviv
100.00
Kenya
Merck Healthcare and Life Science Limited
Nairobi
100.00
MERCK Limited
Germany
Dubai
Emirates
III. Companies measured at fair value through other comprehensive income in accordance with IFRS 9 due to immateriality and
other equity investments
Germany
Germany
BEEoled GmbH
Dresden
21.76
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Germany
thereof:
Merck KGaA
(%)
100.00
Equity
interest (%)
Company
II. Companies accounted for using the equity method
Other European
countries
United Kingdom
MM Domain Holdco Limited
London
50.00
50.00
North America
United States
Syntropy Technologies LLC
Wilmington
50.00
Footnotes follow at the end of the table.
Consolidated Financial Statements Notes to the Consolidated Financial Statements Other Disclosures
346
Country
Registered office
32.41
Netherlands
Russia
Switzerland
United States
United States
United States
Country
347
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
Footnotes follow at the end of the table.
24.99
Wilmington
Polaris Electro-Optics, Inc
United States
23.55
Los Angeles
Pictor Labs, Inc.
United States
20.67
Ann Arbor
Asia-Pacific (APAC)
32.16
China
Singapore
Middle East and Africa (MEA)
Dominican Republic
Latin America
100.00
Singapore
35.00
Kawasaki
100.00
Shanghai
Merck Testing (Shanghai) Co., Ltd.
Resonac Versum Materials Co. LTD D)
Merck Life Science Testing Services Pte.
Ltd.
100.00
35.61
44.50
Equity
interest (%)
Registered office
St. Louis
St. Louis
Wilmington
Prolog Healthy Living Fund II, L.P. C)
Prolog Healthy Living Fund, L.P. C)
Surface Solutions, LLC
Company
Japan
Algeria
Wilmington
Wilmington
United Kingdom
United Kingdom
United Kingdom
United Kingdom
100.00
Feltham
Merck Ltd.
United Kingdom
100.00
Feltham
Merck Cross Border Trustees Ltd.
United Kingdom
22.21
London
Macrophage Pharma Limited
Adsorptionstechnik AG
39.11
Muttenz
Merck Pension Trustees Ltd.
Outrun Therapeutics Limited
Sigma Chemical Co. Ltd.
Theolytics Ltd.
25.43
Feltham
Dundee
100.00
Wilmington
50.00
Dover
21.65
Toronto
Future Fertility Inc.
Actithera Inc.
EMD Biotech LLC
ImmuneBridge Inc.
Indi Molecular, Inc.
MemryX Inc.
United States
United States
North America
Canada
United States
United States
United States
23.80
Oxford
100.00
Gillingham
35.40
100.00
Israel
Israel
Nigeria
Helene von Roeder
Mikado
Matthias Heinzel
M. Henizel
Peter Guenter
Kai Beckmann
Bohum
Belén Garijo
Darmstadt, February 14, 2024
To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated
financial statements of the Merck Group give a true and fair view of the assets, liabilities, financial position, and
profit or loss of the Group. The combined management report includes a fair review of the development and
performance of the business and the position of the Group, together with a description of the material
opportunities and risks associated with the expected development of the Group.
Responsibility statement
349
Other Information Responsibility Statement
363 Financial Calendar
362 Business Development 2019-2023
350 Independent Auditor's Report
349 Responsibility Statement
350
other information
Other Information Reproduction of the Independent Auditor's Report
To Merck Kommanditgesellschaft auf Aktien, Darmstadt, Germany
Switzerland
United Kingdom
Kivu BioScience B.V.
Naarden
21.66
Chemical Trade Limited LLC
Moscow
100.00
Asceneuron SA
Lausanne
Pursuant to section 322 (3) sentence 1 HGB, we declare that our audit has not led to any reservations relating
to the legal compliance of the consolidated financial statements and of the combined management report.
the accompanying combined management report as a whole provides an appropriate view of the Group's
position. In all material respects, this combined management report is consistent with the consolidated
financial statements, complies with German legal requirements and appropriately presents the
opportunities and risks of future development. Our audit opinion on the combined management report does
not cover the content of the above-mentioned statements and disclosures extraneous to the combined
management report.
the accompanying consolidated financial statements comply, in all material respects, with the IFRS as
adopted by the EU and the additional requirements of German commercial law pursuant to section 315e (1)
HGB and, in compliance with these requirements, give a true and fair view of the assets, liabilities and
financial position of the Group as at December 31, 2023, and of its financial performance for the financial
year from January 1 to December 31, 2023, and
In our opinion, on the basis of the knowledge obtained in the audit,
We have audited the consolidated financial statements of Merck Kommanditgesellschaft auf Aktien,
Darmstadt, Germany, and its subsidiaries (the Group) which comprise the consolidated balance sheet as at
December 31, 2023, the consolidated income statement, the consolidated statement of comprehensive
income, the consolidated statement of changes in net equity and the consolidated cash flow statement for
the financial year from January 1 to December 31, 2023, and the notes to the consolidated financial
statements, including a summary of significant accounting policies. In addition, we have audited the
combined management report for the parent and the Group of Merck Kommanditgesellschaft auf Aktien,
Darmstadt, Germany, for the financial year from January 1 to December 31, 2023. In accordance with the
German legal requirements, we have not audited the content of the combined non-financial statement
pursuant to sections 289b and 315b German Commercial Code (HGB) included in the section "Non-financial
statement" of the combined management report, nor the corporate governance statement pursuant to
sections 289f and 315d HGB referred to in the combined management report. Moreover, we have not audited
the content of the disclosures described as extraneous to the combined management report.
Audit Opinions
Report on the Audit of the Consolidated
Financial Statements and of the Combined
Management Report
Reproduction of the
Independent Auditor's
Report
100.00
100.00
Helene von Roeder
20.00
Wilaya de Tipiza
100.00
Santo Domingo
Representaciones MEPRO S.A.
Merck S.A.
Venezuela
Venezuela
Latin America
Merck Foundation gGmbH
Germany
Germany
IV. Majority interest in non-controlled companies
Merck Pharmaceutical and Life Sciences
Ltd.
PxE Computational Imaging Ltd.
Sentaur Bio Ltd.
Novapharm Production SARL
Merck Dominicana, S.R.L.
Lachish Darom
26.92
Yavne
98.37
Indaco
Matthias Heinzel
M. Heinzel
Peter Guenter
Kai Beckmann
1Bchmmmm
Belén Garijo
Darmstadt, February 14, 2024
Yavne
D) This is an affiliate within the meaning of IFRS 11 (joint activity).
A) Companies opting for exemption as provided for by section 264 (3) and section 264b of the German Commercial Code.
B) Fully-consolidated due to majority of voting rights.
Caracas
Caracas
100.00
100.00
Darmstadt
thereof:
Merck KGaA
(%)
100.00
Lagos
C) Closed-end funds classified as debt instruments in accordance with IFRS 9.
Merck Finance S.à r.l.
PMatX Ltd.
100.00
Singapore
Taiwan
100.00
Singapore
Versum Materials Singapore International Pte. Ltd.
Singapore
100.00
Singapore
Sigma-Aldrich Pte. Ltd.
Singapore
100.00
Singapore
Merck Pte. Ltd.
Singapore
100.00
Singapore
Merck Performance Materials Pte. Ltd.
Singapore
100.00
Pyeongtaek-shi
Versum Materials Singapore Pte. Ltd.
Versum Materials SPC Korea Ltd.
Singapore
Merck Ltd.
74.00
Taipei
Versum Materials Taiwan Co., Ltd.
Merck Ltd. B)
Merck S.A.
Merck Healthcare Vietnam Limited
Merck Vietnam Company Limited
Argentina
Latin America
Vietnam
Vietnam
Taiwan
Thailand
100.00
Kaohsiung
100.00
Taipei
Merck Performance Materials Ltd.
SAFC Hitech Taiwan Co., Ltd.
Taiwan
Taiwan
100.00
Taipei
100.00
Bangkok
100.00
100.00
341
Equity interest
Country
Latvia
Lithuania
Company
Merck Serono SIA
Merck Serono, UAB
Registered office
(%)
thereof:
Merck KGaA (%)
Riga
100.00
Vilnius
100.00
Luxembourg
Merck Chemicals Holding S.à r.l.
Luxembourg
100.00
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
Siheung-Si
100.00
M Chemicals Inc.
Siheung-si
100.00
Ansan-si
100.00
Ansan-si
100.00
Seoul
100.00
Pyeongtaek-shi
Versum Materials ADM Korea Inc.
Versum Materials HYT Inc.
Versum Materials Korea Inc.
Versum Materials PM Korea Inc.
Merck Performance Materials Ltd.
Sigma-Aldrich Korea Ltd.
99.99
Seoul
100.00
Seoul
Merck Electronic Materials Ltd.
Merck Ltd.
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
Republic of Korea
100.00
Eumseong
Israel
45.11
Hong Kong
100.00
345
Consolidated Financial Statements. Notes to the Consolidated Financial Statements Other Disclosures
Footnotes follow at the end of the table.
100.00
Montevideo
Ares Trading Uruguay S.A.
Herzliya Pituach
Uruguay
100.00
Lima
Merck Peruana S.A.
Peru
100.00
Panama City
100.00
Panama City
100.00
Toluca
100.00
Country
Mexico City
Middle East and
Israel
Ho Chi Minh City
Equity interest
thereof:
Registered office
(%)
Merck KGaA (%)
Africa (MEA)
Egypt
Merck Ltd.
Cairo
100.00
Israel
Yavne
Company
100.00
Israel
InterPharm Laboratories Ltd.
Yavne
100.00
Merck Serono Ltd.
100.00
Inter-Lab Ltd.
Mesofarma Corporation
100.00
Santiago de Chile
Merck S.A.
Chile
100.00
Barueri
Sigma-Aldrich Brasil Ltda.
Brazil
Chile
100.00
100.00
Buenos Aires
Brazil
Argentina
100.00
Buenos Aires
100.00
Mexico City
Rio de Janeiro
Sigma-Aldrich Quimica Ltda.
Sigma-Aldrich de Argentina S.R.L.
Merck S.A.
100.00
Sigma-Aldrich Quimica, S. de R.L. de C.V.
Santiago de Chile
Merck Biopharma Distribution S.A. de C.V.
Merck, S.A. de C.V.
Panama
Merck, S.A.
Panama
Mexico
Mexico
Mexico
100.00
Ho Chi Minh City
Merck, S.A.
Guatemala City
Merck S.A.
Bogota
100.00
Ecuador
Guatemala
Colombia
Quito
100.00
Merck C.A.
Furthermore, we analyzed correspondence with the competent tax authorities and assessed the assumptions
underlying the determination of income tax liabilities based on our knowledge and experience of how the
relevant legal requirements are currently applied by the tax authorities and courts. We used a risk-based audit
approach to audit the accuracy of the calculation of the income tax liabilities.
Other Information Reproduction of the Independent Auditor's Report
353
Other Information
Among other things, as part of our audit we obtained an understanding of the process and of the
accounting-relevant controls included in the process and involved our own tax experts in respect of national and
international tax law into the audit team in order to evaluate the executive directors' judgments and estimates
as well as the assessment of the engaged external experts, if any. Where identified controls were relevant for
our audit, we had their design and implementation tested.
the remuneration report pursuant to section 162 German Stock Corporation Act (AktG),
•
the report of the supervisory board,
•
•
•
•
We obtained an understanding of existing tax risks through inquiry of employees in the tax department. We
assessed the competence, capabilities and objectivity of the external experts and evaluated their expert
opinions.
The executive directors and/or the supervisory board are responsible for the other information. The other
information comprises:
the corporate governance statement pursuant to sections 289f and 315d HGB referred to in the combined
management report,
the other content of the combined management report described as extraneous to the combined
management report,
the executive directors' confirmation regarding the consolidated financial statements and the combined
management report pursuant to section 297 (2) sentence 4 and section 315 (1) sentence 5 HGB, and
Management Report
all other parts of the annual report,
but not the consolidated financial statements, not the audited content of the combined management report
and not our auditor's report thereon.
The supervisory board is responsible for the report of the supervisory board. The executive directors and the
supervisory board are responsible for the statement according to section 161 AktG concerning the German
Corporate Governance Code, which is part of the corporate governance statement, and for the remuneration
report pursuant to section 162 AktG. Otherwise, the executive directors are responsible for the other
information.
Our audit opinions on the consolidated financial statements and on the combined management report do not
cover the other information, and consequently we do not express an audit opinion or any other form of
assurance conclusion thereon.
In connection with our audit, our responsibility is to read the other information identified above and, in doing
so, to consider whether the other information:
is materially inconsistent with the consolidated financial statements, with the audited content of the group
management report or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
354
Other Information Reproduction of the Independent Auditor's Report
Responsibilities of the Executive Directors and the Supervisory Board
for the Consolidated Financial Statements and the Combined
b)
the combined consolidated non-financial statement pursuant to sections 289b and 315b HGB included in
the section "Non-financial statement" of the combined management report,
•
Our presentation of these key audit matters has been structured as follows:
The Group operates in different jurisdictions with different legal systems. The application of local tax regulations
and tax incentives as well as transfer pricing rules is complex. The recognition and measurement of income tax
liabilities require the executive directors to exercise judgment in assessing tax matters and to make estimates
regarding uncertain tax positions. In order to reinforce and validate their own risk assessment, the executive
directors engaged external experts as deemed necessary. There is a risk for the consolidated financial
statements that income tax liabilities are not fully recognized or not appropriately measured. For these reasons,
this matter was of particular significance in our audit.
The executive directors are responsible for the preparation of the consolidated financial statements that comply,
in all material respects, with IFRS as adopted by the EU and the additional requirements of German commercial
law pursuant to section 315e (1) HGB, and that the consolidated financial statements, in compliance with these
requirements, give a true and fair view of the assets, liabilities, financial position and financial performance of
the Group. In addition, the executive directors are responsible for such internal control as they have
determined necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud (i.e. fraudulent financial reporting and misappropriation of assets) or error.
In preparing the consolidated financial statements, the executive directors are responsible for assessing the
Group's ability to continue as a going concern. They also have the responsibility for disclosing, as applicable,
matters related to going concern. In addition, they are responsible for financial reporting based on the going
concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there
is no realistic alternative but to do so.
351
Other Information Reproduction of the Independent Auditor's Report
Basis for the Audit Opinions
We conducted our audit of the consolidated financial statements and of the combined management report in
accordance with section 317 HGB and the EU Audit Regulation (No. 537/2014; referred to subsequently as "EU
Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits
promulgated by the Institut der Wirtschaftsprüfer (IDW). Our responsibilities under those requirements and
principles are further described in the "Auditor's Responsibilities for the Audit of the Consolidated
Financial Statements and of the Combined Management Report" section of our auditor's report. We are
independent of the group entities in accordance with the requirements of European law and German commercial
and professional law, and we have fulfilled our other German professional responsibilities in accordance with
these requirements. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we
declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinions on the consolidated financial statements and on the combined management report.
Key Audit Matters in the Audit of the Consolidated Financial
Statements
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the consolidated financial statements for the financial year from January 1 to December 31, 2023. These
matters were addressed in the context of our audit of the consolidated financial statements as a whole and in
forming our audit opinion thereon; we do not provide a separate audit opinion on these matters.
In the following we present the key audit matters we have determined in the course of our audit:
1.
2.
Recoverability of goodwill in the Electronics business sector
Completeness and measurement of income tax liabilities
a)
b)
The disclosures of the executive directors on recognition and measurement of income tax liabilities can be
found in note 15 in the notes to the consolidated financial statements.
1.
description (including reference to corresponding information in the consolidated financial statements)
auditor's response
Recoverability of goodwill in the Electronics business sector
In the consolidated financial statements as of December 31, 2023, of Merck Kommanditgesellschaft auf
Aktien, Darmstadt, Germany, the amount stated under the balance sheet item "Goodwill" is mEUR 17,845
(36.8% of the Group's total assets), with mEUR 4,532 attributable to the Electronics business sector. The
Electronics business sector represents a cash-generating unit.
Recoverability of goodwill of the cash-generating unit Electronics was a key matter in our audit because we
identified an increased impairment risk for this business sector as part of our risk assessment. The impairment
test for the preparation of the consolidated financial statements is based on a valuation of the Electronics
business sector that involves discounting the planned future cash flows for this business sector at weighted
average cost of capital using a discounted cash flow model. The planned cash flows are derived from the
medium-term planning for the business sector approved by the executive directors, which is extrapolated based
on assumed long-term growth rates.
The result of this valuation highly depends on the executive directors' judgmental determination of future cash
flows and the discount rate for the business sector and is therefore subject to considerable uncertainties.
Therefore, and as a result of our risk assessment, this matter was of particular significance in our audit.
Other Information Reproduction of the Independent Auditor's Report
352
The disclosures of the executive directors on goodwill can be found in note 18 in the notes to the consolidated
financial statements.
b)
Among others, in our audit we obtained an understanding of the accounting-relevant controls included in
the process and reproduced the methodological approach to performing the impairment tests. Where identified
controls were relevant for our audit, we had their design and implementation tested. Where estimates were
made by the executive directors, we assessed whether the methods applied, assumptions made and data used
were acceptable. Regarding the projection of future cash flows, we firstly evaluated the planning reliability by
reviewing the past adherence to planning, walked through the underlying planning process and conducted a
critical assessment. Subsequently, we evaluated the appropriateness of the future cash flows used in the
valuation, especially by comparing these figures with the medium-term planning approved by the executive
directors and by reconciling selected planning assumptions with general, company and industry-specific market
expectations. We obtained a deep understanding of the parameters applied in determining the discount rate
used, evaluated the completeness and accuracy of the calculation scheme and had them compared with general
and industry-specific market expectations. Furthermore, due to the material significance of goodwill, we
performed an additional own sensitivity analysis for the cash-generating unit (comparison of carrying amount
with recoverable amount). As part of our audit, we were supported by internal valuation experts. Using their
help, we reproduced the methodological approach to impairment testing, the arithmetical correctness of the
valuation model as well as the determination of the used discount rate.
2.
a)
Completeness and measurement of income tax liabilities
As at December 31, 2023, the amount recognized for income tax liabilities including liabilities for
uncertain tax obligations is mEUR 1,473.
a)
Furthermore, the executive directors are responsible for the preparation of the combined management report
that as a whole provides an appropriate view of the Group's position and is, in all material respects, consistent
with the consolidated financial statements, complies with German legal requirements, and appropriately
presents the opportunities and risks of future development. In addition, the executive directors are responsible
for such arrangements and measures (systems) as they have considered necessary to enable the preparation of
a combined management report that is in accordance with the applicable German legal requirements, and to be
able to provide sufficient appropriate evidence for the assertions in the combined management report.
identify and assess the risks of material intentional or unintentional non-compliance with the requirements
of section 328 (1) HGB, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our audit opinion.
Auditor's Responsibilities for the Audit of the Consolidated Financial
Statements and of the Combined Management Report
statement
Limited assurance report of the independent
practitioner regarding the non-financial
359
Other Information Reproduction of the Independent Auditor's Report
(German Public Auditor)
Wirtschaftsprüfer
Daniel Weise
Signed:
To Merck Kommanditgesellschaft auf Aktien, Darmstadt/Germany
(German Public Auditor)
Christoph Schenk
Signed:
Wirtschaftsprüfungsgesellschaft
Deloitte GmbH
Frankfurt am Main, Germany, February 16, 2024
The German Public Auditor responsible for the engagement is Daniel Weise.
German Public Auditor Responsible for the
Engagement
Other Information Reproduction of the Independent Auditor's Report
Wirtschaftsprüfer
358
Our Engagement
Our assurance engagement did not cover the remuneration report and sustainability report, which are referred
to in the non-financial reporting, nor any references to external sources of documentation and websites
contained in the non-financial reporting, including the contents of such sources of documentation and websites.
Moreover, our assurance engagement did not consider any disclosures relating to prior periods.
Reconciliation of selected disclosures with the corresponding data in the consolidated financial statements
and the annual financial statements and combined management report,
Analytical procedures on selected information in the non-financial reporting,
Identification of likely risks of material misstatement in the non-financial reporting,
Inquiries of the executive directors and relevant employees involved in the preparation of the non-financial
reporting about the preparation process, about the internal control related to this process and about
disclosures in the non-financial reporting,
Gaining an understanding of the structure of the Group's sustainability organization and stakeholder
engagement,
The procedures performed in a limited assurance engagement are less in extent than for a reasonable
assurance engagement; consequently, the level of assurance obtained in a limited assurance engagement is
substantially lower than the assurance that would have been obtained had a reasonable assurance engagement
been performed. The choice of assurance work is subject to the practitioner's professional judgment.
Within the scope of our assurance engagement, which we performed in the months from October 2023 to
February 2024, we have, among other things, performed the following assurance procedures and other
activities:
We conducted our assurance engagement in accordance with the International Standard on Assurance
Engagements (ISAE) 3000 (Revised): "Assurance Engagements other than Audits or Reviews of Historical
Financial Information" issued by the IAASB. This standard requires that we plan and perform the assurance
engagement to obtain limited assurance about whether any matters have come to our attention that cause us
to believe that the Company's non-financial reporting - with the exception of the referenced remuneration
report and sustainability report and of references to external sources of documentation and websites including
their contents as well as of disclosures relating to prior periods - is not prepared, in all material respects, in
accordance with section 289c to section 289e HGB, section 315c in conjunction with section 289c to
section 289e HGB and the EU Taxonomy Regulation and the delegated acts adopted thereunder as well as the
interpretation by the executive directors disclosed in the section "Reporting in accordance with the EU
Taxonomy Regulation” of the non-financial reporting.
Our responsibility is to express a conclusion with limited assurance on the non-financial reporting based on our
assurance engagement.
We have performed a limited assurance engagement on the consolidated non-financial statement of Merck
Kommanditgesellschaft auf Aktien, Darmstadt/Germany, ("the Company"), which was combined with the non-
financial statement of the Company, for the financial year from January 1 to December 31, 2023 ("non-financial
reporting") included in the combined management report on the Company and the Group.
Our audit firm applies the national legal requirements and professional pronouncements - in particular the
Professional Charter for German Public Auditors and German Sworn Auditors (BS WP/vBP) and the quality
management standards issued by the Institute of Public Auditors in Germany (IDW) - and accordingly
maintains a comprehensive quality management system that includes documented policies and procedures with
regard to compliance with professional ethical requirements, professional standards as well as relevant
statutory and other legal requirements.
Independence and Quality Assurance of the Audit Firm
360
Other Information Reproduction of the Independent Auditor's Report
The preciseness and completeness of the environmental data in the non-financial reporting is subject to
inherent restrictions resulting from the manner in which the data was collected and calculated as well as from
assumptions made.
The EU Taxonomy Regulation and the delegated acts adopted thereunder contain wording and terms that are
still subject to considerable interpretation uncertainties and for which clarifications have not yet been published
in every case. Therefore, the executive directors have disclosed their interpretation of the EU Taxonomy
Regulation and the delegated acts adopted thereunder in the section "Reporting in accordance with the EU
Taxonomy Regulation” of the non-financial reporting. They are responsible for the defensibility of this
interpretation. Due to the immanent risk that indeterminate legal terms may be interpreted differently, the
legal conformity of the interpretation is subject to uncertainties.
This responsibility includes the selection and application of appropriate non-financial reporting methods and
making assumptions and estimates about individual non-financial information of the Group that are reasonable
in the circumstances. Furthermore, the executive directors are responsible for such internal control as the
executive directors consider necessary to enable the preparation of a non-financial reporting that is free from
material misstatement, whether due to fraud (i.e. fraudulent non-financial reporting) or error.
The executive directors of the Company are responsible for the preparation of the non-financial reporting in
accordance with section 289c to section 289e German Commercial Code (HGB), section 315c in conjunction
with section 289c to section 289e HGB and Article 8 of Regulation (EU) 2020/852 of the Parliament and the
Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and
amending Regulation (EU) 2019/2088 ("EU Taxonomy Regulation") and the delegated acts adopted thereunder,
as well as for making their own interpretation of the wording and terms contained in the EU Taxonomy
Regulation and the delegated acts adopted thereunder, as set out in the section "Reporting in accordance
with the EU Taxonomy Regulation" of the non-financial reporting.
Responsibility of the Executive Directors
We have complied with the German professional requirements on independence as well as other professional
conduct requirements.
-
Our auditor's report must always be read together with the audited consolidated financial statements and the
audited combined management report as well as with the audited ESEF documents. The consolidated financial
statements and the combined management report converted into the ESEF format - including the versions to
be submitted for inclusion in the Company Register are merely electronic reproductions of the audited
consolidated financial statements and the audited combined management report and do not take their place. In
particular, the ESEF report and our audit opinion contained therein are to be used solely together with the
audited ESEF documents made available in electronic form.
Use of the Auditor's Report
Other Legal and Regulatory Requirements
356
Other Information Reproduction of the 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 for the current period and are therefore
the key audit matters. We describe these matters in the auditor's report unless law or regulation precludes
public disclosure about the matter.
We provide those charged with governance with a statement that we have complied with the relevant
independence requirements, and communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, the actions taken or safeguards
applied to eliminate independence threats.
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.
perform audit procedures on the prospective information presented by the executive directors in the combined
management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the
significant assumptions used by the executive directors as a basis for the prospective information, and
evaluate the proper derivation of the prospective information from these assumptions. We do not express a
separate audit opinion on the prospective information and on the assumptions used as a basis. There is a
substantial unavoidable risk that future events will differ materially from the prospective information.
evaluate the consistency of the combined management report with the consolidated financial statements,
its conformity with German law, and the view of the Group's position it provides.
Report on the Audit of the Electronic Reproductions of the
Consolidated Financial Statements and of the Combined Management
report Prepared for Publication Pursuant to section 317 (3a) HGB
evaluate the overall presentation, structure and content of the consolidated financial statements, including
the disclosures, and whether the consolidated financial statements present the underlying transactions and
events in a manner that the consolidated financial statements give a true and fair view of the assets,
liabilities, financial position and financial performance of the Group in compliance with IFRS as adopted by
the EU and with the additional requirements of German commercial law pursuant to section 315e (1) HGB.
obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Group to express audit opinions on the consolidated financial statements and on the
combined management report. We are responsible for the direction, supervision and performance of the
group audit. We remain solely responsible for our audit opinions.
evaluate the appropriateness of accounting policies used by the executive directors and the reasonableness
of estimates made by the executive directors and related disclosures.
obtain an understanding of internal control relevant to the audit of the consolidated financial statements
and of arrangements and measures relevant to the audit of the combined management report in order to
design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
audit opinion on the effectiveness of these systems.
identify and assess the risks of material misstatement of the consolidated financial statements and of the
combined management report, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our audit opinions. The risk of not detecting a material misstatement resulting from fraud is higher than the
risk of not detecting a material misstatement resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal controls.
We exercise professional judgment and maintain professional skepticism throughout the audit. We also:
355
Other Information Reproduction of the Independent Auditor's Report
Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance
with section 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted
Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always
detect a material misstatement. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of these consolidated financial statements and this group management report.
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a
whole are free from material misstatement, whether due to fraud or error, and whether the combined
management report as a whole provides an appropriate view of the Group's position and, in all material
respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit,
complies with the German legal requirements and appropriately presents the opportunities and risks of future
development, as well as to issue an auditor's report that includes our audit opinions on the consolidated
financial statements and on the combined management report.
conclude on the appropriateness of the executive directors' use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in the auditor's report to the
related disclosures in the consolidated financial statements and in the combined management report or, if
such disclosures are inadequate, to modify our respective audit opinions. Our conclusions are based on the
audit evidence obtained up to the date of our auditor's report. However, future events or conditions may
cause the Group to cease to be able to continue as a going concern.
Audit Opinion
We have performed an audit in accordance with section 317 (3a) HGB to obtain reasonable assurance whether
the electronic reproductions of the consolidated financial statements and of the combined management report
(hereinafter referred to as "ESEF documents") prepared for publication, contained in the file, which has the SHA
256 value c114c083dc2ea03436431c301daa4137a7a71bd1b9fb0c7c074e316f288ebc8f, meet, in all material
respects, the requirements for the electronic reporting format pursuant to section 328 (1) HGB ("ESEF
format"). In accordance with the German legal requirements, this audit only covers the conversion of the
information contained in the consolidated financial statements and the combined management report into the
ESEF format, and therefore covers neither the information contained in these electronic reproductions, nor any
other information contained in the file identified above.
In our opinion, the electronic reproductions of the consolidated financial statements and of the combined
management report prepared for publication contained in the file identified above meet, in all material respects,
the requirements for the electronic reporting format pursuant to section 328 (1) HGB. Beyond this audit opinion
and our audit opinions on the accompanying consolidated financial statements and on the accompanying
combined management report for the financial year from January 1 to December 31, 2023 contained in the
"Report on the Audit of the Consolidated Financial Statements and of the Combined Management Report"
above, we do not express any assurance opinion on the information contained within these electronic
reproductions or on any other information contained in the file identified above.
-
Other Matter
We declare that the audit opinions expressed in this auditor's report are consistent with the additional report to
the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report).
We were elected as Group auditor by the general meeting on April 22, 2022. We were engaged by the
supervisory board on April 28, 2023. We have been the auditor of Merck Kommanditgesellschaft auf Aktien,
Darmstadt/Germany, since the financial year 2023.
Further Information pursuant to Article 10 of the EU Audit Regulation
evaluate whether the tagging of the ESEF documents with Inline XBRL technology (iXBRL) in accordance
with the requirements of Articles 4 and 6 of the Delegated Regulation (EU) 2019/815, in the version in
force at the balance sheet date, enables an appropriate and complete machine-readable XBRL copy of the
XHTML reproduction.
evaluate whether the ESEF documents enable a XHTML reproduction with content equivalent to the audited
consolidated financial statements and to the audited combined management report.
evaluate the technical validity of the ESEF documents, i.e. whether the file containing the ESEF documents
meets the requirements of the Delegated Regulation (EU) 2019/815, in the version in force at the balance
sheet date, on the technical specification for this electronic file.
obtain an understanding of internal control relevant to the audit on the ESEF documents in order to design
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
assurance opinion on the effectiveness of these controls.
Our objective is to obtain reasonable assurance about whether the ESEF documents are free from material
intentional or unintentional non-compliance with the requirements of section 328 (1) HGB. We exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
Group Auditor's Responsibilities for the Audit of the ESEF Documents
357
Other Information Reproduction of the Independent Auditor's Report
The supervisory board is responsible for overseeing the process for preparing the ESEF documents as part of
the financial reporting process.
In addition, the executive directors of the parent are responsible for such internal controls that they have
considered necessary to enable the preparation of ESEF documents that are free from material intentional or
unintentional non-compliance with the requirements for the electronic reporting format pursuant to section 328
(1) HGB.
The executive directors of the parent are responsible for the preparation of the ESEF documents based on the
electronic files of the consolidated financial statements and of the group management report according to
section 328 (1) sentence 4 no. 1 HGB and for the tagging of the consolidated financial statements according to
section 328 (1) sentence 4 no. 2 HGB.
Responsibilities of the Executive Directors and the Supervisory Board for the
ESEF Documents
We conducted our audit of the electronic reproductions of the consolidated financial statements and of the
combined management report contained in the file identified above in accordance with section 317 (3a) HGB
and on the basis of the IDW Auditing Standard: Audit of the Electronic Reproductions of Financial Statements
and Management Reports Prepared for Publication Purposes Pursuant to section 317 (3a) HGB (IDW AUS 410
(06.2022)). Our responsibilities in this context are further described in the "Group Auditor's Responsibilities
for the Audit of the ESEF Documents" section. Our audit firm has applied the requirements set forth in the
IDW Quality Management Standards.
Basis for the Audit Opinion
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.
Responsibility of the Independent Practitioner
Evaluation of the presentation of the non-financial reporting, and
Evaluation of the process to identify taxonomy-eligible and taxonomy-aligned economic activities and the
corresponding disclosures in the non-financial reporting.
25.2%
Current
0.4%
9,239
9,200
8,270
9,785
8,644
Non-current
-4.7%
9,941
10,428
10,801
12,142
4,550
2,357
2,531
1,228
and equipment³
1,807
1,531
Payments for investments in property, plant,
-21.5%
216
13,194
275
150
208
Payments for investments in intangible assets³
Liquidity
-42.9%
702
355
Financial liabilities
2.9%
26,005
Trade receivables and other current
0.1%
4,637
4,632
361
Other Information Reproduction of the Independent Auditor's Report
receivables
In determining the information in accordance with Article 8 of the EU Taxonomy Regulation, the executive
directors are required to interpret indeterminate legal terms. Due to the immanent risk that indeterminate legal
terms may be interpreted differently, the legal conformity of their interpretation and, accordingly, our
assurance engagement thereon are subject to uncertainties.
Based on the assurance procedures performed and the evidence obtained, nothing has come to our attention
that causes us to believe that the combined non-financial statement of the Company for the financial year from
January 1, 2023 to December 31, 2023 is not prepared, in all material respects, in accordance with
section 289c to section 289e HGB, section 315c in conjunction with section 289c to section 289e HGB and the
EU Taxonomy Regulation and the delegated acts adopted thereunder as well as the interpretation by the
executive directors as disclosed in the section "Reporting in accordance with the EU Taxonomy
Regulation" of the combined non-financial statement.
Our assurance engagement did not cover any external sources of documentation, expert opinions or references
to external websites listed in the combined non-financial statement.
Restriction of Use
We issue this report as stipulated in the engagement letter agreed with the Company (including the "General
Engagement Terms for Wirtschaftsprüfer and Wirtschaftsprüfungsgesellschaften (German Public Auditors and
Public Audit Firms)" as of January 1, 2017, promulgated by the Institut der Wirtschaftsprüfer (IDW)). We draw
attention to the fact that the assurance engagement was conducted for the Company's purposes and that the
report is intended solely to inform the Company about the result of the assurance engagement. Consequently,
it may not be suitable for any other purpose than the aforementioned. Accordingly, the report is not intended to
be used by third parties for making (financial) decisions based on it.
Our responsibility is to the Company alone. We do not accept any responsibility to third parties. Our conclusion
is not modified in this respect.
Frankfurt am Main, Germany, February 16, 2024
Practitioner's Conclusion
813
4,114
3,488
21,416
17,017
17,914
Equity
6.9%
1,982
4,004
1,854
1,355
781
Cash and cash equivalents
-2.7%
3,646
3,221
1,899
1,413
1,066
18.0%
April
2024
7 Annual Press Conference
March
Financial calendar
4 Proposal on the appropriation of profits for 2023.
26 Annual General Meeting
3 According to the consolidated cash flow statement.
1 Not defined by International Financial Reporting Standards (IFRS).
-2.1%
62,908
64,232
60,334
58,096
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
57,036
2024
15 Quarterly Statement Q1
www.nexxar.com
nexxar GmbH, Vienna
DESIGN
Frankfurter Strasse 250,
64293 Darmstadt, Germany
Telephone: +49 6151 72-0
www.merckgroup.com
Published on March 7, 2024
by Merck KGaA
M
May
2024
November
Half-yearly
Financial Report
2024
1
August
2024
14 Quarterly Statement Q3
Deloitte GmbH
Employees (number as of December 31)
2.204
-9.9%
7,500
8,328
8,753
10,758
12,363
Other key data
Net financial debt¹
3,784
4,259
4,616
3,477
2,856
Operating cash flow³
-11.2%
0.0%
Equity ratio (in %)¹
40.7%
2.20
1.85
1.40
-3.0%
2,445
2,521
40.9%
2,426
2,268
1.30
Dividend per share (in €)
Research and development costs
55.2%
53.6%
47.2%
2,288
Wirtschaftsprüfungsgesellschaft
26,754
Daniel Oehlmann
-15.2%
Assets and liabilities
Total assets
43,808
41,796
45,362
6.49
48,535
-0.1%
Non-current assets
34,805
32,516
34,380
36,334
48,495
36,102
7.65
4.57
2,630
3,924
4,287
3,484
-18.7%
Profit after tax
7.03
1,324
3,065
3,339
2,834
-15.1%
Earnings per share (in €)
3.04
1,994
1,735
Signed:
Goodwill
9,056
10.4%
Current assets
9,003
9,280
10,982
8,204
12,201
1.6%
thereof:
Inventories
3,342
3,294
3,900
12,393
thereof:
7,217
6,192
17,114
15,959
17,004
18,389
17,845
-3.0%
6,421
Other intangible assets
7,653
7,612
7,335
6,551
-10.7%
Property, plant, and equipment
9,221
Profit before income tax
-0.6%
30.8%
-5.6%
-19.3%
20,993
3,609
4,474
4,179
2,985
2,120
Operating result (EBIT)¹
22,232
19,687
17,534
16,152
Net sales
Results of operations
2022
2021
2020
2019
28.0%
Wirtschaftsprüfer
(German Public Auditor)
Signed:
Jan Joos
Wirtschaftsprüfer
Margin (% of net sales) 1
(German Public Auditor)
362
Business
BUSINESS DEVelopment
2019-2023
This overview may include historically adjusted values in order to ensure comparability with the reporting
period.
€ million
Other Information Business Development 2019 - 2023
13.1%
2023 Change in %
4,385
345
390
13.1%
EBITDA pre¹
5,201
6,103
279
6,849
-14.2%
Margin (% of net sales) 1
27.1%
29.7%
17.0%
31.0%
5,879
318
157
5,946
17.2%
EBITDA²
4,066
4,923
Adjustments¹
6,504
5,489
-15.6%
Margin (% of net sales) 1
28.1%
30.2%
29.3%
26.1%
20.1%
21.2%
thereof: Changes in trade accounts payable/refund liabilities³
-98.0%
-144
101
405
-43
-413
-93
thereof: Changes in trade accounts receivable³
-85.3%
516
-604
-89
> 100.0%
thereof: Changes in inventories³
-8
Changes in provisions³
21
279
-84.7%
-72
Other non-cash income and expenses³
> 100.0%
-102
-48
188
-150
-32.5%
69.6%
-310
-445
-755
Changes in other assets and liabilities³
-91
Neutralization of gains/losses on disposal of fixed assets and
other disposals³
776
31
-141
2023
Changes in working capital¹
Income tax²
Finance result²
Adjustments¹
EBITDA pre¹
2022
€ million
Operating cash flow
Merck Group
Operating cash flow results from Merck's current business activities and describes the cash generated from
operating activities. It is influenced mainly by EBITDA pre, income tax, the financial result and changes in net
working capital.
Operating cash flow (OCF)
Combined Management Report_ Fundamental Information about the Group. Internal Management System
> 100.0%
Change
€ million
%
5,879
-31.4%
298
-948
-650
-33.0%
62
-187
-125
13.1%
-45
-345
-390
-14.2%
-970
6,849
-917
Operating cash flow
Internal rate of return (IRR)
4,259
Life Science
Healthcare
Electronics
Corporate and Other
Total
Change
2023
2022
€ million
%
396
3,784
-3
-0.7%
1,657
297
94
2,445
1,694
-37
-2.2%
308
-11
-3.5%
119
-24
-20.5%
2,521
€ million
Research and Development Costs
Athinia™ is targeting the semiconductor industry and is a collaborative data ecosystem where multiple
companies leverage AI to solve critical challenges by utilizing data to improve supply chain transparency,
quality and reliability of materials and to accelerate time to market. In July 2023, Athinia™ expanded its
partnerships to include Tokyo Electron for real-time collaborative analysis of the performance of semiconductor
manufacturing equipment. As a cloud solution, Athinia ™ is an independent platform that provides a secure and
specific data analytics tool for the industry. In the context of a sustainability application, data from various
sources can be integrated to facilitate seamless collaboration in modeling, exchanging, and calculating carbon
emissions data. As a founding member of the Semiconductor Climate Consortium, Athinia™ is leading the way
in establishing sustainability standards on a digital platform. Companies can use this platform to benchmark
their emissions performance against their industry peers, identify areas for improvement and participate in
collaborative initiatives aimed at reducing emissions.
Syntropy provides a data integration and analytics environment wherein healthcare organizations can
contextualize and analyze infinitely a wide variety of data types across their entire ecosystem in an unlimited
and secure manner. In 2023, Syntropy announced a partnership with Evidium to develop an AI operating
system for healthcare: This alliance will make it easier for clinicians to contextualize clinical data at the source
and for scientists to securely collaborate on that data. In the era of increasingly prevalent generative AI, it is
crucial for AI to be trustworthy and responsible, especially in healthcare.
=4
Relevant non-financial performance measures
Along with the indicators of the financial performance of the businesses, non-financial measures also play an
important role in furthering the success of the company.
High-Impact Culture
Our culture should embody what unites us as well as the way in which we collaborate, lead and work as a team
to achieve human progress and drive the company forward. We live our high-impact culture and through this,
we measure our ability to attract, develop and retain the right people.
Sustainability
According to our sustainability strategy, which was revised in 2023, we aim to achieve human progress through
sustainable science and technology, fully integrate sustainability into our value chains and reduce our ecological
footprint. We are pursuing these goals in seven focus areas, within which we are realizing numerous initiatives
and projects and measuring our progress.
Diversity, equity and inclusion
We know that diversity drives progress. It strengthens our ability to innovate and makes an essential
contribution to our success in science and technology. We actively promote and measure the diversity of our
leaders to create an inclusive culture that reflects our values and enables every employee to fulfill their
potential.
35
Combined Management Report Fundamental Information about the Group. Research and Development
Research and Development
-75
We conduct research and development (R&D) worldwide to develop new products and services to improve the quality
of life of patients and meet the needs of our customers. Further optimizing the relevance and efficiency of our
research and development activities - either on our own or in collaboration with third parties - is one of our top
priorities. In addition, we are continuously improving the fulfilment of our sustainability criteria and integrating them
into our R&D processes starting with our product development stage. In 2023, we evaluated almost all relevant R&D
projects, thereby increasing transparency regarding the sustainability performance of our global R&D portfolio.
The organizational setup of our R&D activities reflects our structure with three business sectors. In the
Life Science business sector, our research activities focus on developing innovative technologies for laboratory
and life science applications in government and academic labs, the biopharmaceutical industry, and the
industrial sector. Our Life Science Technology Office, established in 2022, continues to drive long-term
innovation and ensures that R&D investments are aligned with our growth strategy. Our goal is to accelerate
and impact scientific discovery across our Life Science business units and the Group as a whole. We focus on
digital and automated labware, the factory of the future and novel modalities as well as providing more
sustainable products for the lab. In addition, our teams remain dedicated to delivering advancements in our
core portfolios, such as filtration, pure water for use in laboratories and diagnostic solutions.
With our Healthcare business sector's R&D pipeline, we aspire to make a positive difference for patients. Our
main research areas include oncology and immunology, including multiple sclerosis. The main focus of our
Electronics business sector's research is on developing innovative materials and technologies required for the
manufacture of ever smaller, faster, more powerful, and more sustainable processors and memory chips.
Furthermore, Electronics develops novel materials for next-generation displays and functional and decorative
effect pigments for use in the automotive and cosmetics industries and other industrial applications.
We are firmly convinced that science should not be conducted in silos. We believe that a modern,
multidisciplinary approach to science will power the next wave of human progress. We call this approach
"bioconvergence" because it leverages synergies across digital and material science as well as biotechnology.
Success depends on the ability to combine a broad mix of competencies and technologies across several
disciplines to create novel market solutions. We are a diversified science and technology company with leading
positions across the life science, healthcare and electronics industries. Our goal is to harness synergies not only
within our business sectors, but across them.
Examples of opportunities we are developing at the intersection of our business sectors and converging
technologies include:
Continuing to build our automated design-make-test-analyze platform powered by state-of-the-art artificial
intelligence (AI) and lab automation. This will accelerate the discovery of new and better drug candidates
and in turn expedite timelines for new therapies to reach patients.
Using our capabilities across the Group in messenger ribonucleic acid (mRNA) synthesis, lipid nanoparticle
(LNP) synthesis and formulation and targeted delivery as well as AI to enable the development of "smarter"
LNPs that can more effectively target different tissue types including hard-to-reach biological targets in
various disease areas.
Developing digital twins in smart manufacturing. As virtual models designed to accurately replicate a
physical object or organism, they can help to improve the time, cost, quality, and sustainability of
manufacturing, process optimization and product development. Examples include making pharma supply
chains more traceable and trustworthy. We developed a model for primary packaging in the pharmaceutical
industry, and in cooperation with a partner provided proof-of-concept.
Combined Management Report
Fundamental Information about the Group. Research and Development
36
Advanced microphysiological systems based on human cell culture models promise to deliver faster and
more accurate drug testing results compared with today's two-dimensional approaches and might reduce
animal testing. We are currently looking into this next generation of organoids based on chip technology,
bringing our Life Science, Healthcare and Electronics colleagues together to work on this area of innovation.
In our R&D, AI and machine learning have demonstrated their ability to predict the properties of new materials.
However, our applications of AI and machine learning go beyond just internal use. One example of AI and
machine learning being commercialized is the progress made on AIDDISON™. This AI- powered drug discovery
software uses generative AI based on two decades of historic data. The software, which had been in
development since 2020, was launched by Life Science in 2023. In addition to external commercialization, we
also use it in our Healthcare business sector for internal early drug discovery.
High-quality, interoperable data combined with analytics and AI offer unprecedented potential for new digital
business models adjacent to our current product offering and unlock additional growth opportunities. Examples
include Syntropy and Athinia™, which are partnerships with Palantir.
Around 6,500 employees (2022: approximately 7,300) worked in R&D and related support functions in 2023. They
dealt with innovations to address long-term health and technology trends in both established and growth markets.
Expenditure for R&D amounted to € 2.4 billion in 2023 (2022: € 2.5 billion).
-3.0%
The ratio of research expenditure to Group sales was 11.6% (2022: 11.3%). The increase is due to the
negative sales development.
Combined Management Report
39
Healthcare
With our Healthcare research, we aspire to make a positive difference for patients. Our business sector-wide
"Focused Leadership" approach to pipeline enrichment builds on our established expertise in the underlying
disease biology of our core therapeutic areas of oncology, neurology and immunology as well as technological
capabilities. By building on our existing strengths and maximizing synergies within our pipeline of compounds
discovered in-house and with external assets, we will secure sustainable R&D productivity in order to provide
innovative medicines to patients in need. In November 2022, we announced that we would aim to launch one
new product or indication every 1.5 years on average, bolstered by external innovation.
Oncology*
In Oncology, our scientific curiosity and dedication to patients are at the heart of our efforts to improve the future
of people living with cancer. In this core focus area of our R&D portfolio, we aim to deliver transformative
treatments. Translational research is embedded into the whole R&D process, with several projects addressing
unmet needs in difficult-to-treat cancers through innovative treatment approaches and novel combinations.
We are committed to bringing new standards of care for multiple tumor types to as many patients as possible
worldwide. Therefore, in 2023 we continued to explore the impact of our marketed therapies through continued
analysis of data from our pivotal studies and the generation of real-world evidence. We are assessing these
treatments in new settings as well.
BavencioⓇ
To date, BavencioⓇ (avelumab), an anti-PD-L1 antibody, has been approved in 66 countries as a first-line
maintenance treatment for locally advanced or metastatic urothelial carcinoma (UC) in adult patients whose
disease has not progressed following platinum-based chemotherapy. At the 2023 American Society of Clinical
Oncology (ASCO) Genitourinary Cancers Symposium, we presented long-term follow-up data from the Phase III
JAVELIN Bladder 100 trial. The data demonstrated median overall survival from start of chemotherapy of 29.7
months among patients receiving BavencioⓇ who did not progress on first-line platinum-based chemotherapy,
thus establishing a new benchmark for treatment outcomes in clinical studies.
We continue to evaluate whether optimization of first-line maintenance treatment by adding a novel therapy to
avelumab could improve outcomes for patients with advanced UC whose disease did not progress with first-line
platinum-based chemotherapy in the Phase II JAVELIN Bladder Medley study. Initiated in 2022, this randomized
umbrella study is assessing avelumab monotherapy versus the combination of avelumab with our
investigational anti-TIGIT antibody M6223, avelumab in combination with Nektar Therapeutics' interleukin-15
(IL-15) receptor agonist, NKTR-255, and avelumab in combination with Gilead Sciences' TrodelvyⓇ
(sacituzumab govitecan-hziy).
BavencioⓇ is also approved as a monotherapy for the treatment of metastatic Merkel cell carcinoma (MCC) in
63 countries. In September 2023, we received U.S. Food and Drug Administration approval of a supplemental
Biologics Licensing Application for BavencioⓇ, converting the MCC indication from accelerated approval into full
approval. This makes it the first MCC treatment to receive full approval in the U.S. market.
Additionally, Bavencio® is approved for the treatment of advanced renal cell carcinoma (RCC) in combination
with axitinib in 60 countries.
TepmetkoⓇ
Fundamental Information about the Group. Research and Development
In 2023, we shared multiple analyses of studies of the oral MET inhibitor TepmetkoⓇ (tepotinib) in advanced
non-small cell lung cancer (NSCLC). In a long-term follow-up analysis of the Phase II VISION study published in
JAMA Oncology, TepmetkoⓇ showed robust and durable clinical activity across therapy lines in patients with
METex14-skipping NSCLC, particularly in previously untreated patients with METex14 skipping confirmed by
Combined Management Report Fundamental Information about the Group. Research and Development
40
tissue biopsy. An additional subgroup analysis presented at the 2023 World Congress on Lung Cancer (WCLC)
in September demonstrated the robust and durable clinical activity of TepmetkoⓇ, particularly as a first-line
treatment, with stability in health-related quality of life and a manageable safety profile in Asian patients with
advanced NSCLC with METex14 skipping. Tepmetko® is now available for the treatment of METex14-skipping
NSCLC in 23 markets globally.
We also shared results of the primary analysis of the Phase II INSIGHT 2 study at the WCLC. These findings
suggest the potential of tepotinib plus osimertinib as a chemotherapy-sparing oral targeted therapy option for
patients with EGFR-mutant NSCLC with MET amplification who have developed resistance to prior EGFR tyrosine
kinase inhibitor therapy.
Novel medicines
As we work towards our vision of creating a world where more cancer patients can become cancer survivors, we
continue to pioneer novel medicines, advancing promising molecules in our pipeline that build on our expertise
and leadership in core mechanisms and tumor types.
Our Phase III development program for xevinapant, the potentially first-in-class IAP (inhibitor of apoptosis protein)
inhibitor, in the treatment of squamous cell carcinoma of the head and neck (SCCHN) continues to progress. Patient
enrollment for the TrilynX study (NCT04459715) was completed in 2023. This international, randomized, double-
blind, placebo-controlled Phase III study evaluates the efficacy and safety of xevinapant compared to placebo when
administered in addition to definitive chemoradiotherapy in patients with unresected, locally advanced SCCHN.
Patient recruitment continues in the international, randomized, double-blind, placebo-controlled Phase III XRay
Vision (NCT05386550) study, which is evaluating the efficacy and safety of xevinapant versus placebo in
combination with adjuvant, post-operative radiotherapy in patients with resected LA SCCHN who are at high risk for
relapse and are ineligible for cisplatin treatment.
Additional progress in our pipeline in 2023 includes completion of Phase Ia for our anti-CEACAM5 antibody-drug
conjugate (ADC), M9140, with the identification of two doses for evaluation in Phase Ib. M9140 is the first ADC
based on our proprietary technology to enter clinical development.
We also continued to advance our pipeline of DNA damage response inhibition (DDR) assets, exploring multiple
hypotheses to determine which regimens may provide the most value to patients. In 2023, we initiated the Phase
Ib/IIa DDRiver NSCLC 322 study of tuvusertib (M1774), our potentially best-in-class, potent and selective inhibitor
of ataxia telangiectasia and Rad3-related (ATR), in combination with Regeneron Pharmaceutical's PD-1 inhibitor
cemiplimab in patients with non-squamous NSCLC that has progressed on prior anti-PD-(L)1 and platinum-based
therapies. The first dose was administered in October to a person requiring treatment.
In July 2023, our collaboration partner Telix Pharmaceuticals announced the administration of the first dose in
the Phase Ib STARSTRUCK trial. This open-label, single-arm, multicenter dose-escalation and dose-expansion
study will evaluate the safety profile, dosing and activity of our DNA-dependent protein kinase (DNA-PK)
inhibitor candidate, peposertib (M3814), in combination with Telix's investigational targeted radiation therapy,
TLX250, in patients with solid tumors expressing carbonic-anhydrase IX (CAIX).
To diversify our robust internal pipeline in our focus areas of DNA damage response inhibition and antibody-drug
conjugates, in October 2023 we announced a strategic collaboration with Jiangsu Hengrui Pharmaceuticals Co.
Ltd. (Hengrui). The partnership includes an exclusive global license (excluding mainland China) to develop,
manufacture and commercialize Hengrui's next-generation potent and selective PARP1 (poly (ADP-ribose)
polymerase 1) trapping inhibitor HRS-1167. The agreement also includes an option for exclusive global
development, manufacturing and commercialization (excluding mainland China) of Hengrui's Claudin-18.2
antibody-drug conjugate (ADC) SHR-A1904.
In December, we announced a license agreement with Abbisko Therapeutics Co. Ltd, Shanghai, China, for
pimicotinib (ABSK021), which is currently being evaluated in a Phase III study for the treatment of tenosynovial
giant cell tumor (TGCT). TGCT is a benign tumor of the joints that can cause swelling, pain, stiffness, and
limited mobility of the affected joints. The agreement grants Merck a license to commercialize pimicotinib in
mainland China, Hong Kong, Macau and Taiwan, with an option for rest of world.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
34
Combined Management Report
The launch of 3dGRO™ Patient-Derived Organoids (PDOS) is also opening up new possibilities for researchers.
During 2023, we launched 20 pancreatic and 20 colorectal organoids, along with 3dGROTM Wnt3a conditioned
media supplement used for organoids. These complex, multicellular 3-dimensional in vitro cell models used in
biomedical research that closely mimic in vivo organs are a powerful way to study drug responses, disease
progression, and more. An important tool in cancer research, organoids provide a more relevant, phenotypic
model of cancer than traditional 2D cell culture models.
Fundamental Information about the Group. Research and Development
37
Life Science
Across our three business units Process Solutions, Life Science Services, and Science & Lab Solutions, our R&D
teams continue to bring expertise and a diversified and relevant portfolio of products and services to our
customers around the world.
As the fields of preventive and personalized medicine evolve, it will be essential to set the standard with robust,
scalable, efficient processes for viral vector production, next-generation sequencing and autologous cell
therapies. This in turn will support the expansion of disruptive cell and gene therapies to treat the most
challenging and chronic conditions, including cancer, heart disease, diabetes, and muscular dystrophy.
To this end, a large number of engineers, chemists and biologists across five global hubs are focused on six
strategic innovation vectors: building our core portfolio, factories and labs of the future, novel modalities, next
generation biology, AI and digital, and sustainability. In 2023, we launched more than 8,500 products including
products under our “faucet program" for antibodies, reference materials, chemicals, and nanomaterials.
Process Solutions*
In January, we introduced the PelliconⓇ Capsule with Ultracel® membrane, which meets the single-use
tangential flow filtration (TFF) device requirements for the antibody-drug conjugate (ADC) manufacturing
process. Engineered with operator safety in mind, the PelliconⓇ Capsule features for easy connection to a
single-use TFF system. The capsules are resistant to organic solvents commonly used in the ADC manufacturing
process.
In April, we launched UltimusⓇ single-use process container film, designed to provide extreme durability and
leak resistance for single-use assemblies used for bioprocessing liquid applications. Ultimus® film is designed
with a proprietary woven nylon structure and provides enhanced bag strength and resilience. This technology is
now available in Mobius® 3D process containers.
In July, the MobiusⓇ iFlex Bioreactor was launched as the latest addition to the BioContinuum TM Production and
Harvest Platform, our integrated solution for perfusion process development and manufacturing. Alongside our
portfolio of EX-CELL® Advanced HD Perfusion, Mobius® Breez Microbioreactor and Cellicon® Cell Retention
Solution, the MobiusⓇ iFlex Bioreactor enables customers to realize the efficiency gains and cost savings of
production intensification and continuous monoclonal antibody (mAb) manufacturing.
In March, Medicine Maker recognized the Process Solutions business unit with its Best Biopharma Equipment
Company award.
Life Science Services*
One key R&D investment for Life Science Services was the expansion of Contract Testing Development and
Manufacturing Organization (CTDMO) Services with two new GMP-grade mRNA drug substance manufacturing
sites in Darmstadt and Hamburg, Germany. Consequently, our offering is the first to encompass all key stages
of mRNA technologies, lipids, lipid nanoparticles (LNP), and fill & finish, including key products and biosafety
testing.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Life Science Services received three awards in 2023. In March, it was recognized at Life Science Leader's 2023
CDMO Leadership Awards in five categories: capabilities, compatibility, expertise, quality, and service. In
September, it received the API Development Award for ChetoSensarTM at the 2023 CPHI Pharma Awards as well
as the Best Biologics CMO Award at the 2023 Asia Pacific Biologics CMO Excellence Awards 2023.
38
Combined Management Report Fundamental Information about the Group. Research and Development
Science & Lab Solutions*
From nanomaterials enhancing battery performance to optimal media culture for producing lab-cultivated meat,
the breadth, and depth of our Science & Lab Solutions portfolio highlights how life science innovation improves
important aspects of our daily lives.
The lab of the future
One important driver for the Science &Lab Solutions business innovation is digitalizing the lab of future, with
workflows through AI, machine learning, automation, and other solutions. It supports scientists at all stages
with tools that can increase efficiency, safety and success rates of delivering new, safer therapies for patients.
By combining expertise in small molecules, biologics and new modalities with AI and other digital tools, we are
helping to redefine how drugs are discovered, developed and produced.
In December, we launched AIDDISON™ drug discovery software, the first AI-powered software-as-a-service
platform that bridges the gap between virtual molecule design and real-world manufacturability through
Synthia™ retrosynthesis software Application Programming Interface (API) integration. It combines generative
AI, machine learning, and computer-aided drug design to speed up drug screening. Trained on more than two
decades of experimentally validated datasets from pharmaceutical R&D, AIDDISON™ identifies compounds from
more than 60 billion possibilities that have key properties of a promising active ingredient, such as non-toxicity,
solubility, and stability in the body. The platform then proposes ways to best synthesize these drugs.
In February, we launched M-TRACE® All-in-One Computer solution, another example of how we are digitalizing
the lab. M-TRACE® offers a cleanroom-friendly way to create test records used during sterility testing and other
quality control workflows. Compliant with the QC sterility testing environment, it enables full data traceability.
In November, we launched ChemisTwin™, an online digital reference materials platform. It is a digital reference
materials platform that can perform automatic analysis of samples' purity, identity, and degradation of
compounds through over 1,500 calibrated algorithm-based digital references. Reference materials ensure the
quality and safety of medicines and other products (such as water, food and beverage) from the earliest stages
of research and development through quality control and quality assurance testing.
Efficiency and productivity-enhancing tools
We continued to offer incremental and sustainable technologies that improve productivity challenges to address
customers' key challenges. In June, we launched mPAGE® Lux electrophoresis gel, a product that decreases,
from 90 to three minutes, the time-consuming and key step of gel casting for western blotting, a method for
protein separation.
In December, we launched the Milli-Q® SQ-2 series systems. With eight patents for its innovative features, this
ultrapure lab water equipment offers greater flexibility, autonomy and sustainability - with less energy and
water consumption. The system does not require a direct connection to a water pipe, so researchers can draw
ultrapure water via the equipment at the point of use without any intermediate installations.
The next frontier in cell culture
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report_ Fundamental Information about the Group Internal Management System
399
Credit rating
Non-controlling interest
2023
2022
€ million
in %
2,824
3,326
-502
-15.1%
10
14
-3
-25.6%
Income tax
650
-298
-31.4%
Amortization of acquired intangible assets
783
830
-47
-5.6%
Adjustments¹
477
577
Net income
€ million
Change
Reconciliation net income to net income pre¹
-475
-11.2%
1 Not defined by International Financial Reporting Standard (IFRS). Adjustments according to definition above.
2 According to Consolidated Income Statement.
3 According to the Consolidated Cash Flow Statement.
4 As of January 1, 2023, the tranche of the Merck Long-Term Incentive Plan to be paid out in the months following the balance sheet date is disclosed
under other current non-financial liabilities and no longer under current provisions for employee benefits. For better comparability, the previous year's
figures have been adjusted.
Combined Management Report_
Fundamental Information about the Group. Internal Management System
32
Investments and value management
Sustainable value creation is essential to secure the long-term success of the company. To optimize the
allocation of financial resources, we use a defined set of parameters as criteria for prioritizing investment
opportunities and portfolio decisions.
Net present value (NPV)
-99
The main criterion for prioritizing investment opportunities is net present value. It is based on the discounted
cash flow method and is calculated as the sum of the discounted free cash flows over the duration of a project.
The weighted average cost of capital (WACC), representing the weighted average of the cost of equity and cost
of debt, is used as the discount rate. Different markups are applied to the WACC depending on the nature and
location of the respective project.
The internal rate of return is a further important criterion for the assessment of acquisition projects and
investments in property, plant and equipment, as well as intangible assets. It is the discount rate that makes
the present value of all future free cash flows equal to the initial investment or the purchase price of an
acquisition. A project adds value if the internal rate of return is higher than the weighted cost of capital
including markups.
Return on capital employed (ROCE)
In addition to NPV and IRR, return on capital employed is an important metric for the assessment of investment
projects when looking at individual accounting periods. It is calculated as the adjusted operating result pre
(EBIT pre) divided by the sum of property, plant and equipment, intangible assets, trade accounts receivable,
trade accounts payable, and inventories.
Payback period
An additional parameter for assessing investments in property, plant & equipment, and intangible assets is the
payback period, which indicates the time in years after which an investment will generate positive net cash
flow.
Merck value added (MEVA)
Merck value added gives information about the financial value created over a period of time. Added value is
created when the return on capital employed (ROCE) of the company or the business is higher than the
weighted average cost of capital (WACC). MEVA metrics provide us with a powerful tool to weigh investment
and spending decisions against capital requirements and investors' expectations.
Combined Management Report_ Fundamental Information about the Group. Internal Management System
33
Capital market-related parameters
Net income, earnings per share (EPS) and earnings per share pre (EPS pre)
Earnings per share are calculated by dividing profit after tax attributable to the shareholders of Merck KGaA
(net income) by the weighted average number of theoretical shares outstanding. The use of a theoretical
number of shares takes into account the fact that the general partner's capital is not represented by shares. As
an alternative comparison, we also report earnings per share pre, which are adjusted for the effects of
integration expenses, IT expenses for selected projects, restructuring expenses, profits/losses from the
divestment of businesses, acquisition expenses, and other adjustments. Amortization of acquired intangible
assets is also adjusted for. The adjustment excludes impairment losses on intangible assets for acquired
research and development (R&D) projects below a threshold value of € 50 million. Income tax is calculated on
the basis of the Group's underlying tax rate. The following table presents the reconciliation of net income to net
income pre for the calculation of EPS pre.
The rating of our creditworthiness by external agencies is an important indicator of our ability to raise debt
capital at attractive market conditions. The capital market makes use of the assessments published by
independent rating agencies in order to assist debt providers in estimating the risks associated with a financial
instrument. We are currently assessed by Moody's and Standard & Poor's. The most important factor for the
credit rating is the ability to repay debt, which is determined in particular by the ratio of operating cash flow to
net- or gross financial debt.
-17.2%
948
-1,044
-15.6%
Earnings per share pre¹ in €
8.49
Income tax on the basis of the underlying tax rate¹
10.05
-1.56
-15.5%
1 Not defined by International Financial Reporting Standards (IFRS).
Dividend ratio
We pursue a reliable dividend policy with a target payout ratio based on EPS pre (see definition above) with the
aim of ensuring an attractive return for our shareholders.
-680
4,371
-1,310
266
-20.3%
Non-controlling interests to be adjusted
-10
-14
3
-25.6%
Net income pre¹
3,691
Systemic lupus erythematosus¹
Cutaneous lupus erythematosus¹
Phase Ia
Phase Ib
Phase Ib
Phase II
Phase III
Phase III
Pediatric schistosomiasis 10
Malaria
Phase II
Phase II
Idiopathic inflammatory myopathies (DM and PM)²
Phase II
Locally advanced squamous cell carcinoma of the
head and neck - Unresected, cisplatin-eligible³
Locally advanced squamous cell carcinoma of the
head and neck - Resected, cisplatin-ineligible4
Locally Advanced or Metastatic Urothelial Carcinoma 5
Solid tumors6
Solid tumors?
Status
M9140 (anti-CEACAM5 Antibody drug conjugate)
Solid tumors8
Indication
Solid tumors⁹
Global Health
Arpraziquantel (anthelmintic)
M5717 (PeEF2 inhibitor)
Solid tumors
M9466 (HRS-1167; Selective PARPi)
Fundamental Information about the Group. Research and Development
Our R&D is aligned to strengthen our existing position in the industry across many key material and innovation
areas, with the addition of artificial intelligence (AI), data services, analytics, and sustainability to enhance our
portfolio offering. As an essential part of our "Level Up" growth program, we are continuing to invest significantly
more than € 3 billion in innovation and capacity expansion. With our R&D investments within "Level Up", we are
also scaling up our research and development capabilities for next-generation semiconductor and display materials
to further strengthen our position as one of the leading suppliers to the electronics industry.
6 Studies as monotherapy and in combination with cemiplimab, niraparib, avelumab or M4076 ATMi. Includes studies (phase I/II) in collaboration with/
sponsored by external partners, e.g. US National Cancer Institute (NCI).
5 Combinations include Sacituzumab Govitecan, NKTR-255 and M6223.
5 In combination with radiotherapy in resected LA SCCHN patients ineligible for the treatment with cisplatin.
3 In combination with cisplatin and radiotherapy in unresected LA SCCHN patients eligible for the treatment with cisplatin.
2 Dermatomyositis and Polymyositis.
1 Clinical trial passed futility analysis.
7 Administered in combination with Tuvusertib/M1774 (ATRI).
Unless noted otherwise, clinical programs conducted in collaboration with external partners are not shown unless Merck has co-ownership of data. More
information on the ongoing clinical trials can be found at www.clinicaltrials.gov. Pipeline products are under clinical investigation and have not been
proven to be safe and effective. There is no guarantee any product will be approved in the sought-after indication.
On December 04, 2023, Merck announced a license agreement with Abbisko Therapeutics Co. Ltd, China, for pimicotinib (ABSK021), which is currently
being evaluated in a Phase III study for the treatment of tenosynovial giant cell tumor (TGCT). The agreement grants Merck a license to commercialize
pimicotinib in mainland China, Hong Kong, Macau and Taiwan, with an option for rest of world.
Phase II
Registration
Phase I
M6223 (anti-TIGIT mAb)
Phase Ib
End of December 2023, Merck entered into a licensing agreement with Inspirna, Inc., United States, for ompenaclid (RGX-202), a first-in-class oral
inhibitor of the creatine transport channel SLC6A8, and SLC6A8-targeting follow-on compounds. Ompenaclid is currently being evaluated in a Phase II
study for the second-line treatment of RAS-mutated (RASmut) advanced or metastatic colorectal cancer (mCRC).
8 Administered in combination, including combinations other than avelumab.
10 On 14 December, 2023, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive scientific
opinion for arpraziquantel for the treatment of schistosomiasis in children aged 3 months to 6 years. The application was submitted by Merck, on behalf of the
Pediatric Praziquantel Consortium, under the EU-M4all procedure for high-priority medicines for human use intended for countries outside the European Union.
ATM: ATM serine/threonine kinase
As a science and technology company, we strive to offer leading-edge products, services, and solutions.
Our R&D strategy follows our overall Electronics technology strategy, which aims to enhance and expand our
capabilities, drive organic growth and enable new technology platforms. Our Chief Technology Office (CTO) is
identifying trends and vetting technologies that are beyond the time horizon or scope of our business units. As
a dedicated technology organization, the CTO is managing research partnerships, shaping our technology
roadmaps, and managing our long-term R&D portfolio. Our Technology Leadership Board reviews and optimizes
our technology investment across the business sector.
Electronics
45
Combined Management Report
TIGIT: T cell immunoreceptor with Ig and ITIM domains
TLR7/8: Toll-like receptors 7 and 8
PeEF2: Plasmodium eukaryotic elongation factor 2
PD-L1: Programmed cell death ligand 1
Phase Ib: Dose escalation/expansion and signal seeking
Phase Ia: Dose finding
PARP1: poly (ADP-ribose) polymerase 1
mAb: Monoclonal antibody
IAP: Inhibitor of apoptosis proteins
CEACAM5: Carcinoembryonic antigen-related cell adhesion molecule 5
BTK: Bruton's tyrosine kinase
ATR: Ataxia telangiectasia and Rad3-related
Our R&D is focused on finding solutions for the needs that drive our industry: increase energy efficiency of
devices, enhance performance of materials, reduce environmental impact on the planet. Consequently,
sustainability, and the use of AI and machine learning are key focus areas of our R&D.
M4076 (ATM inhibitor)
Sustainable technologies and materials*
Avelumab (anti-PD-L1 mAb) + combinations
Clinical data for BavencioⓇ that reinforce its role as a standard of care in first-line maintenance for
advanced urothelial carcinoma in patients without disease progression following first-line platinum-based
chemotherapy. Poster discussions, including long-term safety analyses and an analysis of quality-adjusted
survival from the Phase III JAVELIN Bladder 100 study, confirm the acceptable long-term benefit-risk
profile as well as the net benefit estimate of BavencioⓇ in first-line maintenance and further support its use.
Long-term outcomes from the VISION study, the largest study of a MET inhibitor in patients with METex14-
skipping advanced NSCLC (N=313). Detection was carried out via liquid and/or tissue biopsy. The results
demonstrate the robust and sustained clinical activity of TepmetkoⓇ, particularly in the first-line setting:
with a median follow-up time of 32.6 months, the overall response rate in 164 people treated with first-line
therapy was 57.3% (95% CI: 49.4, 65.0) and the median duration of response 46.4 months (13.8, cannot
be estimated).
Additional presentations for TepmetkoⓇ that included analyses of the INSIGHT 2 study in NSCLC with
epidermal growth factor receptor (EGFRm) mutation and MET amplification during treatment with
TepmetkoⓇ plus osimertinib.
ErbituxⓇ data that add to the growing body of evidence supporting the role of cetuximab-based therapies
across the continuum of care in the treatment of RAS wild-type metastatic colorectal cancer and as a
backbone of treatment in SCCHN.
At the European Society for Medical Oncology (ESMO) Congress 2023, we presented 28 abstracts featuring the
latest research on our oncology portfolio addressing unmet treatment needs across bladder, head and neck,
lung, colorectal, and other cancers.
Highlights included:
•
New analyses and real-world evidence that reinforce the role of BavencioⓇ first-line maintenance in the
treatment of advanced UC in patients with varying characteristics. These include long-term efficacy and
safety outcomes from the Phase III JAVELIN Bladder 100 study that confirm the prolonged overall survival
(OS), progression-free survival (PFS) and tolerability of first-line maintenance with BavencioⓇ in patients
older than 65 years with advanced UC. Further evidence from France and the United States, including initial
data from the French AVENANCE study on patients with advanced UC whose tumors have histological
variants, support the findings of JAVELIN Bladder 100 in real-world settings.
Additional real-world analyses reinforcing the use of BavencioⓇ as a treatment for advanced/metastatic
MCC. After a median follow-up of approximately 29 months, data from the MCC TRIM study showed a
median OS of 52 months for patients with metastatic MCC treated with BavencioⓇ in a real-world setting in
Germany. Most patients (approximately 86%) received first-line BavencioⓇ.
Updated findings from the Phase II VISION trial, which is the largest study of a MET inhibitor in METex14-
skipping NSCLC and served as the basis for regulatory approvals, continue to show clinically meaningful
long-term efficacy in patients treated with TepmetkoⓇ regardless of line of therapy (2L, 2L+ and 3L+).
A new analysis of real-world survival outcomes and survival risk factors in elderly patients with locally
advanced SCCHN that highlights poor survival outcomes, especially in patients aged 70 years and older
with advanced disease stage and comorbidities, underscoring the need for innovative effective treatments
for this population.
Combined Management Report
Fundamental Information about the Group. Research and Development
42
Neurology & Immunology*
•
With a commitment of more than 25 years to people living with multiple sclerosis (MS), our ongoing dedication
to science drives us to discover cutting-edge therapies through our research in neurological and immune-
mediated disease areas.
Enpatoran, an investigational highly specific potential first-in-class immune modulator blocking the activation of
toll-like receptors (TLR7 and TLR8), is being developed as a new oral therapy for SLE and CLE. It aims to
overcome limitations of currently available lupus therapies by providing selective inhibition of lupus-relevant
disease drivers, which may increase efficacy while preserving immunity against infections. We anticipate data
from our Phase II clinical trials for enpatoran in the first half of 2024.
We are also exploring the potential of oral cladribine beyond MS, developing it for the treatment of gMG, which
affects an estimated 700,000 people and where a high unmet need remains, particularly as regards oral
treatment options. Cladribine is believed to work by affecting the pathogenic pathways involved in the
development of autoimmunity (auto-antibody producing B cells and T cells). In June 2023, the FDA granted
Orphan Drug Designation for cladribine for the treatment of myasthenia gravis. We anticipate the initiation of a
global Phase III clinical trial program in the second quarter of 2024.
In February 2023, we entered a preclinical licensing and strategic research partnership with Aqilion, a biotech
company focused on developing innovative treatments for immune-mediated and neurological diseases.
New data for our existing therapy MavencladⓇ (cladribine tablets), as well as for our investigational drug
evobrutinib, were presented at key congresses in 2023, including the Americas Committee for Treatment and
Research in Multiple Sclerosis (ACTRIMS) Forum in February, the American Academy of Neurology (AAN)
Annual Meeting in April and the European Committee for Treatment and Research in Multiple Sclerosis
(ECTRIMS) Congress in October.
At ACTRIMS 2023, we presented data that included analyses of the CLARIFY-MS study, showing the potential of
MavencladⓇ to improve outcomes in an impactful way for people living with RMS. In addition, we showed
updated long-term efficacy and safety data from our Phase II program for the investigational drug evobrutinib.
In December we shared that the phase III pivotal study did not meet its primary endpoint of annualized relapse
rate for up to 156 weeks compared to oral teriflunomide.
At AAN 2023, we presented data from the M AGNIFY-MS study, showing sustained reductions in the memory B-
cell numbers, with changes towards anti-inflammatory phenotypes in circulating B- and T-cell types for study
participants taking Mavenclad® and provided updated efficacy and safety data from our Phase II program for
the investigational drug evobrutinib.
At ECTRIMS 2023, we presented 31 abstracts in total, including long-term efficacy and neurofilament light chain
data (from the M AGNIFY-MS study) for MavencladⓇ as well as new real-world evidence data highlighting naïve use
of the treatment. In addition, we shared updated five-year safety and efficacy data from the Phase II Open Label
Extension for investigational evobrutinib as well as baseline demographic data of our Phase III EVOLUTION trials.
Fertility*
As the global market leader in fertility drugs and treatments, our Fertility franchise plays a crucial role in our
Healthcare business.
Infertility is an increasing challenge globally due to demographic changes and lifestyle adjustments such as
delayed childbearing. Based on the latest data from WHO, one in six people worldwide are affected by infertility.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report
Fundamental Information about the Group. Research and Development
Beyond our portfolio in MS, we have a pipeline focusing on discovering new therapies that have potential in
other neuroinflammatory and immune-mediated diseases, including systemic lupus erythematosus (SLE),
cutaneous lupus erythematosus (CLE) and generalized myasthenia gravis (gMG).
Tuvusertib/M1774 (ATR inhibitor)
Highlights included:
We shared additional new data for our marketed and investigational oncology medicines at major oncology
congresses.
Xevinapant (IAP inhibitor)
Xevinapant (IAP inhibitor)
Oncology
Enpatoran (TLR7/8 antagonist)
Enpatoran (TLR7/8 antagonist)
Enpatoran (TLR7/8 antagonist)
Immunology
As of December 31, 2023
Therapeutic area
Compound
44
Research and Development
Combined Management Report Fundamental Information about the Group.
Our pipeline
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
On September 20, we announced two strategic collaborations with Benevolent AI and Exscientia to drive
accelerated drug discovery with higher probability of success. Access to end-to-end AI platform capabilities is
expected to generate several novel development candidates in oncology, neurology and immunology. AI-
powered R&D is an integral part of delivering on our ambition to bring more medicines to more patients, faster.
Collaborations to strengthen AI-driven drug discovery*
In June, 43 abstracts featuring new data for the medicines Bavencio® (avelumab), Erbitux® (cetuximab) and
TepmetkoⓇ (tepotinib) and drug candidates from our pipeline including the first-in-class investigational IAP
inhibitor xevinapant were presented at the ASCO Annual Meeting.
In September, we celebrated the topping-out for our Launch and Technology Center at our site in
Darmstadt, Germany. This investment of approximately € 160 million is intended to ensure that our next
generations of innovative small-molecule medicines (including high-potency compounds) are available for
clinical trials, global launches and commercial supply on time and in the required quality and quantity, with
accelerated processes compared with the past. The Launch and Technology Center is anticipated to be fully
operational by the end of 2025 following validation by regulatory authorities.
•
Our declared aim is to bring more medicines to more patients faster. In 2023, we supported this aim by reaching
key milestones for two transformational investments focusing on complementary therapeutic modalities:
Investments to speed up the availability of new medicines*
ConcorⓇ/Concor Cor®, containing bisoprolol, is a beta-blocker for treating hypertension and cardiovascular diseases
such as coronary heart disease and chronic heart failure. In addition to ConcorⓇ/Concor CorⓇ, the ConcorⓇ
franchise includes fixed-dose combinations such as Concor Plus®/Lodoz® (bisoprolol with hydrochlorothiazide) and
ConcorⓇ AM (bisoprolol with amlodipine). ConcorⓇ AM has been registered in 71 countries.
GlucophageⓇ, containing the active ingredient metformin, is the most widely prescribed non-insulin diabetes
treatment worldwide for first-line treatment of type 2 diabetes for which we achieved a successful label
extension in Europe in 2022. The label update on the mechanism of action is evidence of the still growing body
of knowledge and opportunities for metformin in the diabetes continuum. Those label updates are currently
being rolled out in all other countries outside Europe where the GlucophageⓇ family of products is available.
The new formulation of Euthyrox® (levothyroxine) for the treatment of hypothyroidism obtained further
regulatory approvals in 2023, resulting in a total of 101 countries where this incremental innovation is
registered. With its characteristics of delivering precise, fine-tuned and stable T4 doses, EuthyroxⓇ may help
optimize disease management, making it a good choice for healthcare providers and patients.
In view of the significant and growing impact of chronic diseases such as diabetes, prediabetes, hypertension,
and cardiovascular disease, growth hormone disorders and thyroid disorders on health and society in the 21st
century, we are committed to helping patients with these conditions.
Cardiovascular, Metabolism & Endocrinology*
According to updated data, more than five million babies have been born worldwide with the help of Gonal-fⓇ,
a leading therapeutic within our fertility portfolio. It contains the active ingredient follitropin alfa (r-hFSH alfa),
which is a recombinant form of the natural hormone FSH and is available in a convenient and ready-to-use pre-
filled injection pen. Treatment with Gonal-fⓇ can result in increased follicles, oocytes and embryos compared
with urinary gonadotropins, thereby improving the chances of pregnancy and live birth. Recent real-world
evidence studies based on key European registries (D.I.R., SNDS) showed increased likelihood of live birth with
Gonal-fⓇ compared with urinary gonadotropins and biosimilar preparations of follitropin alfa.
43
Combined Management Report Fundamental Information about the Group. Research and Development
41
Highlights of congress publications in 2023
In June, we inaugurated our Biotech Development Center at our site in Corsier-sur-Vevey, Switzerland. This
investment of over € 250 million aims to ensure that our next generations of innovative large-molecule
medicines (biotech therapies and potential other new therapeutic modalities) are available for clinical trials
on time and in the required quality and quantity with an accelerated process compared with the past. The
Biotech Development Center is expected to be fully operational in early 2024 following validation by
regulatory authorities.
We are continuing to drive sustainability in R&D to address the increasing push for lower emissions along the
value chains. Ongoing key programs focus on, e.g. NF3 abatement and more sustainable processes and
manufacturing technologies as well as green solvents, sustainable etch gases and PFAS replacement.
9 On October 30, 2023, Merck announced a collaboration with Jiangsu Hengrui Pharmaceuticals Co. Ltd., China, including an exclusive license worldwide
(excluding China) to develop, manufacture and commercialize the next-generation potent and selective PARP1 trapping inhibitor HRS-1167.
Nitrogen trifluoride (NF3) accounts for about 60% of our global emissions, mainly from our specialty gases
business. We developed and tested an abatement solution using a modified commercial thermal destruction
technology and demonstrated the ability to destroy NF3 with 99% efficiency.
7.8%
9.2%
7.7%
17.4%
35.8%
38.2%
14.5%
16.9%
4.2%
-5.6%
Change 2022
Change 2023¹
NF3 abatement
Once capital markets stabilize, spending on laboratory products is likely to increase again. In the pharma and
biotech production market, in which our Process Solutions and Life Science Services business units are active,
demand is driven by the development and manufacture of therapeutics and vaccines. According to the
pharmaceutical market research firm IQVIA, the end market for biopharmaceuticals grew by 16.9% in 2023
(2022: 14.5%) to € 496 billion (or 38.2% of the global pharmaceutical market). The number of monoclonal
antibodies (mAbs) in phase I or II development grew by 17.4% (2022: 7.7%). While the biopharmaceutical
market grew in 2023, laboratory consumables and materials used in manufacturing were pre-purchased to a
significant extent in 2022, resulting in high inventories among our customers.
49
Electronics
Market for the treatment of colorectal cancer6
3.0
1 Figures for fiscal 2023 estimated
Combined Management Report _ Report on Economic Position Macroeconomic and Sector-Specific Environment
The development of selected sector specific environments was as follows:
Life Science
Growth in market for laboratory products²
-2.3%
Growth in global sales of biopharmaceutical drugs³
Early clinical monoclonal antibody (mAb) pipeline growth
Healthcare
Global pharmaceutical market
Market for multiple sclerosis therapies
Market for type 2 diabetes therapies5
Market for fertility treatment5
Share of biopharmaceutical sales in the global pharmaceutical market³
2.5%
19.1%
18.1%
5 Growth rates based on market data in local currency, translated at a constant euro exchange rate. The IQVIA market data on the growth of indications
are based on current figures, including the third quarter of 2023. Annual growth based on the values for the past 12 months. The type 2 diabetes
market excludes the United States since this market is insignificant to Merck.
6 Growth rates based on market data stated in US dollars. Market data from Evaluate Pharma on the growth of indications are based on published
company reports and are subject to exchange rate fluctuations.
7 Growth of display area is a pure volume indicator.
Combined Management Report _ Report on Economic Position
Macroeconomic and Sector-Specific Environment
50
3 Global pharmaceutical spending at a constant exchange rate. IQVIA market data based on the past 12 months as of the third quarter 2023.
4 Number of programs in Phase I or Phase II clinical trials, Cortellis.
50
Our Life Science business sector is one of the leading global suppliers of products, tools and services for
research laboratories, pharma and biotech production, as well as industrial and testing laboratories. The
convergence of several adverse developments (macroeconomics, capital constraints, declining Covid-19
pandemic demand, and high customer inventory) has challenged growth of life science companies compared
with previous years.
The developments in the therapeutic areas of relevance to Merck saw differing trends in the reporting year. The
global market for type 2 diabetes, excluding the United States, followed the growth trend of previous years and
accelerated growth, achieving 19.1% in 2023 (2022: 18.1%). The therapeutic area of infertility grew 10.9% in
the reporting year (2022: 4.2%). Colorectal cancer declined by -0.1% in 2023 (2022: increase of 4.5%) due to
biosimilar penetration. The growth trend in the market for multiple sclerosis therapies declined slightly
compared with previous year level by -2.3% (2022: 2.5%), as new product launches are counteracted by the
effect of generic competition.
Not only the growth of the pharmaceutical sector as a whole, but also the market development for
biotechnologically produced active ingredients is relevant to our business. According to IQVIA, these products
accounted for 38.2% of the global pharmaceutical market in 2023 (2022: 35.8%), thus continuing the increase
in market share of recent years. The most important market for biological pharmaceuticals remains the United
States, with a 64.2% share of global biopharmaceutical market volumes.
The developments at a regional level follow the described trend. EMEA (Europe, Middle East and Africa) grew by
9.2% in 2023 (2022: 8.2%) with the EU5 (Germany, France, UK, Italy, and Spain) growing by 7.8% (2022:
8.0%). North America grew by 10.2% (2022: 9.6%) with the United States growing at a rate of 10.3% (2022:
9.5%). In absolute terms, the pharmaceutical market in the United States remains the biggest and most
important market by far. Latin America achieved double-digit growth of 19.2% (2022: 12.5%) impacted by
high inflation. This is followed by the Asia-Pacific region (excluding China and Japan) with 8.2% growth (2022:
9.6%). Despite continued extension of price regulations (for example, volume-based procurement), China
returned to growth with 4.3% in 2023 (2022: -0.8%) due to the lifting of Covid-19 pandemic measures,
increased access to innovative products and growing healthcare infrastructure).
In its latest study from September, IQVIA forecasts growth of 9.2% in 2023 (2022: 7.8%) for the global overall
pharmaceutical market. After the recovery from the Covid-19 pandemic, the pharmaceutical market is expected
to see still high growth rates benefitting from accelerated approval pathways and increased access to innovative
medicines globally. This is balanced by further increasing cost containment measures and policies driving
biosimilar and generics uptake as well as stricter price reviews and prescription controls.
Healthcare
Life Science
5.2
1 Predicted development. Final development rates for 2023 were not available for all industries when this report was prepared.
2 Global Market for Laboratory Products, October 2023, Frost & Sullivan.
10.1%
10.9%
4.2%
-0.1%
4.5%
Growth of wafer area for semiconductor chips
-14.1%
7.1%
3.9%
-1.5%
-3.9%
Global sales of cosmetics and care products
4.2%
12.2%
Global number of produced light vehicles
Growth of display surface area?
China
Accordingly, the markets in which the Life Science business sector of Merck operates slowed down in 2023
compared with 2022. According to the market research firm Frost & Sullivan, the market for laboratory
products, which is relevant to our Science & Lab Solutions business unit, declined by -5.6% in 2023 (2022:
4.2%). This decline is due to a challenging macroeconomic outlook (declining GDP growth and persistent
inflation) and a sustained slowdown of investment in early stage biotech companies (according to Citi Research,
venture capital and IPOs remain below pandemic highs).
6.7
The main driver of our R&D engagements in patterning is the manufacturing capability and costs associated
with extreme ultraviolet (EUV) lithography systems. We are increasing our efforts in the development of EUV
lithography materials to directly help our key customers address these challenges. Our Patterning Solutions
team achieved a breakthrough in PFAS-free EUV rinse development, paving the way for a sustainable solution
to prevent the collapse of structures in EUV lithography.
We are also investing in directed self-assembly (DSA) capabilities as we support customers' integration of DSA
into advanced nodes, and we are beginning to sample photoresists and rinse materials from our PFAS-free
portfolio development.
Our Planarization business is driving new product development across advanced oxide and metal segments. For
example, we are achieving technical progress using dielectric high-performance cerium dioxide particles for
advanced oxide CMP (chemical mechanical planarization).
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
Combined Management Report
Fundamental Information about the Group. Research and Development
47
Display Solutions
With the proliferation of multiple applications and display trends, the display industry's technological
requirements are significantly expanding. Our display materials are enabling the fast-growing market of
innovative displays for current and future applications such as foldable smartphones, flexible displays for
automotive or AR/VR (augmented reality/virtual reality) devices.
As our liquid crystals business remains a strong focus area, our R&D team is continuously working to develop new
liquid crystal mixtures for our customers who need differentiated performance such as high transmittance, high
contrast ratio, and high reliability to realize displays for new applications. We are working with our customers in
the field of AR/VR to expand the application scenarios of liquid crystals and continue to enhance the user
experience in small and micro-sized displays. We remain fully committed to advancing LCD technology and are
working very closely with leading panel makers to develop next-generation products for the electronics market.
In the display industry, OLED is regarded as state-of-the-art technology for its excellent visual experience. It is
also considered as the technology of the future of displays as it enables the production of flexible, foldable,
rollable, and even transparent displays. We introduced new barrier materials that offer superior flexibility,
higher reliability and a longer lifetime in flexible OLED devices compared with existing solutions. Devices with
fully flexible OLED displays are one of the fastest-growing trends in data-driven electronics. Our innovative ALD
material won the "Display Component of The Year 2023" award from Society for Information Display (SID), the
world's largest display association. In addition, our innovative deuterated material won the "Technology
Innovation Award" from LG Displays in September 2023.
Surface Solutions
In our automotive pigments business, we are continuously expanding our portfolio of Colorstream® multicolor-
effect pigments. A recent example is the development of Colorstream® F20-52 SW Mineral Red pigment, a new
silica-based pigment that extends the red color palette of Surface Solutions into a more blueish-red range.
In our cosmetics business, we are further developing our range of high-color intensity pigments with metallic
optical effects entirely without the use of metals. These Ronaflux® pigments are based on an entirely new
proprietary technology employing fluidized bed processes for depositing ultrathin and highly stable carbon
layers onto pearlescent pigments - a major precondition for spectacular shine effects. The carbon layers
intensify the colors of the effect pigments, thus enabling brilliant shades of blue and green without the addition
of chrome oxides, Prussian blue or other colorants. This new offering enables manufacturers of eye makeup and
lipsticks to meet the strict regulatory requirements while offering brilliant metallic blue and green shades that
do not contain any metal-based pigments.
To produce realistic color effects on electronic devices, we are focusing on methodologies to transfer coloristic
measuring data into 3D visible effects. As a first step, we have introduced the first digital tool for visualizing car
colors in various light conditions in a realistic way. Under controlled, calibrated conditions, color data, measured
state-of-the-art technology, can be used to produce a realistic display.
Euro Area
Combined Management Report _ Report on Economic Position
USA
7.2
Advanced Economics
World
2022
20231
Annual change in %
Business field Formulations (patterning and planarization)
The development of gross domestic product (GDP) in selected countries and regions was as follows:
In its latest World Economic Outlook published on January 30, 2024, the International Monetary Fund (IMF)
predicts that the global economic recovery will prove surprisingly resilient despite numerous crises, but the
speed of the recovery will vary depending on the economy. Global gross domestic product (GDP) growth slowed
from 3.5% in 2022 to a projection of 3.1% in 2023. Overall, economic activity remains below pre-pandemic
levels. Major impediments to economic recovery are long-term consequences of the pandemic and geopolitical
tensions as well as cyclical factors such as inflation and tightened monetary policy. The ongoing war in Ukraine
and the resurgent conflict in the Middle East are weighing on the economic development by accelerating the
geoeconomic fragmentation and hindering the flow of commodities, which could lead to food or energy price
peaks.
Macroeconomic and Sector-Specific Environment
position
Report on ECONOMIC
48
Macroeconomic and Sector-Specific Environment
Overall, the IMF expects global inflation to decline more than expected in 2023 but remained above target
levels. The persistently high inflation rates prompted central banks to increase interest rates and high debt
levels led to tighter fiscal policies in some countries. China's property sector crisis still poses a risk as it could
deepen and cause global spillovers.
Our etch gas technology program continues to develop new chemistries to enable more than 100-layer, single-
stack etching for advanced memory devices such as V-NAND (vertical flash memory). We are also seeing good
progress in our etch gas development work for new low-GWP (global warming potential) gases for etching
applications and in our cooperation with customers to develop low-GWP gas solutions used in the production of
semiconductors.
In our Surface Solutions business, we offer our customers solutions for designing surfaces that meet their
specific requirements. Together with our customers, we are consistently developing new formulations that, in
combination with existing products and product innovations, provide customized solutions across various
industries.
Our Thin Films business field is actively developing new dielectrics (organosilanes and spin-on dielectrics) and
metallics offerings. Many of these new products are qualified by multiple customers and we are developing new
materials for leading-edge nodes that will enable chips and chiplets used for generative AI. The integration of
the chemical business of Mecaro into our business enables us to develop new precursors for high performance
DRAM and provides us with unique capabilities to expand our development in Asia. In addition, we continued to
expand our metallics portfolio to support our customers' roadmaps, providing innovative solutions for ALD
(atomic layer deposition) and CVD (chemical vapor deposition). We achieved significant advancements in high-
performance, conformal dielectric ALD films which address key customer pain points. Our spin-on-dielectrics
platform focuses on developing new formulations for gap-fill applications in increasingly deep and narrow
insulating features with the improved performance needed to enable next-generation V-NAND (vertical flash
memory) and DRAM (dynamic random-access memory).
1.6
2.6
2.5
1.9
0.5
3.4
1.9
1.0
Emerging Markets and Developing Economies
4.1
4.1
Business field Specialty Gases
5.4
4.5
India
3.5
3.1
Emerging Markets and Developing Economies Asia
PFAS
Japan
Business field Thin Films
In our R&D we are addressing critical material needs through every step of the wafer manufacturing process.
Top R&D programs for our Semiconductor Solutions business units include:
R&D activities in the business units*
With the objective of enabling more sustainable semiconductor manufacturing solutions, we have joined forces
with the Intel Corporation to jointly fund an academic research program over three years. The program will
specifically leverage AI and machine learning technologies to achieve innovative breakthroughs in sustainable
semiconductor manufacturing processes and technologies. Potential solutions include environmentally friendlier
materials, more efficient use of resources, AI-based solutions for modeling chemical processes, and opportunities
for reducing waste and emissions. The focus is on building open-source tools for the benefit of the entire scientific
and industrial community.
Academic research program
Research and Development
Semiconductor Solutions
46
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
To embed sustainable design into R&D and steer our portfolio in a more sustainable direction in the long term,
we have developed a scorecard that focuses on sustainable criteria in the development of new products and
solutions. The scorecard is a tool for driving a sustainability culture in R&D and considers every step of the
value chain to identify opportunities and risks at an early stage and act accordingly.
Scorecard
PFAS, a generic term that covers about 10,000 per- and polyfluoralkyl substances, is used for several critical
applications in the manufacture of microchips, e.g. photolithography, plasma etching and wafer cleaning. While
it is currently not possible to manufacture semiconductors without PFAS, we have already developed several
alternative products for some applications in Electronics. One area in which we are highly advanced is the
replacement of PFAS surfactants with non-PFAS alternatives in photoresists and related ancillary products such
as rinse solutions.
Combined Management Report Fundamental Information about the Group.
-
Our Life Science business sector reported an organic decline in net sales of -7.9% in fiscal 2023. This was at
the lower end of the forecast range of between -8% and -2%, which we adjusted in the second quarter and
confirmed in the third quarter, meaning that Life Science fell below our original forecast of slight to moderate
organic growth. All of the business units Process Solutions, Life Science Services and Science & Lab Solutions
recorded a downturn in organic net sales. As expected, Process Solutions and Life Science Services saw the
most pronounced organic decline in net sales, whereas the downturn in the Science & Lab Solutions business
unit was only slight. All in all, net sales in the Life Science business sector fell by -10.6% to € 9,281 million
including a negative exchange rate effect of -2.7% and a positive portfolio effect of 0.1%. This was in the lower
half of the forecast range of € 9,100 million to € 9,950 million, which is consistent with the more specific
forecast issued at the end of the third quarter (trending in the lower half of the forecast range).
Healthcare
EBITDA pre
We originally forecast moderate to solid organic sales growth for our Healthcare business sector compared with
the previous year. We then quantified this organic sales growth forecast at between +5% and +9% when we
published the figures for the first quarter. We raised this forecast range to between +6% and +9% with the
publication of the figures for the second quarter and confirmed this at the end of the third quarter. With full-year
organic growth of +8.5%, the business sector achieved the forecast for fiscal 2023. This development was driven
in particular by the significant growth of the oncology business and, above all, the strong performance of our
recently approved product BavencioⓇ. Neurology & Immunology made a substantial contribution to full-year
organic sales growth in fiscal 2023 thanks to our recently approved product MavencladⓇ in particular. Sales
growth was also driven by our established portfolio, especially fertility products. Taking into account the negative
exchange rate effect of -5.8%, net sales in the Healthcare business sector increased by +2.7% to € 8,053 million
in fiscal 2023, thereby falling within the upper half of the forecast range. This was consistent with the more
specific forecast issued together with the report on the third quarter (trending slightly above the mid-point).
Report on Economic Position
Review of Forecast against Actual Business Developments
53
Electronics
Life Science
Despite the economically and geopolitically difficult conditions in the market for semiconductor materials, we
forecast slight to solid organic net sales growth for our Electronics business sector at the start of the year based
on the assumption that the semiconductor market would recover in the second half of 2023. We quantified our
organic sales growth forecast at between -2% and +3% when we published the figures for the first quarter.
Compared with the previous forecast, we anticipated an even more pronounced weakening of the market
followed by a delayed but stronger recovery which should now only occur later in the second half of the year.
We adjusted this forecast with the publication of the figures for the second quarter, stating that we expected an
organic decline in net sales of between -6% and -1% in light of the further delay in the recovery of the
semiconductor market. We then confirmed this forecast at the end of the third quarter. The organic decline in
net sales for fiscal 2023 as a whole was -5.1%, which is in line with the lower end of the forecast range. Due to
negative exchange rate effects of -4.1% and taking into account a portfolio effect of +0.3%, net sales in the
Electronics business sector declined by -8.8% year-on-year to € 3,659 million, thereby falling within the
forecast range of between € 3,500 million and € 3,800 million. This was consistent with the more specific
forecast issued together with the report on the third quarter (trending around the mid-point).
Combined Management Report
We forecast slight to solid organic net sales growth for the Group in 2023. In particular, the macroeconomic,
geopolitical and industry-specific conditions changed over the course of the year. Furthermore, the Life Science
business sector saw sustained high inventory levels and a reluctance to invest on the part of customers, while the
Electronics business sector was affected by the ongoing weakness of the market for semiconductor materials.
Waning demand for products in connection with the Covid-19 pandemic meant that, as expected, net sales
declined sharply in fiscal 2023. All in all, we reported an organic decline in net sales of -1.6% in fiscal 2023,
which fell within the forecast range of between -2% and +2% that we revised in the second quarter and
confirmed in the third quarter. At the start of the year, we anticipated a negative exchange rate effect totaling
between -1% and -4%, especially as a result of the expected development of the U.S. dollar and the Chinese
renminbi. Several currencies, including the U.S. dollar and the Chinese renminbi as well as some currencies of
emerging economies, saw less favorable development than expected as the year progressed. The negative
exchange rate effect in 2023 as a whole was -4.1%, thus falling within the range of -3% to -6% which we most
recently revised in the second quarter and confirmed in the third quarter. The slightly positive portfolio effect
was negligible at +0.1%. All in all, net sales amounted to € 20,993 million, representing a year-on-year
decrease of -5.6%. This was below the mid-point of the forecast range of € 20,500 million to € 21,900 million
and thus was consistent with the more specific forecast issued together with the figures for the third quarter
(trending slightly below the mid-point).
Combined Management Report
The forecast of the Merck Group for fiscal 2023 published in the Annual Report for fiscal 2022 comprised the forecast
for the Group as well as the forecast for the three business sectors: Life Science, Healthcare, and Electronics.
Review of Forecast against Actual Business
Developments
52
Review of Forecast against Actual Business Developments
Report on Economic Position
The markets for automotive coatings and cosmetics are crucial to our Surface Solutions business. According to
the December 2023 report from GlobalData (formerly LMC), a leading global provider of automotive forecasts,
global automobile production grew significantly by 10.1% in 2023 compared with growth of 7.1% in 2022.
Underlying drivers include an unmet global demand, with China continuing to be one of the most important
markets. According to Euromonitor's report from October 2023, the market for cosmetics and care products
grew more slowly in 2023 after a very strong development in 2022 with an overall growth of 4.2% in 2023
(2022: 12.2%).
With our Display Solutions business, we are a significant producer of liquid crystal mixtures and OLED materials
for the display industry. After the Covid-19-pandemic-induced "stay at home boom," the display industry
underwent demand normalization in 2022. There are several indications that display market is slowly
recovering after supply inventory adjustments. Due to sluggish demand in the fourth quarter of 2023, however,
the market research company OMDIA (forecast as of Q3 2023) forecasted a slight decline in growth for 2023.
In the medium to long term, liquid crystals will continue to play a key role in the display industry in the future.
OLED technology, for which we have a strong position as material supplier, is becoming increasingly important
in high-end display applications.
Despite the current downturn, we foresee a positive outlook for the Electronics business sector. We anticipate
that the semiconductor market will regain momentum in 2024, driven by AI solutions, the Internet of Things,
and the increase in data volumes related to big data.
The semiconductor industry is the most important market for our business with materials, solutions and
services for the production of integrated circuits (Semiconductor Solutions). In particular, the growth in demand
for semiconductor materials depends mainly on the wafer area produced for semiconductors. The silicon wafers
required as raw materials are used as an indicator to estimate the demand for semiconductor materials overall.
According to the global industry association SEMI (forecast as of Q3 2023), the delivered silicon wafer area
experienced a -14.1% decline in 2023, following moderate growth in 2022 (3.9%). The current cyclical industry
downturn is amplified by macroeconomic challenges such as high interest rates and changing consumer buying
behaviors with a preference for services. Semiconductor manufacturers have responded by reducing utilization
rates to address excess inventory, resulting in declining demand for silicon wafers and related materials and
services.
Electronics
51
Combined Management Report _ Report on Economic Position Macroeconomic and Sector-Specific Environment
The net sales in the individual quarters as well as the respective organic growth rates in 2023 are presented in
the following graph:
Our original forecast for the Merck Group's EBITDA pre for 2023 ranged from a moderate decline to roughly
stable organic development compared with the previous year. This assumption was based on the expectation of
a moderate decline to roughly stable organic development in the Life Science business sector, slight to
moderate organic growth in the Healthcare business sector, and a slight to strong organic decline in the
Electronics business sector. We originally expected negative exchange rate effects to impact EBITDA pre by
between -1% and -4% compared with the prior year. With the presentation of the figures for the first quarter,
we quantified our forecast at organic development of between -5% and 0%. In response to inflation-related
cost increases and the underutilization of our production capacities, especially in the Life Science and
Electronics business sector, we revised our forecast to between -9% and -3% at the end of the second quarter.
This forecast was confirmed with the publication of the figures for the third quarter. Due to negative exchange
rate effects, we revised our forecast for the impact of exchange rate effects twice in the course of fiscal 2023,
ultimately ending with a forecast of between -6% and -3%. EBITDA pre amounted to € 5,879 million in fiscal
2023, representing an overall decline of -14.2% compared with the previous year (-9.0% organic, -4.9% from
currency effects, -0.3% from portfolio effects). This is in the lower half of the forecast range of between
€ 5,800 million and € 6,400 million, and hence is consistent with the more specific forecast range (trending in
the lower half of the range).
Net sales
Life Science
Operating cash flow
Combined Management Report
3,339
2,834
Profit after tax
30.8%
28.0%
Margin (% of net sales) 1
-14.2%
-970
6,849
5,879
EBITDA pre¹
29.3%
26.1%
Margin (% of net sales)¹
-1,015
-505
-15.1%
Earnings per share (€)
6.49
Development of sales and results of operations
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
1 Not defined by International Financial Reporting Standards (IFRS).
-11.2%
-475
4,259
3,784
6,504
Operating cash flow
-1.56
10.05
8.49
Earnings per share pre (€)¹
-15.2%
-1.16
7.65
-15.5%
5,489
EBITDA²
20.1%
Merck Group
Course of Business and Economic Position
55
Merck Group
Report on Economic Position Course of Business and Economic Position
Combined Management Report
€ 3,500 million and € 4,100 million at the end of the second quarter and confirmed this forecast in our report
on the third quarter. The operating cash flow amounted to € 3,784 million in fiscal 2023, which was within the
most recent forecast range of between € 3,500 million and € 4,100 million. This corresponded to a decline of
-11.2% compared with the previous year (2022: € 4,259 million). The decisive factor for this was the
development of EBITDA pre.
Merck Group
We originally anticipated a moderate decline to roughly stable development for the operating cash flow of the
Merck Group in 2023 (2022: € 4,259 million). We then specified the forecast range at between € 3,700 million
and € 4,300 million with the publication of the figures for the first quarter. As we expected the development of
operating cash flow to be largely in line with operating performance, we lowered our forecast to between
We originally anticipated a slight to strong organic decrease in EBITDA pre for our Electronics business sector in
fiscal 2023. We expected inflation-driven cost increases to have a particularly pronounced impact on material costs,
and that we would only be able to pass on cost increases to a limited extent in the coming quarters due to the price
pressure faced by our customers. With the presentation of the figures for the first quarter, we quantified our
forecast for the organic decline in EBITDA pre as ranging from -12% to -3%. Having lowered our forecast
considerably to between -18% and -10% with the report on the second quarter in response to inflation-related cost
increases and the underutilization of our production capacities, we reiterated this guidance at the end of the third
quarter. Along with the exchange rate effect that was most recently forecast at between -10% and -7% (originally:
significantly negative exchange rate effect), this resulted in a forecast range for EBITDA pre in the Electronics
business sector of between € 870 million and € 980 million. EBITDA pre of € 913 million in fiscal 2023 (2022:
€ 1,192 million) was in the lower half of the forecast range. This was consistent with the more specific forecast
issued along with the report on the third quarter (trending in the lower half of the range) and corresponded to a
decline of -23.4% compared with the previous year (-17.1% organic, -5.6% due to exchange rate effects).
Corporate and Other
Electronics
With our new products expected to continue to deliver a substantial earnings contribution, especially
MavencladⓇ and BavencioⓇ, we forecast slight to moderate organic growth in EBITDA pre for our Healthcare
business sector. Largely because of the sustained high level of prices due to inflation, this original forecast was
slightly below the expected organic growth in net sales (moderate to solid organic sales growth). With the
publication of the figures for the first quarter, we quantified our forecast for organic growth in EBITDA pre at
between +8% and +12% in fiscal 2023. We then raised this forecast to between +14% and +19% at the end
of the second quarter, especially as business performance was expected to be stronger. We confirmed this
forecast range at the end of the third quarter. Along with the exchange rate effect that was most recently
forecast at between -17% and -13% (originally: negative exchange rate effect in a high single-digit to low
double-digit percentage range), this resulted in a forecast range for EBITDA pre in the Healthcare business
sector of between € 2,450 million and € 2,600 million. With EBITDA pre of € 2,543 million in fiscal 2023 (2022:
€ 2,477 million), the business sector came in at the upper end of this range. This was also consistent with the
more specific forecast issued together with the report on the third quarter (trending at the upper end of the
range). This corresponded to an increase of +2.7% compared with the previous year (+17.1% organic, -14.4%
due to exchange rate effects, -0.7% from portfolio).
Healthcare
54
54
Report on Economic Position Review of Forecast against Actual Business Developments
The expenses for Corporate and Other in EBITDA pre amounted to € -397 million in fiscal 2023. This meant that
EBITDA pre was slightly below the original forecast range of between € -370 million and € -330 million. However,
we specified our forecast with the presentation of the figures for the third quarter. Due to substantially lower
expected income from currency hedging transactions, we have forecast that EBITDA pre for corporate costs and
other is expected to be slightly below the forecast range of -330 to -370 million €. The original forecast for fiscal
2023 provided for a significant decline in the expenses in this area. Compared with the prior-year figure of € -
579 million, the expenses decreased significantly by -31.5%.
In contrast to the expected net sales development, we originally expected EBITDA pre in Life Science to be in a
range from a moderate decline to organically about stable in fiscal 2023 due to inflation-driven price increases
weighing more heavily on earnings. At the end of the first quarter, we quantified our forecast for the organic
decline in EBITDA pre at between -8% and -4%. In response to the underutilization of our production
capacities, we then lowered this to between -21% and -12% with the publication of the figures for the second
quarter. Along with the exchange rate effect that was most recently forecast at between -6% and -2%
(originally: slightly negative exchange rate effect), this resulted in a forecast range for EBITDA pre in the
Life Science business sector of between € 2,750 million and € 3,200 million. The business sector achieved this
forecast with EBITDA pre of € 2,820 million in fiscal 2023 (2022: € 3,760 million). This corresponded to a
decline of -25.0% compared with the previous year (-21.4% organic, -3.3% due to exchange rate effects).
EBITDA pre therefore also fell within the more specific forecast range issued at the same time as the report on
the third quarter (trending in the lower half of the range of € 2,750 million to € 3,200 million).
Key figures
€ million
17.2%
Margin (% of net sales) 1
-19.3%
-865
4,474
3,609
Operating result (EBIT) 1
Change
-5.6%
22,232
20,993
Net sales
%
€ million
2022
2023
-1,239
-15.6%
thereof:
Change
658
Current financial debt
702
Trade and other current
payables/
3,422
refund liabilities¹
Other current liabilities²
3,918
Total equity and liabilities¹
2,030
299
9,200
1,486
162
Current provisions²
-22
thereof:
liabilities¹, 2
26
0.2%
Equity
Non-current liabilities¹
thereof:
Non-current provisions for
2,192
employee benefits
Other non-current
277
provisions
Non-current financial debt
9,239
Other non-current
1,333
Current liabilities1
39
-153
8,699
Combined Management Report Report on Economic Position
Course of Business and Economic Position Merck Group
60
60
The total assets of the Merck Group were essentially unchanged at € 48,495 million as of December 31,
2023 (December 31, 2022: € 48,535 million).
Goodwill was down as against the previous year as a result of the depreciation of the U.S. dollar against the
euro in particular.
Other intangible assets were reduced by amortization and currency effects, in particular stemming from the
U.S. dollar. Slightly higher investment than in the previous year, in particular from in-licensing in the
Healthcare business sector (further information can be found under "Other intangible assets" in the
Notes to the Consolidated Financial Statements), was not enough to offset this development.
The year-on-year increase in property, plant and equipment was attributable to additions of € 1,981 million
(2022: € 1,730 million), which significantly exceeded depreciation and disposals in the reporting period.
Of the additions to property, plant and equipment in 2023, € 391 million (2022: € 279 million) related to
strategic investments in Germany, including € 329 million for the expansion of the Darmstadt site. At the
Darmstadt site, the Healthcare business sector invested € 51 million in a new research center and the
Life Science business sector invested € 31 million in a new membrane production facility. Furthermore, the
Life Science business sector invested € 50 million in a new filling and logistics center in Schnelldorf. Outside
Germany, there were high levels of investment in strategic projects in the United States (€ 330 million),
Ireland (€ 157 million) and China (€ 90 million) in particular. In the United States, the Life Science business
sector invested € 69 million in expanding its capacities for biosafety testing and analytical development
services in Rockville, while the Electronics business sector invested € 30 million in a new production facility
for specialty gases for the semiconductor industry in Hometown. In Ireland, the Life Science business
sector invested € 149 million in the expansion of membrane production capacities and the construction of a
new filtration plant in Cork. In China, the Electronics business sector invested € 34 million in the
establishment of a site for advanced semiconductor solutions in Zhangjiagang.
Trade and other current receivables mainly developed in line with the business volume. At the same time,
this item was reduced by exchange rate effects.
In fiscal 2023, the equity of the Merck Group rose by 2.9% to € 26,754 million (December 31, 2022:
€ 26,005 million). Profit after tax (€ 2,834 million) contributed to this development. By contrast, a negative
currency translation difference (€ 1,003 million) and the dividend payments and profit distribution in the
reporting year served to reduce equity (see “Consolidated Statement of Changes in Net Equity” in the
Consolidated Financial Statements). Partially as a result of the ongoing reduction in net financial debt, the
equity ratio improved by more than one percentage point to 55.2% (December 31, 2022: 53.6%).
The increase in non-current provisions for employee benefits essentially resulted from actuarial losses in
connection with the discount rate.
Current provisions increased as a result of follow-on obligations in connection with the discontinuation of
the development program for evobrutinib and ongoing efficiency programs (further information can be
found in Note (27) "Other provisions” in the Notes to the Consolidated Financial Statements).
Current financial liabilities were reduced by the repayment of a bond in the amount of € 600 million and an
early partial repayment of hybrid bonds in the amount of € 275 million.
1 Previous year's figures have been adjusted, see Note (6) "Acquisitions and Divestments" in the Notes to the Consolidated Financial Statements.
2 Previous year's figures have been adjusted, see Note (2) "Reporting principles" in the Notes to the Consolidated Financial Statements.
-0.1%
-40
-504
17.9%
9,514
19.6%
-815
-8.6%
48,495
100.0%
26.8%
453
3,411
4,422
48,535
100.0%
205
-526
11
1,228
13,015
26.9%
13,042
Property, plant and
9,056
8,204
equipment¹
Other non-current assets
2,650
2,406
-544
-784
852
244
Current assets
12,393
25.6%
12,201
7,335
6,551
Other intangible assets¹
18,389
€ million
%
€ million
%
€ million
%
Non-current assets¹
25.1%
36,102
36,334
74.9%
-232
-0.6%
thereof:
Goodwill1
17,845
74.4%
Dec. 31, 2022
192
Merck Group
-9
128
Total assets¹
48,495
100.0%
48,535
100.0%
-40
-0.1%
26,754
55.2%
26,005
53.6%
749
2.9%
178
1,854
1,280
321
Inventories
4,637
4,632
Trade and other current
4,004
4,114
5
1.6%
-110
Other current financial
499
assets
Other current assets
1,271
Cash and cash equivalents
1,982
receivables
Net sales and organic growth¹ by quarter²
8.5%
Q1
70%
57
557
396
Life Science
17%
297
Electronics
13%
€ million/%
Research and development costs by business sector¹ - 2023
Merck Group
Merck Group
Course of Business and Economic Position_
Report on Economic Position
Healthcare
1,657
1 Not presented: research and development costs of € 94 million allocated to Corporate and Other.
There was a year-on-year decline in the operating result (EBIT) in fiscal 2023. This was largely due to the lower
level of gross profit, which was only partially offset by a reduction in operating expenses. In particular, the
year-on-year decline in the gross margin was due to lower sales of high-margin products in the Life Science
business sector that had experienced strong demand in conjunction with the Covid-19 pandemic. In addition, as
a result of the agreement terminating the strategic alliance with Pfizer Inc., United States, the cost of sales
included royalties for the Bavencio® product for the first time from July 1, 2023, which in turn reduced the
gross margin.
Marketing and selling expenses declined on the back of lower logistics costs in particular.
Q1
€ million/change in %
EBITDA pre¹ and change by quarter²
Merck Group
The development of EBITDA pre in the individual quarters in comparison with 2022 as well as the respective
growth rates are presented in the following overview:
58
Course of Business and Economic Position Merck Group
Combined Management Report
Report on Economic Position
The net income attributable to Merck KGaA shareholders declined by 15.1% to € 2,824 million (2022:
€ 3,326 million) and resulted in a reduction in earnings per share to € 6.49 (2022: € 7.65).
Income tax expense amounted to € 650 million (2022: € 948 million) and resulted in a tax rate of 18.7%
(2022: 22.1%). The downturn in earnings was accompanied by a corresponding reduction in taxes.
Furthermore, a non-recurring deferred tax income had a reducing effect on the tax rate.
The financial result improved by 33.0% to € -125 million (2022: € -187 million). This was due in particular
to the positive development of net interest income. Details about financial income and expenses can be
found in Note (40) "Finance income and expenses/Net gains and losses from financial
instruments" in the Notes to the Consolidated Financial Statements.
Compared to the previous year, EBITDA pre, the key financial indicator used to steer operating business,
fell by € 970 million or -14.2% to € 5,879 million (2022: € 6,849 million).
Other operating income and expenses fell compared with the previous year, mainly as a result of lower profit
transfer expenses in the Healthcare business sector. Impairment losses on non-financial assets also declined.
Overall, the aforementioned developments led to a reduction in the EBIT margin by around three
percentage points, from 20.1% in the previous year to 17.2%.
Accounting for a 70% (2022: 70%) share of Group R&D spending (excluding research and development
cost allocated to Corporate and Other), Healthcare was the most research-intensive business sector of the
Merck Group. Further information can be found in the "Research and Development" chapter.
Administration expenses increased as a result of a program to continuously improve processes and align
the Group Functions more closely with the businesses in particular.
Combined Management Report
56
56
1 Not defined by International Financial Reporting Standards (IFRS).
Income tax
-18.7%
-33.0%
62
-803
-0.8%
19.3%
-187
4,287
-0.6%
16.6%
Profit after tax
-125
3,484
Financial result
-43.8%
-19.3%
300
-865
-3.1%
20.1%
€ million/organic growth in %
17.2%
3,609
Profit before income tax
22
-650
2,834
-948
3,339
-15.1%
-502
-25.6%
3
-0.1%
15.0%
-14
3,326
13.5%
-3.1%
13.5%
2,824
-10
Non-controlling interests
-15.1%
-505
-31.4%
298
-4.3%
15.0%
Net income
Operating result (EBIT)¹
Q2
Q4
3%
695
6.1%
-2.7%
8.8%
4%
737
20,993
Merck Group
Africa (MEA)
Middle East and
5%
1,231
8.1%
-10.5%
100.0%
100%
-1.6%
-4.1%
0.1%
20,993
%
2023
Cost of sales
Net sales
€ million
Change
18.6%
Consolidated Income Statement
The Consolidated Income Statement of the Merck Group is as follows:
Net sales in the Life Science business sector decreased by € 1,100 million or -10.6% year-on-year to
€ 9,281 million (2022: € 10,380 million). This development was mainly attributable to organic effects, which
amounted to € 821 million or -7.9%. Exchange rate effects of € 285 million or -2.7% also contributed to the
downturn in net sales. The Life Science business sector accounted for the largest share of Group net sales at
44% (2022: 47%), followed by Healthcare at 38% (2022: 35%). Net sales in the Healthcare business sector
increased by € 214 million or 2.7% year-on-year to € 8,053 million (2022: € 7,839 million). Negative exchange
rate effects of -5.8% were offset by organic growth of 8.5%. The € 354 million decline in net sales in the
Electronics business sector to € 3,659 million (2022: € 4,013 million) was driven by organic effects of -5.1% and
exchange rate effects of -4.1%. This was offset by a positive effect of 0.3% from the acquisition of M Chemicals
Inc., Korea. The percentage contribution of Electronics to Group net sales was unchanged year-on-year at 18%.
Orders already received by the reporting date that will result in net sales in future periods amounted to
around € 4 billion as of December 31, 2023 (December 31, 2022: around € 6 billion), of which around
€ 3 billion related to the Life Science business sector (December 31, 2022: around € 4 billion).
In fiscal 2023, the Merck Group generated net sales of € 20,993 million (2022: € 22,232 million),
representing a year-on-year decline of € 1,239 million or -5.6%. Negative exchange rate effects served to
reduce net sales by € 902 million or -4.1% in fiscal 2023. These effects largely resulted from the exchange
rate development of the Chinese renminbi, the US dollar, and the Argentinian peso. Net sales fell by
€ 357 million or -1.6% organically. Net sales in the Life Science and Electronics business sectors declined,
while the Healthcare business sector recorded organic growth. The portfolio-related net sales increase of
€ 19 million mainly resulted from the acquisition of M Chemicals Inc., Korea.
1 Not defined by International Financial Reporting Standards (IFRS).
100%
22,232
-5.6%
Merck Group
Dec. 31, 2023
Balance sheet structure
Merck Group
Merck Group
2 Quarterly breakdown unaudited.
1 Not defined by International Financial Reporting Standards (IFRS).
-12.8%
-2.6%
%
1,628
EBITDA pre¹ by business sector² - 2023
1,810
1,629
2022
1,293
1,446
1,553
1,587
2023
1,782
Q3
€ million/%
Electronics
Net assets and financial position
59
Merck Group
Course of Business and Economic Position_
Report on Economic Position
Combined Management Report
2,543
15%
Healthcare
2 Not presented: Decline in Group EBITDA pre by € -397 million due to Corporate and Other.
1 Not defined by International Financial Reporting Standards (IFRS).
-20.6%
-20.2%
2,820
45%
Life Science
913
41%
-1.8%
-685
4,474
Other operating income and expenses
18%
4,013
-8.8%
0.3%
-4.1%
-5.1%
18%
3,659
Electronics
35%
7,839
47%
10,380
Share
2022
Merck Group
20,993
100%
-1.6%
Share
2023
-385
Net sales by region
Merck Group
In fiscal 2023, the Merck Group recorded the following regional sales performance:
Merck Group
Total change
-10.6%
2.7%
Course of Business and Economic Position
Combined Management Report
1 Not defined by International Financial Reporting Standards (IFRS).
100%
22,232
-5.6%
0.1%
-4.1%
Report on Economic Position
-5.8%
38%
8,053
-1.1%
0.8%
%
5,660
5,806
5,568
5,198
-4.1%
2022
5,173
5,302
5,293
2023
Q4
Q3
Q2
5,225
Organic
growth¹
-1.7%
2 Quarterly breakdown unaudited.
Healthcare
0.1%
-2.7%
-7.9%
44%
9,281
Acquisitions/
divestments
1 Not defined by International Financial Reporting Standards (IFRS).
Exchange
rate effects
Share
2023
Life Science
€ million
Net sales by business sector
Merck Group
In fiscal 2023, the net sales by business sector developed as follows:
Organic
growth¹
Exchange
rate effects
€ million
Total change
Administration expenses
-4.3%
203
-21.2%
-4,714
-21.5%
-4,510
Marketing and selling expenses
0.9%
-9.6%
-5.6%
%
€ million
-1,239
-73
-1,313
Acquisitions/
divestments
13,705
59.0%
-1,392
-6.6%
-1,306
-5.9%
losses on financial assets (net)
> 100%
-45
-6
-0.2%
-51
Impairment losses and reversals of impairment
12,392
-3.0%
-11.3%
-2,521
-11.6%
-2,445
Research and development costs
6.6%
-86
75
Gross profit
61.6%
-8,527
0.1%
-2.7%
-38.4%
28%
5,952
North America
28%
-6.4%
6,248
-2.1%
-1.3%
29%
6,037
Europe
Share
2022
-3.4%
6,361
-3.8%
Asia-Pacific (APAC)
-41.0%
-8,600
100.0%
29%
2022
22,232
6%
1,331
Latin America
%
7,697
-9.9%
0.2%
-5.8%
-4.3%
33%
6,936
35%
100%
14%
-4.0%
53%
14.9%
1 Not defined by International Financial Reporting Standards (IFRS).
23%
10%
Share
-12.8%
2.9%
2022
28.5%
4%
84
25%
353
3%
116
1%
0.1%
-10.6%
10,380
100%
1 Not defined by International Financial Accounting Standards (IFRS).
1 The core business consists of "Net sales excluding the Covid-19 pandemic business". This is a financial indicator that is not defined by International Financial
Reporting Standards (IFRS). It should not be taken into account in order to assess the performance of Merck in isolation or as an alternative to the financial
indicators presented in the consolidated financial statements and determined in accordance with IFRS.
Combined Management Report Report on Economic Position Course of Business and Economic Position_ Life Science
The following table presents the composition of EBITDA pre for 2023 in comparison with 2022. The
International Financial Reporting Standards (IFRS) figures have been modified to reflect the elimination of
adjustments included in the respective functional costs.
Life Science
Reconciliation EBITDA pre¹
2,536
2023
-10.7%
-0.3%
-0.1%
-7.9%
-5.1%
-5.6%
Latin America
352
4%
10.3%
-10.8%
0.1%
Middle East and Africa (MEA)
116
1%
5.3%
Life Science
9,281
100%
-5.5%
-2.7%
2022
Change
€ million
Gross profit
5,044
6
5,050
6,100
7
6,107
-17.3%
Marketing and selling expenses
-2,245
12
-2,232
-2,400
16
-2,384
-10.6%
-1.0%
-4,273
7
-4,280
Net sales
Cost of sales
IFRS
Elimination of
adjustments
-0.5%
IFRS
Elimination of
adjustments
25%
Pre¹
9,281
9,281
10,380
10,380
-4,236
6
-4,230
Pre¹
2,263
Asia-Pacific (APAC)
38%
-2.3%
-16.7%
4,540
44%
Life Science Services
Life Science
792
9,281
8%
-14.6%
-2.0%
0.6%
100%
-7.9%
-2.7%
0.1%
-14.4%
41%
3,782
Process Solutions
Acquisitions /
€ million
2023
Share
growth¹ rate effects
divestments Total change
20222
-15.9%
-10.6%
Share
4,706
51%
-0.6%
-3.3%
-3.9%
4,898
47%
Science & Lab Solutions
-6.3%
943
10,380
North America
3,372
36%
-12.0%
Exchange
rate effects
-0.2%
-2.3%
Acquisitions/
divestments
Total change
2022
Share
-7.8%
3,445
33%
0.1%
-14.2%
3,931
-7.6%
34%
3,178
Europe
100%
1 Not defined by International Financial Accounting Standards (IFRS).
2 Previous year's figures were adjusted due to internal restructuring in the Life Science division.
Combined Management Report Report on Economic Position Course of Business and Economic Position_ Life Science
66
The Science & Lab Solutions business unit, which provides products and services to support life science
research for pharmaceutical, biotechnology, academic research laboratories and researchers, and scientific
and industrial laboratories, had organically stable sales in 2023. While the core business¹ generated organic
growth in the first half of 2023, sales saw an organic decline in the second half of 2023 amid further
decreasing pandemic-related demand as well as decreasing demand in China due to the current economic
environment. Including an unfavorable foreign exchange effect of -3.3%, net sales decreased to
€ 4,706 million in 2023 (2022: € 4,898 million). Science & Lab Solutions accounted for 51% of Life Science
net sales (2022: 47%). Geographically, Europe showed organic growth in 2023, while net sales in North
America and Asia-Pacific (APAC) declined organically.
9%
The Process Solutions business unit, which markets products and services for the entire pharmaceutical
production value chain, saw an organic mid-teens percentage decrease in sales for 2023. This was
attributable to the continued decline in pandemic-related sales and a slowdown of the core business in
2023, driven mainly by the effects of destocking by key customers. Including an unfavorable foreign
exchange effect of -2.3%, net sales decreased across all core regions (North America, Europe, Asia-Pacific
(APAC)) with exception to Latin America and Middle East and Africa (MEA) to € 3,782 million in 2023
(2022: € 4,540 million). The percentage contribution of the Process Solutions business unit to Life Science
net sales was 41% (2022: 44%).
Net sales of the business sector by region developed as follows:
Life Science
Net sales by region
€ million
2023
Share
Organic
growth¹
The Life Science Services business unit, which offers fully integrated Contract Development and
Manufacturing Organization (CDMO) and contract testing services, recorded a significant organic sales
decline in the mid-teens for 2023. This was driven by decreasing pandemic-related sale partially offset by
growth in the core business. Including an unfavorable foreign exchange effect of -2.0%, net sales
decreased across all regions to € 792 million (2022: € 943 million).
Administration expenses
-425
53
1,006
976
%
-2.9%
-29.2%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
850
-37.0%
-30.4%
Combined Management Report
Report on Economic Position Course of Business and Economic Position
Healthcare
69
Healthcare
927
2022
592
615
67
Combined Management Report
Report on Economic Position Course of Business and Economic Position_ Life Science
68
The development of EBITDA pre in the individual quarters in comparison with 2022 is presented in the following
overview:
Life Science
EBITDA pre¹ and change by quarter²
Healthcare
€ million/change in %
22
Q2
Q3
Q4
2023
901
712
Q1
40
Key figures
Net sales
24.2%
2,545
2,385
160
6.7%
31.6%
30.4%
2,543
2,477
66
2.7%
31.6%
31.6%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Development of sales and results of operations
27.6%
17.4%
330
1,895
Operating result (EBIT)¹
Margin (% of net sales) 1
EBITDA²
Margin (% of net sales)¹
EBITDA pre¹
Margin (% of net sales) 1
Change
€ million
2023
€ million
%
8,053
7,839
214
2.7%
2,225
2022
Exchange
In 2023, EBITDA pre saw an organic mid-twenties percentage decline compared to 2022, resulting in an
EBITDA pre margin of 30.4% (2022: 36.2%).
Adjusted gross profit for the Life Science business sector was lower in 2023 in comparison with 2022. This
was attributable to the organic sales decline following the continued decrease in pandemic-related sales
combined with a slowdown of the core business as well as plant fix costs. At 54.4%, the adjusted gross
margin in 2023 was below the year-earlier period (2022: 58.8%).
48
-78
-85
61
-24
> 100.0%
expenses
Operating result (EBIT)¹
1,850
2,808
Depreciation/amortization/
impairment losses/reversals of
881
-34
848
-126
Other operating income and
-75.5%
-9
-372
-400
22
-377
-1.4%
Research and development costs
-396
870
3
-399
-0
-399
-1.5%
Impairment losses and reversals
of impairment losses on financial
assets (net)
-2
-2
-393
The decrease in marketing and selling expenses in 2023 was largely driven by lower logistics costs
following lower sales volume and a decline in personnel costs. In 2023, administration expenses and
Research & Development costs remained organically largely stable in comparison to 2022. In addition to
our organic development, positive foreign exchange effects impacted the development of costs compared to
2022. The net position of other operating income and expenses decreased compared to 2022 due to one-off
effects in 2022 which did not repeat in 2023. Among other items, there was one-off income from a
contractual arrangement with a supplier.
-24
0.3%
-18
Other adjustments
EBITDA pre²
2,820
2,820
3,760
of which: organic growth¹
of which: exchange rate effects
3,760
-25.0%
-21.4%
-3.3%
of which: acquisitions/
divestments
1 Not defined by International Financial Reporting Standards (IFRS).
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
-0.3%
18
-6
6
Acquisition-related adjustments
impairment losses
EBITDA²
2,731
Restructuring expenses
30
-30
Integration expenses/IT expenses
845
53
3,678
41
-41
24
-24
Gains (-)/losses (+) on the
divestment of businesses
-53
Organic
Net sales by business unit
Life Science
201
187
Dividend payments/profit withdrawals²
1,164
967
-30
86
-258
-3
7,500
8,328
1 Not defined by International Financial Reporting Standards (IFRS).
2 As reported in the Consolidated Cash Flow Statement.
Traditionally, the capital market represents a major source of financing for Merck, for instance via bond
issues. As of December 31, 2023, there were liabilities of € 3.9 billion from a debt issuance program most
recently renewed in fiscal 2023 (December 31, 2022: € 4.5 billion).
Loan agreements represent a further source of financing for Merck. A € 2.5 billion syndicated loan facility is
in place until 2028 to cover unexpected cash needs. This credit line is a backup facility that is intended to
be used in exceptional circumstances only. Merck also agreed upon several bilateral loan facilities.
December 31
Other
Currency translation difference
Change in lease liabilities
216
275
Payments from the disposal of intangible assets²
-136
-38
Payments for investments in property, plant and equipment²
1,807
In addition, Merck has a commercial paper program with a volume of € 2.5 billion at its disposal. Within the
scope of this program, Merck can issue short-term commercial paper with a maturity of up to one year.
1,531
-19
-21
Acquisitions²
12
854
Payments from divestments²
-4
Payments from the disposal of property, plant and equipment²
Payments for investments in intangible assets²
Combined Management Report
Course of Business and Economic Position
3.375%
1.625%
0.125%
3.250%
1.875%
1.625%
600
600
750
634
0.375%
2.875%
0.5%
2030
500
500
2.375%
2031
842
500
1,502
750
Merck Group
62
The maturities of our financial liabilities are aligned with our planned free cash flow. The repayment profile
of the issued bonds was as follows:
• Eurobond
• USD Bond¹
• Hybridbond²
2024
Report on Economic Position
2025
2027
2028
2029
| | |
500
500
500
2026
800
-4,259
8,753
1 Not defined by International Financial Reporting Standards (IFRSS).
Change
Dec. 31, 2023
Dec. 31, 2022
€ million
%
7,802
8,726
-924
-10.6%
283
203
80
39.4%
1,196
Net financial debt¹
Other current financial assets²
Cash and cash equivalents
less:
Combined Management Report
Report on Economic Position
Course of Business and Economic Position_
Merck Group
61
The composition and the development of net financial debt were as follows:
Merck Group
919
Net financial debt¹
Bonds
Bank loans
Liabilities to related parties
Loans from third parties and other financial debt
Liabilities from derivatives (financial transactions)
Lease liabilities
Financial debt
€ million
-3,784
276
68
212
85.9%
8,328
-828
-9.9%
2 Excluding current derivatives (operational) and contingent considerations, which are recognized in the context of business combinations according to
IFRS 3.
Bonds were reduced by the repayment of a bond in the amount of € 600 million in December 2023 and the
partial repurchase of a nominal volume of € 275 million of hybrid bonds issued in 2019 and 2020.
Merck Group
Reconciliation of net financial debt¹
€ million
January 1
Operating Cash Flow
2023
2022
8,328
247
6.9%
128
1,854
59
9
15.7%
77
30
47
> 100.0%
30.1%
515
24
5.0%
9,941
10,428
-487
-4.7%
1,982
459
7,500
491
The net sales in the individual quarters as well as the respective organic growth rates in 2022 are presented in
the following graph:
0.875%
2 For the hybrid bonds, repayment is assumed at the earliest possible date.
1 Not defined by International Financial Reporting Standards (IFRS).
Change
2023
2022
€ million
%
9,281
10,380
1,850
2,808
-1,100
-958
-10.6%
-34.1%
19.9%
27.1%
Margin (% of net sales) 1
EBITDA pre¹
Margin (% of net sales) 1
Margin (% of net sales)¹
EBITDA²
Course of Business and Economic Position
Merck Group
Overall assessment of business performance and economic situation
Despite the challenging macroeconomic environment and headwinds in individual markets, Merck can look
back on a predominantly steady fiscal 2023 thanks to the diversified nature of its business sectors. As
anticipated, Life Science business declined as a result of the forecast downturn in demand for products in
connection with the Covid-19 pandemic and the slower than expected reduction in customer inventories in
the Process Solutions business unit. Additionally, the economic slowdown in the semiconductor industry led
to weak business performance in the Electronics business sector. However, Healthcare achieved strong
organic growth that partially offset the negative development in the other business sectors.
All in all, the Merck Group's net sales declined by -5.6% or € -1.2 billion to € 21 billion in fiscal 2023. Our
most important key performance indicator, EBITDA pre, fell by -14.2% to € 5.9 billion. Earnings were
adversely affected by the challenging market conditions and exchange rate effects. We will propose to the
Annual General Meeting an unchanged dividend payment of € 2.20 per share for fiscal 2023.
The solid financing policies of the Merck Group were reflected in its consistently good key balance sheet
figures. The equity ratio remained at 55.2% as of December 31, 2023 (December 31, 2022: 53.6%). Net
financial debt was reduced further, amounting to € 7.5 billion at the end of the fiscal year (2022:
€ 8.3 billion).
Based on our solid net assets and financial position as well as our diversified operations, we view the
economic situation of the Merck Group as positive overall. Thanks to our resilient business model and our
clear positioning as a science and technology company, we are well positioned even in economically
challenging times.
2,731
65
Report on Economic Position Course of Business and Economic Position_ Life Science
Life Science
Life Science
Key figures
€ million
Net sales
Operating result (EBIT) 1
Combined Management Report
Combined Management Report Report on Economic Position
3,678
-25.7%
2,354
2,191
2,249
2022
2,445
2,648
2,681
2,606
%
0.6%
-8.7%
-13.2%
-9.7%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
2,487
2023
Q4
Q3
29.4%
35.4%
2,820
3,760
-940
-25.0%
30.4%
-946
36.2%
Development of sales and results of operations
The development of sales in the individual quarters in comparison with 2022 as well as the respective organic
growth rates are presented in the following graph:
Life Science
Net sales and organic growth¹ by quarter²
€ million/organic growth in %
Q1
Q2
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
1 The nominal volumes of bonds denominated in U.S. dollars were converted into euros at the closing rate on December 31, 2023.
64
-19.1%
53.6%
47.2%
40.7%
40.9%
Total assets
Non-current assets
Asset ratio¹
74.4%
74.9%
75.8%
77.8%
79.4%
Total assets
Total equity
Asset coverage¹
55.2%
Dec. 31, 2019
Dec. 31, 2020
Dec. 31, 2021
The capital market uses the assessments published by rating agencies to help lenders assess the risks of a
financial instrument used by Merck. Merck is currently rated by Standard & Poor's and Moody's. Standard &
Poor's has issued a long-term credit rating of A with a stable outlook, while Moody's has issued a rating of
A3 with a stable outlook. An overview of the development of our rating in recent years is presented in the
“Report on Risks and Opportunities”.
The financial debt was not secured by liens or similar forms of collateral. The loan agreements do not
contain any financial covenants. There were no indications that the availability of extended credit lines was
restricted. Cash and cash equivalents included restricted cash amounting to € 404 million
(December 31, 2022: € 456 million). We pursue a sustainable dividend policy and aim for a target corridor
of 20% to 25% of earnings per share pre when determining the amount of the dividend. The average
borrowing cost on December 31, 2023, was 2.1% (December 31, 2022: 1.9%).
Combined Management Report
Report on Economic Position
Course of Business and Economic Position_
Merck Group
63
74.1%
83
Merck Group
Key balance sheet figures
%
Total equity
Equity ratio¹
Dec. 31, 2023
Dec. 31, 2022
The development of key balance sheet figures was as follows:
3.8%
71.6%
52.3%
840
852
%
1.5%
22
Q2
Q3
Q4
1,255
1,053
1,552
1,015
-27.0%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
622
853
2023
Q1
51.5%
Non-current assets
Current liabilities
Finance structure¹
40.0%
42.2%
43.6%
62.3%
37.3%
Liabilities (total)
1 Not defined by International Financial Reporting Standards (IFRS).
In the area of financial risks and opportunities, Merck uses an active management strategy to reduce the
effects of fluctuations in exchange and interest rates. This also includes the use of derivative financial
instruments. Further details on liquidity, counterparty and financial market risks and opportunities are
presented in the "Report on Risks and Opportunities” in the “Financial risks and opportunities" section.
In fiscal 2023, operating cash flow, which is one of the three most important key performance indicators
alongside net sales and EBITDA pre, decreased by -11.2% to € 3,784 million (2022: € 4,259 million). This was
mainly due to the development of EBITDA pre. This was countered by a reduction in working capital and lower
tax payments. Further information about the development of the operating cash flow can be found in the
“Internal Management System” chapter in this Combined Management Report, under "Consolidated Cash
Flow Statement" in the Consolidated Financial Statements and in Note (16) "Operating cash flow” in the
Notes to the Consolidated Financial Statements.
The distribution of operating cash flow across the individual quarters and the percentage changes in comparison
with 2022 were as follows:
Merck Group
Operative cash flow¹ and change by quarter²
€ million/change in %
45.7%
Healthcare
Pre¹
€ million/organic growth in %
3%
Other
235
3%
161
2%
Healthcare
266
8,053
8.5%
-5.8%
2.7%
7,839
100%
1 Not defined by International Financial Reporting Standards (IFRS).
Combined Management Report Report on Economic Position Course of Business and Economic Position Healthcare
100%
70
25.1%
35.7%
1.6%
-4.9%
-3.3%
590
8%
thereof: EuthyroxⓇ
565
-10.6%
7%
-3.2%
2.2%
553
7%
thereof: SaizenⓇ
332
4%
5.4%
70
The cancer drug Erbitux® (cetuximab) saw low double-digit percentage organic net sales growth in 2023,
largely on the back of increased demand in the Asia-Pacific (APAC), Latin America and Europe regions. By
contrast, organic net sales performance in the Middle East and Africa region in the reporting period was
negative.
In immuno-oncology, net sales of the oncology drug Bavencio® (avelumab) saw organic growth in the low-
twenties percentage range in the reporting period. This was driven by all regions, with Europe, North America
and Asia-Pacific (APAC) enjoying particularly strong performance with double-digit organic growth rates. The
main driver of this development was the continued growth in the drug's market share for first-line
maintenance treatment for patients with locally advanced or metastatic urothelial carcinoma (UC).
Share
€ million
Organic growth¹
Share
€ million
Organic growth¹
100%
41%
956
360
15.9%
3.4%
GlucophageⓇ
490
23.2%
100%
38%
51%
2%
882
128
467
45%
20
-0.7%
MavencladⓇ
54.4%
87
MavencladⓇ, for the oral short-course treatment of highly active relapsing multiple sclerosis, recorded
encouraging organic net sales growth in the mid-teen percentage range in the past fiscal year and reached
blockbuster status with total net sales of more than US$ 1 billion. The North America region made a
particularly strong contribution to the positive sales performance, but Latin America, Europe and the Middle
East and Africa region also saw organic growth in net sales. Net sales in the Asia-Pacific (APAC) region
remained essentially unchanged year-on-year in organic terms.
The reporting period saw a high-teens percentage decline in net sales of Rebif®, which is used to treat relapsing
forms of multiple sclerosis (MS). The sustained downturn in sales was anticipated and largely reflects the
momentum on the interferon market, which is expected to remain negative in the future due to the persistently
difficult competitive situation and the competition from oral dosage forms and high-efficacy MS therapies.
The Fertility franchise recorded strong organic net sales growth in the mid-teen percentage range in the
reporting period. Gonal-f®, a leading recombinant hormone used in the treatment of infertility, saw low
double-digit percentage growth in net sales on the back of higher demand as well as supply bottlenecks
affecting a rival product. Other Fertility products also contributed to the strong growth in the franchise with
organic net sales growth in the mid-teen percentage range in some cases. This development was also
attributable to supply bottlenecks affecting a rival product as well as higher demand.
The Cardiovascular, Metabolism and Endocrinology franchise, which includes drugs for the treatment of
cardiovascular, thyroid and growth disorders and diabetes, recorded solid year-on-year growth in net sales
in the past financial year. Net sales of the diabetes drug Glucophage® were largely stable, with organic
sales growth in Europe and Latin America not quite offsetting the organic downturn in the Asia-Pacific
(APAC) and Middle East and Africa (MEA) regions. Net sales of the beta-blocker ConcorⓇ increased slightly
in organic terms in the reporting period, while the thyroid product Euthyrox® enjoyed solid organic growth
compared with the previous year. The franchise also benefited from encouraging organic growth in the net
sales of SaizenⓇ in the mid-thirty percentage range, which was due to rising demand as well as supply
bottlenecks affecting a rival product.
Healthcare
Product sales and organic growth¹ of Erbitux®, Mavenclad® and GlucophageⓇ by region
- 2023
Total
Europe
North America
ErbituxⓇ
€ million
Organic growth¹
1,025
421
10.9%
2.4%
Asia-Pacific
(APAC)
464
14.2%
Latin America
7%
571
thereof: ConcorⓇ
12%
8%
Neurology & Immunology
1,665
21%
-0.9%
-3.5%
-4.5%
611
1,743
thereof: MavencladⓇ
956
12%
15.9%
-4.3%
11.7%
856
22%
16.6%
-6.8%
23.4%
2022
Share
-9.2%
8.1%
1,683
22%
thereof: Erbitux®
1,025
13%
10.9%
-10.6%
0.3%
1,023
13%
thereof: BavencioⓇ
713
9%
11%
9%
45
62.6%
5%
203
thereof: Rebif®
9%
Cardiovascular, Metabolism &
Endocrinology
2,786
35%
4.0%
-4.6%
-0.7%
11%
2,805
thereof: GlucophageⓇ
882
11%
-0.5%
-4.6%
-5.1%
930
36%
825
2.7%
-7.8%
-17.2%
-2.9%
-20.1%
887
11%
Fertility
1,547
19%
14.9%
-7.8%
7.0%
1,446
18%
thereof: Gonal-fⓇ
847
11%
10.5%
709
Middle East and
Africa (MEA)
53
-12.8%
5%
41
Net sales and organic growth¹ by quarter²
9.2%
Q1
Q2
Q3
Q4
2023
1,905
2,049
2,066
2,032
2022
1,795
2,089
2,030
%
5.3%
1,924
7.4%
Exchange
Organic
growth¹
17.3%
11.9%
1,819
Oncology
Share
2023
22%
Net sales by major product lines/products
€ million
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
rate effects Total change
Net sales of the key product lines and products developed as follows in 2023:
Healthcare
1,700
21
-20.7%
Marketing and selling expenses
-591
3
-588
-662
3
-659
1,721
-10.9%
-147
440
12
> 100.0%
Operating result (EBIT)¹
248
572
Depreciation/amortization/
impairment losses/reversals of
expenses
568
526
565
-20
545
-3.5%
impairment losses
EBITDA²
816
-42
Administration expenses
-28
70
29
-118
-128
8
-120
-1.0%
Research and development costs
-297
26
1
Gross profit
-308
2
-306
-3.2%
Impairment losses and reversals
of impairment losses on financial
assets (net)
Other operating income and
-44
-297
1,364
Operating result (EBIT)¹
1,138
100%
4,013
-8.8%
0.3%
-4.1%
-5.1%
100%
2%
53
42.4%
1%
1 Not defined by International Financial Reporting Standards (IFRS).
40
-1.6%
-11.2%
53.6%
2%
75
3,659
Electronics
Middle East and Africa (MEA)
-2.3%
1%
39
Latin America
72%
-3.9%
The following table presents the composition of EBITDA pre for 2023 in comparison with 2022. The IFRS figures
have been modified to reflect the elimination of adjustments included in the respective functional costs.
Electronics
Reconciliation EBITDA pre¹
0.1%
-2,292
21
-2,314
-2,295
37
-2,332
Cost of sales
-8.8%
4,013
4,013
3,659
3,659
Pre¹
Pre¹
Elimination of
adjustments
IFRS
Pre¹
Elimination of
adjustments
IFRS
Net sales
€ million
Change
2022
2023
37
Restructuring expenses
60
-60
Report on Risks and Opportunities
Combined Management Report_
The overall effectiveness of our internal financial control system with regard to accounting and compliance with
financial reporting on the part of the relevant individual companies is confirmed by both the local Managing
Director and the local Chief Financial Officer by signing the single-entity reporting and a separate confirmation
regarding the effectiveness of the financial control system (internal financial control system sign-off letter). For
the accounting treatment of balance sheet items, Group Accounting closely cooperates with Group Risk
Management to correctly present potential risks in the balance sheet.
The operational effectiveness of our internal financial control system is regularly tested within the scope of self-
assessments by our legal entities and enabling Group functions including the Merck Business Services
organization. The quality is systematically reviewed by a dedicated global financial control and governance
team. Control deficiencies are properly recorded and, wherever necessary, adequate countermeasures are
taken to remediate control deficiencies in a timely manner.
For Group financial reporting purposes, most of our subsidiaries use standard SAP software. Consolidation
software from SAP is also used for the elimination of intragroup transactions. A detailed authorization concept
ensures the segregation of duties with respect to both single-entity reporting and the Consolidated Financial
Statements. The accounting process is generally designed to ensure that all units involved adhere to the
principle of dual control.
Group Accounting provides support to the local contacts and ensures a consistently high quality of reporting
throughout the entire reporting process.
79
The individual legal entities, including Merck KGaA, have a local internal control system within a global
framework. Where financial processes are handled by the Merck Business Services organization, the internal
control system of the Merck Business Services organization is additionally applied. Both ensure that accounting
complies with IFRS and with the Group accounting guidelines.
Our internal control system for financial reporting is based on the COSO (Committee of Sponsoring
Organizations of the Treadway Commission) framework, a globally recognized standard divided into five
components: control environment, risk assessment, control activities, information and communication as well
as monitoring activities. Each of these components is regularly documented, tested and/or assessed. This
control system aims to ensure the accuracy of the consolidated accounting process through functioning internal
controls with reasonable assurance.
The objective of the internal control system for the accounting process is to implement controls that provide
assurance that the financial statements are prepared in compliance with the relevant accounting laws and
standards. This system covers measures designed to ensure the complete, correct, and timely reporting and
presentation of information that is relevant for the preparation of the Consolidated Financial Statements and
the Combined Management Report.
Internal control system for the (Group) accounting process
Internal control system
Combined Management Report_ Report on Risks and Opportunities
78
The Group Accounting function centrally steers the preparation of the Consolidated Financial Statements of
Merck KGaA as the parent company of the Merck Group. This Group function defines the reporting requirements
that all companies of the Merck Group must meet. At the same time, this function steers and monitors the
scheduling and process-related requirements of the Consolidated Financial Statements. The Merck Business
Services organization manages all changes to the equity holding structure and correspondingly adapts the
Group's scope of consolidation. The proper elimination of intragroup transactions within the scope of the
consolidation process is ensured. Group-wide accounting guidelines form the basis for the preparation of the
financial statements according to International Financial Reporting Standards (IFRS), which are reported to
Group Accounting; the guidelines are adapted in a timely manner to reflect changes in the financial regulatory
environment and are updated in accordance with internal reporting requirements. For special issues, such as
the accounting treatment of intangible assets within the scope of business combinations in accordance with
IFRS 3 or defined benefit obligations, external experts are additionally involved where necessary.
Both the second and third line of defense functions regularly report to the Executive Board and the Audit
Committee of the Supervisory Board.
All the structures and processes described in the foregoing relate to the Group Accounting procedures and are
subject to regular review by Group Internal Auditing based on an annual audit plan set out by the Executive Board.
Non-financial internal control system and overall evaluation*
For the internal bottom-up risk reporting process, reporting is based on defined thresholds, and a variety of
distribution functions are used to reflect scenarios with varied occurrence probabilities. Risks below the global
reporting threshold are managed and monitored at a local level. The timeframe applied for internal risk and
opportunity reporting is five years. It may extend beyond this timeframe in specific cases, such as for
regulatory risks related to climate change. The outlined risks and their evaluation are based on respective
annual values within the reporting period. The assessment of the risks presented relates to December 31, 2023.
No significant changes occurred after the balance sheet date that would necessitate an amended presentation
of the Group's risk situation.
The risk owners continuously assess the status of risks and report their risk portfolio to Group Risk Management
twice a year. To facilitate and support these activities, we employ dedicated risk management tools. Group Risk
Management coordinates and supervises the bottom-up risk reporting process. This includes validating the
plausibility of the reported risks, assessing the effectiveness of mitigation measures and time frames, and
determining the residual risk. The net risk is then presented in the internal risk report.
Our risk management activities aim to continuously and promptly identify, assess and manage risks so that
appropriate measures can be implemented to mitigate their potential negative impact. The responsibilities,
objectives, and procedures of risk management are outlined in our internal group standard for risk
management. The designated risk owners, including business heads, managing directors of Merck subsidiaries,
and the heads of enabling Group functions, are responsible for overseeing and running local risk management
processes. These processes encompass various requirements, such as identifying risks considering internal and
external factors (impacting both financial and non-financial targets), analyzing risks, implementing appropriate
mitigation actions, establishing preventive measures and contingency plans if applicable, and documenting risks
and mitigation efforts.
Group Controlling & Risk Management provides the organizational framework for risk management and reports
to the Group Chief Financial Officer. We have established a holistic risk management system aimed at
safeguarding the long-term achievement of our Group's goals and addressing risks to ensure our continued
existence and future success. Within the scope of audits, Group Internal Auditing regularly reviews the
performance of risk management processes within the units on local level and, at the same time, the
communication of relevant risks from the operating businesses to Group Risk Management. Additionally, the
external auditor examines the risk early warning system in accordance with section 317 (4) of the German
Commercial Code (HGB) as part of the year-end audit of Merck KGaA.
Risk and opportunity management
2,901
The results of the self-assessments, quality reviews, and internal audits are dealt with by the Executive Board,
the Supervisory Board and the Audit Committee. The internal financial control system at Merck makes it
possible to lower the risk of material misstatements in accounting. However, residual risk cannot be entirely
ruled out as no internal control system is infallible, irrespective of its design.
Combined Management Report_
Given the multi-layered process landscape and the high speed of change regarding the catalog of requirements
for non-financial information, the degree of development of the non-financial internal control system does not
yet match that of the (Group) accounting-related internal control system. Based on risk-based assessments of
the financial and non-financial internal control system, compliance and risk management and reporting by
Internal Auditing, as of December 31, 2023 the Executive Board was not aware of any indications with regard
to material issues that this system is not appropriate or effective.
Relevant representatives from the business sectors and the enabling Group functions reported to the Executive
Board through the implemented control system in 2023. In this context, areas where potential for improvement
and optimization had been identified and relevant ongoing projects were also presented to the Executive Board.
Finally, the individual Group functions and business sectors issued an assessment to the Executive Board
regarding the appropriateness and effectiveness of the control system, considering the recommended
improvement opportunities, where applicable. Based on this as well as the review of the non-financial internal
control system, and reporting by Internal Auditing, as of December 31, 2023, the Executive Board was not
aware of any indications with regard to material issues that the system is not appropriate or effective.
The aim of our internal control system as the entirety of all systematically defined controls is therefore to
prevent and reduce the probability of potential risks occurring as well as actively steer risks in business
processes. Thereby, it helps to ensure the compliance of the company's activities with laws and regulations.
The entire internal control system and the applied methods are continuously developed further. The
responsibility for the effectiveness of the internal control system and the further development of the non-
financial key metrics lies with the respective responsible senior leaders or risk and process owners.
Additionally, the non-financial internal control system aligns with the sustainability strategy and ongoing projects
for implementing sustainability reporting (e.g. CSRD). The goal is to continuously improve regulatory compliance
pursuant to CSRD requirements through the implementation of organization-wide measures and controls.
For fiscal 2023, the Group Legal & Compliance function provides the organizational framework for the non-
financial internal control system. In line with the risk situation of the Group and to ensure regulatory
compliance, non-financial topics such as sustainability, cyber security and supply chain are core areas of the
internal control system. We base this on international standards, such as the framework for the governance of
Group Cyber Security, which includes organizational, process-related, and technical measures for information
security. The existing process of Cyber Security Risk Management is designed pursuant to ISO 27005:2018. In
comparison with the previous year, a monthly Group Security Forum has been established, where new risks
from the risk register are reported, and actions are tracked.
In the context of constantly evolving external and internal requirements for the management of non-financial
risks, work continued in fiscal 2023 on the development of a procedural and organizational concept as well as a
roadmap for expanding non-financial risk management. An important decision was to consolidate the
management of financial and non-financial risks under unified organizational leadership (with the Chief Financial
Officer being responsible commencing with fiscal 2024) to increase efficiency and quality. This also includes the
non-financial internal control system.
* The contents of this chapter or section are voluntary and therefore not audited. However, our auditor has read the text critically.
The third line of defense is our Internal Auditing function. As an objective and independent auditing body, it
examines both the operational business (first line of defense) and the controls and monitoring functions
(second line of defense) to ensure that risks are effectively identified, evaluated and controlled vis-à-vis the
Executive Board and the Supervisory Board.
The second line of defense includes enabling functions at both Group and local level that control and monitor
the operational business (first line of defense). This includes, among other things, the design and
implementation of methods and procedures for risk management and the internal control system (financial and
non-financial) as well as its regular monitoring.
The first line of defense consists of all functions that are responsible for the operational business and whose
day-to-day business risks can have an impact. Risk owners (i.e. the heads of the business units, enabling
Group functions and local Managing Directors) establish processes in accordance with the requirements set by
the second line of defense to identify, assess, and monitor risks and to develop measures for proper risk
mitigation. Results of these assessments are regularly communicated to the Executive Board.
-696
-603
-11.0%
88
-801
-713
93
%
2022
2023
Change
1 Not defined by International Financial Reporting Standards (IFRS).
EBITDA pre¹
EBITDA²
€ million
-13.4%
-397
-579
To organize risk management and controls, we use the well-established "Three Lines of Defense Model",
was developed by the Federation of European Risk Management Associations (FERMA), the European
Confederation of Institutes of Internal Auditing (ECIIA) and the Institute of Internal Auditors (IIA). The model
divides our company functions for controlling risks properly and effectively into three areas, the so-called lines
of defense:
which
Three Lines of Defense
The following report is relevant from the perspective of both Merck KGaA and the overarching Merck
Group. For additional information and details regarding the non-financial topics, please refer to the "Non-
Financial Statement".
Opportunities imply favorable deviations from targets. Future events and expected developments are
considered in internal planning if a likely occurrence can be assumed within the planning period. The
following section presents the risks and opportunities that could result in favorable and unfavorable
deviations from existing plans and targets.
In our internal risk reporting framework, we define risks as potential future events or developments that
could result in unfavorable deviations from our financial and non-financial targets. Risk parameters in this
context are the probability of financial (quantitative) impact (EBITDA pre/Operating Cash Flow) or non-
financial (qualitative) impact (reputation/brand, Environment, Social, Governance (ESG) including
workforce and ethics, strategy, operations).
As a global science and technology enterprise, identifying risks and opportunities is an intrinsic part of
making our businesses resilient and generating value. We operate in a highly complex, global and
interconnected business environment that further necessitates the competent management of risks and
opportunities. Therefore, managing risks and opportunities is an imperative and a core component of our
internal business planning and forecasting. We have processes, tools and responsibilities in place to enable
the early identification of risks and to supply effective and efficient mitigation strategies.
Report on Risks and
opportunities
77
Report on Risks and Opportunities
Combined Management Report_
The year-on-year improvement in the operating result, EBITDA and EBITDA pre in fiscal 2023 was due in
particular to the positive currency result from cash flow hedging. Cross-business research and development
costs amounting to € 94 million (2022: € 119 million) were allocated to Corporate.
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
-31.5%
182
Group Risk Management analyzes the reported information to determine the current risk portfolio of the Group.
This assessment is presented in a comprehensive report, accompanied by detailed explanations, to the
Executive Board, the Supervisory Board, and relevant committees twice a year. This also encompasses a
quantitative aggregation of risks at Group level, using a Monte Carlo simulation. Moreover, any notable changes
in the assessment of existing risks or the identification of new significant risks can be reported at any time and
promptly communicated to the Executive Board.
Our internal controlling processes incorporate the opportunity management process, which is aligned with the
Group's strategy within the operating units. As part of the strategy and planning processes, the business
sectors analyze and evaluate possible business-related opportunities. In this context, investment opportunities
are carefully examined and prioritized primarily in terms of their potential value proposition, ensuring optimal
resource allocation. We target investment in growth markets to leverage the opportunities of dynamic
development and customer proximity at a local level.
Identified opportunities that are deemed likely to occur are integrated into the business plans and forecasts.
Additionally, trends and events that have the potential to positively impact EBITDA pre or Operating Cash Flow.
These opportunities have the potential to have a positive effect on our medium-term prospects.
88
of which: organic growth¹
of which: exchange rate effects
1,192
-23.4%
-17.1%
-5.6%
-0.7%
1,192
of which: acquisitions/ divestments
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Combined Management Report.
_ Report on Economic Position Course of Business and Economic Position Electronics
75
Adjusted gross profit for the Electronics business sector decreased in 2023 driven by the aforementioned
sales decline. At 37.3%, the adjusted gross margin declined compared with the previous year (2022:
42.9%) owing mainly to lower volumes to cover fixed costs, unfavorable price and mix in Liquid Crystals,
rising raw material costs and adverse foreign exchange effects.
Marketing and selling expenses decreased versus prior year, primarily due to lower logistics costs along
with favorable foreign exchange effects and tighter personal cost management. Research and development
costs were also favorable due to tighter cost management and project scrutiny and favorable foreign
exchange effects. Adjusted other operating income improved in 2023 compared to the prior year due to the
sale of a patent portfolio in the second quarter of 2023.
1 Not defined by International Financial Reporting Standards (IFRS).
913
913
EBITDA pre¹
31
-31
Integration expenses/IT expenses
24
-24
13
-13
Gains (-)/losses (+) on the
divestment of businesses
Acquisition-related adjustments
13
-13
11
-11
Other adjustments
As a result, EBITDA pre was down year-on-year in fiscal 2023. The EBITDA pre margin declined to 25.0%
in the reporting period (2022: 29.7%), as the volume-based margin reduction and other factors affecting
gross profit outlined above were only partially compensated by good operating cost management, the sale
of a patent portfolio and lower logistics expenses.
€ million
The development of EBITDA pre in the individual quarters in comparison with 2022 is presented in the following
overview:
EBITDA pre¹ and change by quarter²
-31.1%
-33.1%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
Combined Management Report
Report on Economic Position
-10.7%
Course of Business and Economic Position
76
Corporate and Other
Corporate and Other comprises administrative expenses for central Group functions that cannot be directly
allocated to the business sectors.
Corporate and other
Key figures
80
Corporate and Other
308
302
-18.0%
€ million/change in %
Q2
Q3
Q4
208
206
Q1
22
2023
237
262
2022
289
293
%
Electronics
Report on Risks and Opportunities
1,327
901
Organic
growth1
Exchange
rate effects
Acquisitions/
divestments
Total change
2022
Share
Semiconductor Solutions
2,479
68%
-3.9%
-3.9%
0.5%
-7.3%
2,674
67%
Display Solutions
770
21%
-9.2%
Share
-5.3%
2023
-3.2%
Q3
Q4
2023
Acquisition-related adjustments
899
916
943
2022 ―
957
996
1,036
% - -7.1%
-6.3%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
Electronics
Net sales by business unit
1,024
-4.0%
€ million
Q2
-14.5%
22%
The Surface Solutions business unit reported a moderate organic net sales decline in 2023. While the
Cosmetics business continued to show strength again in 2023, especially in Asia and EMEA, these gains
were more than offset by weaker demand for Industrials and Coatings across all regions.
Net sales of the Electronics business sector by region developed as follows:
Electronics
Net sales by region
€ million
2023
Share
Organic
growth1
Europe
318
9%
-13.6%
Exchange
rate effects
-0.6%
Acquisitions/
divestments
Total change
2022
Share
-14.2%
371
Net sales of the Display Solutions business unit, consisting mainly of the business with liquid crystals,
photoresists for display applications as well as OLED materials, decreased sharply in organic terms in 2023.
Even though utilization at key customers in Liquid Crystals improved in the second half of 2023, this was
more than offset by the combined impact of lower first-half utilization, weaker pricing stemming from
continued competitive pressure, and an unfavorable product mix.
900
74
Combined Management Report. _ Report on Economic Position
Surface Solutions
411
11%
-3.6%
-2.9%
-6.5%
439
11%
Electronics
3,659
100%
-5.1%
-4.1%
0.3%
-8.8%
4,013
100%
1 Not defined by International Financial Accounting Standards (IFRS).
The Semiconductor Solutions business unit, which comprises two businesses, namely Semiconductor Materials
and Delivery Systems & Services (DS&S), reported a moderate decline in net sales in organic terms in fiscal
2023. The cyclical slow-down in the semiconductor industry, which has significantly impacted the sales
volumes of the Semiconductor Materials business, is proving to be both longer and more severe than the
industry initially expected and affected every quarter of 2023. DS&S partially compensated for the decline in
Semiconductor Materials due to the strong demand for equipment and projects throughout 2023 as our key
customers continue to invest in long-term capacity increases. The portfolio effect was due to the acquisition of
the chemical business of Mecaro Co. Ltd., Korea, trading as M Chemicals Inc., Korea, on December 30, 2022.
Course of Business and Economic Position Electronics
Q1
€ million/organic growth in %
Net sales and organic growth¹ by quarter²
2023
590
Q2
Q3
Q4
704
685
565
711
633
2022
529
604
%
11.4%
16.6%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Quarterly breakdown unaudited.
-3.6%
Q1
-10.8%
€ million/change in %
Healthcare
of which: organic growth¹
of which: exchange rate effects
of which: acquisitions/
divestments
2,543
2,543
2,477
2,477
2.7%
17.1%
-14.4%
1 Not defined by International Financial Reporting Standards (IFRS).
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Combined Management Report Report on Economic Position Course of Business and Economic Position Healthcare
72
Adjusted gross profit increased slightly in fiscal 2023, while the gross margin declined slightly to 74.8%
(2022: 75.5%).
Marketing and sales costs and administrative expenses were essentially unchanged year-on-year in the
reporting period. The adjusted research and development costs increased slightly compared with the
previous year, which was largely due to the provisions recognized for follow-on obligations in connection
with the discontinuation of the development program for evobrutinib, a BTK inhibitor used in the treatment
of relapsing multiple sclerosis (RMS).
Net adjusted other operating expenses and income were negative but declined in fiscal 2023. This positive
development was mainly driven by the end of the strategic alliance with Pfizer Inc., United States, on the
co-development and co-commercialization of the oncology drug BavencioⓇ effective June 30, 2023. The
royalties paid to Pfizer Inc., United States, instead of the profit share previously reported in other operating
expenses have been reported in the cost of sales since July 2023, leading to a corresponding increase in
this item. This development outweighed the year-on-year reduction in license income, meaning that the net
figure improved as a result.
The moderate increase in EBITDA pre in fiscal 2023 meant that the EBITDA pre margin amounted to 31.6%
(2022: 31.6%).
The development of EBITDA pre in the individual quarters in comparison with 2022 is presented in the following
overview:
EBITDA pre¹ and change by quarter²
Combined Management Report
_ Report on Economic Position
Course of Business and Economic Position Electronics
-325
-56.8%
6.8%
14.3%
816
1,138
-322
-28.3%
22.3%
28.3%
913
25.0%
1,192
-279
-23.4%
29.7%
2 Not defined by International Financial Reporting Standards (IFRS); EBITDA corresponds to operating result (EBIT) adjusted by depreciation,
amortization, impairment losses, and reversals of impairment losses.
Development of net sales and results of operations
The net sales in the individual quarters as well as the respective organic growth rates in 2023 are presented in
the following graph:
Electronics
572
-8.8%
-354
4,013
73
Electronics
Electronics
Key figures
€ million
Net sales
Operating result (EBIT)¹
Margin (% of net sales)¹
EBITDA²
9%
Margin (% of net sales)¹
Margin (% of net sales) 1
1 Not defined by International Financial Reporting Standards (IFRS).
Change
2023
2022
€ million
%
3,659
248
EBITDA pre¹
North America
787
21%
Healthcare
The following table presents the composition of EBITDA pre in fiscal 2023 in comparison with 2022. The IFRS
figures have been modified to reflect the elimination of adjustments included in the functional costs.
1 Not defined by International Financial Reporting Standards (IFRS).
100%
7,839
2.7%
-5.8%
8.5%
7%
527
3.8%
-1.3%
5.1%
7%
100%
8,053
Healthcare
546
Middle East and Africa (MEA)
10%
Reconciliation EBITDA pre¹
838
2023
Change
-1,925
-2,030
-1
-2,029
2.7%
7,839
7,839
8,053
8,053
Pre¹
Pre¹
Elimination of
adjustments
IFRS
Pre¹
Elimination of
adjustments
IFRS
Cost of sales
Net sales
€ million
2022
12.3%
-10.8%
23.1%
31%
2,541
Europe
Share
2022
Total change
Acquisitions/
divestments
Exchange
rate effects
Organic
growth¹
Share
2023
€ million
Net sales by region
Healthcare
Net sales in the Healthcare business sector by region in 2023 developed as follows:
71
Healthcare
Report on Economic Position Course of Business and Economic Position
Combined Management Report
9.6%
-5.1%
4.5%
2,433
12%
941
Latin America
29%
2,261
-1.3%
-7.7%
6.4%
28%
4
2,232
23%
1,781
0.6%
-3.2%
3.9%
22%
1,793
North America
31%
Asia-Pacific (APAC)
EBITDA pre¹
-1,921
Gross profit
-20
20
Integration expenses/IT expenses
-32
32
Restructuring expenses
2,545
EBITDA²
impairment losses
2.3%
303
-187
490
310
-10
320
impairment losses/reversals of
Depreciation/amortization/
1,895
Gains (-)/losses (+) on the
2,225
-53
2,385
25.2%
-3.8%
21.3%
649
16%
Asia-Pacific (APAC)
2,440
67%
-11.8%
-4.5%
0.4%
-15.9%
divestment of businesses
15
-15
-16
16
-91
91
53
Operating result (EBIT)¹
expenses
-18.7%
-294
20
-314
Administration expenses
0.5%
-1,631
13
-1,644
-1,639
29
-1,668
Marketing and selling expenses
1.8%
5,917
4
5,914
6,023
-1
6,024
-313
18
-296
-0.7%
-198
172
-370
-161
-41
-120
Other operating income and
> 100.0%
2
5.7%
2
-41
2.0%
-1,622
73
-1,694
-1,655
2
-1,657
Research and development costs
Impairment losses and reversals
of impairment losses on financial
assets (net)
-41
Other adjustments
The growing use of biologics is creating a need for more efficient and higher-yield manufacturing processes.
This represents an opportunity for us to enable continuous and intensified processing through our ongoing
innovation in single-use technologies and advancements in bioproduction.
Combined Management Report_
Nevertheless, reputational risks could result, for instance through public dialogues on social media. On the
qualitative rating scale, we thus rate this risk as significant.
We and our employees are active on numerous social media platforms. The consistent and legally compliant use
of such platforms and their content is important in terms of increasing awareness of our brand, among other
things. We take all necessary precautions and have implemented processes to ensure awareness regarding the
proper handling of social media as well as actively manage and control our publications and communication.
Risks from the use of social media
Overall, the threat resulting from product-related crime is likely with a moderate impact.
As a leading global science and technology company and manufacturer of innovative products of the highest
quality, we are exposed to various security- and crime-related risks. Due to the complexity of international
trade and global supply chains, our products are at risk of being counterfeited, stolen, illegally diverted and
misused. If left unaddressed, this would not only lead to financial loss, reputational damage and business
disruption, but also compromise patient and customer safety. Consequently, we have implemented technical,
operational and procedural measures aimed at protecting the integrity of our products and supply chains, while
also ensuring that new threats are identified and managed appropriately.
Risks due to product-related crime
However, part of our supply chain remains vulnerable to certain events. Therefore, we continue to invest in the
improvement of our supply chain, by for example, avoiding single-source situations wherever possible and
economically sensible, and by increasing stock levels for essential materials in close collaboration with our
suppliers. Through these measures we keep our dependencies on individual partnerships as low as possible
within the highly regulatory environment we operate in. Overall, the likely risks might have a moderate to
significant impact.
For example, the promise of our Healthcare business sector to reliably serve our patients is a top priority for us
and requires a strong and resilient supply chain. In 2023, we proved that we could continue to reliably supply
our patients with highly needed drugs while competitors in Fertility and Endocrinology ran out of stock. This
stock-out situation faced by competitors could continue in the near future and would provide us with
opportunities to gain additional market share by serving patient demand.
Merck, like many other market players in other industries, has been exposed in the recent past to
unprecedented events such as the Covid-19 pandemic and other geopolitical events. Throughout these
challenging times, we have been able to avoid any major supply disruptions for our customers. A significant
part of this success is rooted in our efforts to build resilient supply chains over the years with our strategic
suppliers and reduce the probability of these risks. These strong and esteemed relationships have enabled
Merck to respond to the changes in a difficult environment and adapt to the new circumstances quickly.
Risks of dependency on suppliers and opportunities from supply reliability
Although the occurrence of these risks is considered improbable, an individual event could have a critical
negative effect.
Further risks include operational failures due to fire or force majeure, for example natural disasters such as
floods, droughts or earthquakes, which could lead to a substantial interruption or restriction of business
activities. As far as possible and economically viable, the Group limits its damage risks with insurance coverage,
the nature and extent of which is constantly adapted to current requirements. Likewise, we are exposed to risks
of production outages and the related supply bottlenecks that can be triggered by technical problems in
production facilities with very high-capacity utilization. Furthermore, there are risks of supply bottlenecks due
to a lack or disappearance of capacity. We work towards continual mitigation of such risks by making regular
investments, setting up alternative sourcing options and maintaining sufficient inventory levels.
Risks of production availability
87
Report on Risks and Opportunities
Combined Management Report_
We are required to comply with the highest standards of quality in the manufacturing of pharmaceutical
products (Good Manufacturing Practice or official pharmacopoeia). In this regard, we are subject to the
supervision of the regulatory authorities. Conditions imposed by national regulatory authorities could result in a
temporary ban on products/production facilities and possibly affect new registrations with the respective
authority. We make the utmost effort to ensure compliance with regulations, regularly perform own internal
audits, and carry out external inspections. Thanks to these quality assurance processes, the occurrence of a
risk with a significant impact is improbable to possible; however, it cannot be entirely ruled out and depends on
the product concerned and the severity of the objection.
Combined Management Report_
Report on Risks and Opportunities
88
Financial risks and opportunities
We have commitments in connection with pension obligations. The present value of defined benefit obligations
can be significantly increased or reduced by changes in the relevant valuation parameters, for example the
interest rate or future salary increases. Pension obligations are regularly assessed as part of annual actuarial
reports. The obligations are covered by the pension provisions reported in the balance sheet based on the
assumptions as of the balance sheet date. Some of these obligations are funded by plan assets (further
information can be found under "Provisions for pensions and other post-employment benefits" in the
"Notes to the Consolidated Financial Statements").
Risks and opportunities from pension obligations
The carrying amounts of individual balance sheet items are subject to the risk of changing market and business
conditions and thus to changes in fair values as well. Necessary impairments could have a significant negative
non-cash impact on earnings and affect the accounting ratios. This applies specifically to the high level of
intangible assets including goodwill, which mainly derive from the purchase price allocations made in connection
with past acquisitions (further information can be found under "Goodwill" and "Other intangible assets” in
the "Notes to the Consolidated Financial Statements"). This qualitative risk might have a significant effect
on reputation.
Risks of impairment of balance sheet items
Report on Risks and Opportunities
Combined Management Report_
89
As a result of our international business activities and global corporate structure, we are exposed to risks and
opportunities from fluctuations in exchange rates. These result from financial transactions, operating
receivables, and liabilities as well as future cash flows from sales and costs in foreign currency. We use
derivatives to manage and reduce these risks and opportunities (further information can be found under
"Derivative financial instruments" in the "Notes to the Consolidated Financial Statements"). Foreign
exchange rate risks are rated as possible with a significant effect on EBITDA pre or operating cash flow.
Variable interest and current financial liabilities are exposed to the risks and opportunities of interest rate
fluctuations. Interest rate risks have a negative impact, are considered possible, and pose a minor negative risk
overall.
Risks and Opportunities in Life Science
Financial market risks and opportunities
The solvency and operational development of trading partners are regularly reviewed as part of the
management of operational counterparty risks. Sovereign risks are also analyzed. The volume of receivables of
each customer is capped in line with their credit ratings. Risk-mitigating measures, such as credit insurance,
are utilized as appropriate. Nevertheless, defaults by isolated trading partners, even those with outstanding
credit ratings, cannot be entirely ruled out, although rated as unlikely.
As for counterparty risks from financial transactions, we review all central positions relating to trading partners
and their credit ratings daily. We manage financial risks of default by diversifying our financial positions and
through the related active management of our trading partners. Significant financial transactions involving
credit risk are entered into with banks and industrial companies that have a good credit rating. Moreover, our
large banking syndicate - the renewed syndicated loan facility of € 2.5 billion was syndicated among 15 banks
in 2023 - reduces possible losses in the event of default.
Counterparty risks arise from the potential default by a partner in connection with financial investments, loans,
and financing commitments on the one hand and receivables in operating business on the other.
Counterparty risks
To ensure continued existence, we must be able to fulfill our commitments arising from operating and financial
activities at any time. Therefore, to reduce potential liquidity risks, we have a central Group-wide liquidity
management system in place, and a balanced maturity profile. The maturities of our financial liabilities are
aligned with our planned free cash flow. Furthermore, we have a syndicated loan facility of € 2.5 billion with a
term until 2028, which ensures continuing solvency if any liquidity bottlenecks occur. As our loan agreements
do not contain any financial covenants, these agreed lines of credit can be accessed even if Merck's credit rating
should deteriorate. Additionally, we have a commercial paper program with a maximum volume of € 2.5 billion.
Liquidity risks
In the area of financial risks and opportunities, we use an active management strategy to reduce the effects of
fluctuations in exchange and interest rates. The management of financial risks and opportunities by using
derivatives is regulated through extensive guidelines. Speculation is prohibited, and derivative transactions are
subject to constant risk controls. The strict separation of functions between trading, settlement, and control
functions is ensured.
As we operate internationally, and due to our presence in the capital markets, we are exposed to various
financial risks and opportunities. Above all, these are liquidity and counterparty risks, financial market risks and
opportunities, and risks of fluctuations in the market values of operational tangible and intangible assets as well
as risks and opportunities from pension obligations.
Counterparty risks are classified as possible risks and might have moderate effects.
To the extent that pension obligations are covered by plan assets consisting of interest-bearing securities,
shares, real estate, and other financial assets, decreasing or negative returns on these assets can adversely
affect the fair value of plan assets and thus result in further additions to pension provisions. By contrast, rising
returns increase the value of plan assets, thereby resulting in excess cover of plan liabilities. We increase the
opportunities of fluctuations in the market value of plan assets on the one hand and reduce the risks on the
other by using a diversified investment strategy. The possible risk due to pension obligations could have minor
effects.
By employing these strategies, we mitigate project execution risks, ensuring successful project delivery,
improved efficiency, and alignment with our strategic objectives. Overall, the possible risks could have a
moderate to significant impact.
In a rapidly evolving market, there is also a risk of missing out on market growth and development by delaying
or deferring investments. To mitigate this risk, we actively monitor industry trends, conduct market research,
and maintain a flexible project portfolio. By aligning our investment decisions with market dynamics, we aim to
capture opportunities and minimize the risk of being left behind. This is particularly important in industries like
semiconductors, where market cycles present substantial risks.
Report on Risks and Opportunities
Combined Management Report_
Risks due to increased competition and customer technology changes as well as related opportunities
In the Healthcare business sector, both our biopharmaceutical products and classic pharmaceutical business are
exposed to increased competition from other rival products, especially in the form of biosimilars and generics
but also in innovative R&D. We compete with other pharmaceutical companies in various therapeutic indications
and rely on high quality data to successfully market our products. For this reason, we closely observe our
competitive landscape and make assumptions with regard to future competitor entries that pose competition to
our products. Due to the uncertainty that is inherent to clinical trials, there is the possibility that competitor
trials fail to meet primary endpoints in their studies or deliver inferior data than we initially anticipated. If there
The aforementioned trends and the continued announcements of major capacity expansions in the industry in
the coming years also benefit our DS&S business. With this portfolio of gas and chemical cabinets and the
potential to provide our largest customers with turnkey solutions for the delivery of bulk gases in the
manufacturing process, we are well positioned to capture upcoming opportunities.
Irrespective of the current turbulent macroeconomic situation, the positive medium- and long-term growth
prospects of our markets remain unchanged. We see long-term growth opportunities in the semiconductor
market due to the significantly accelerating global demand for innovative semiconductor materials with
potential growth upside beyond the assumptions reflected in our plan, driven by a faster market adaptation and
penetration. This demand is driven by exponential data growth and highly impactful technology trends such as
autonomous driving, electric vehicles, Internet of Things (IoT) and 5G. We will benefit from the high material
requirement of these AI chips and are working with our customers on almost all of these groundbreaking
technological innovations in the semiconductor sector. That is why we are investing in our highly attractive
growth markets and purposefully expanding production capacities with a smart localization of our footprint to
further boost customer proximity and ensure supply stability. Having the right capacity in the right place to
bring new products and higher volumes to our customers enables us to stay flexible about the timing of the
market upswing and can serve as a competitive advantage.
The underlying semiconductor industry is cyclical by nature. The current downturn has been exacerbated by a
post-Covid-19 pandemic recession. The economic weakening has led to a temporary weakness of the traditional
industry growth drivers such as PCs, smartphones and traditional data centers, while the new growth drivers
such as AI and automotive are still too small to compensate for these effects. The multi-layered macro-
economic effects and poor transparency throughout the supply chain cause a certain degree of uncertainty
when estimating the timing and shape of the industry recovery. However, it may also imply upsides compared
with our plan if the industry recovers faster and stronger than expected. The semiconductor cyclical correction
risk is considered as likely with a significant impact.
Our Semiconductor Solutions business unit leverages a broad portfolio of independent technologies. This
enables us to supply products for all essential production steps of wafer processing, helping our customers to
achieve their technology roadmaps.
Risks and opportunities in the semiconductor industry
Further details on the industry, market developments and associated risks, such as the challenging market
environment in the life science industry, can be found under “Risks due to increased competition and
customer technology changes as well as related opportunities" and "Macroeconomic and Sector-
Specific Environment".
Our Science & Lab Solutions business unit serves customers in the pharmaceutical and biotech industries and
other industries in production, testing and research, as well as public authorities and research institutions.
Despite current headwinds - a complex macroeconomic environment, and softer market demand, especially in
the United States and China the business unit is well-positioned to deliver long-term, profitable growth. We
aim to offer our customers a streamlined experience and a comprehensive portfolio of offerings to facilitate
their research and analytical processes. This includes several customer solutions in the area of innovative
digitalization and automation. A faster recovery from the aforementioned macroeconomic adverse development
as well as greater commercial success of our innovative digital and automation solutions could imply an
increased potential compared to our latest plans.
-
==
84
Report on Risks and Opportunities
Combined Management Report_
Our Life Science Services business unit fully integrates Contract Testing, Development, and Manufacturing
Organization (CTDMO) services to meet the evolving needs of our global customers across all stages of drug
development, from preclinical to commercialization. Our CTDMO services cover a wide range of modalities,
including monoclonal antibodies (mAbs), high-potency active pharmaceutical ingredients (HP-APIs), antibody-
drug conjugates (ADCs), viral and gene therapies (VGTS), and end-to-end mRNA offerings. We continually
invest in expanding our portfolio and production capabilities to offer specialized solutions for both traditional
and innovative therapies. This positions us to capitilize on the potential of the growing biopharmaceutical
market by providing leading CTDMO services to our customers. Through quicker establishment of model
modalities on the market in combination with our broad and integrated portfolio, we can increase the potential
beyond the assumptions reflected in our plan.
Consequently, faster market growth driven by the aforementioned industry shifts can lead to a more positive
development compared with our latest plan.
85
are no new competing products or if our competitors deliver less promising data, this could represent
opportunities for us in therapeutic areas in which we are active.
In the Life Science and Electronics business sectors, risks are posed by not only cyclical business fluctuations but
also changes in the technologies used or customer sourcing strategies. We use close customer relationships and
in-house further developments as well as market proximity, including precise market analyses, as mitigating
measures. Overall, the occurrence of these risks is possible to likely and could have a significant impact.
Further details on the industry and market development can be found under "Macroeconomic and Sector-
Specific Environment", e.g. on the market challenging environment in the life science industry.
In today's dynamic business environment, we prioritize innovation and growth. Projects are essential for
achieving our strategic objectives, driving expansion, and promoting sustainable development. To effectively
support further business growth and enhance efficiency, we continuously invest in projects, such as IT systems,
distribution centers, office buildings and other projects. However, project execution involves significant capital
expenditures, making effective project management crucial to avoid delays and higher spending. Inadequate
planning, execution errors, and ineffective change management can lead to inefficiencies and disruptions,
resulting in increased costs and lower sales.
Risks arising from project execution
In fiscal 2023, we announced several new investments to expand capacity and product capabilities at facilities
around the world. These include investments in biosafety testing, the expansion of our production for highly
purified reagents and expanded lab space and production capability to manufacture cell culture media. Having
the right capacity in the right place to ensure supply security, to bring new products to the market and to serve
higher customer demand offers us the opportunity to capture higher market shares and can serve as a
competitive advantage. However, market dynamics naturally influence our expansion activities as well as
utilization. We therefore regularly review our expansion plans and adapt them accordingly.
During the Covid-19 pandemic, supply chains experienced unprecedented disruption, with customers placing
greater emphasis on supply security. In Life Science, we responded to this trend by actively diversifying our
global presence by moving to a production network in the region and for the region to increase resiliency and
meet the local needs of customers in North America, Europe and Asia-Pacific.
We make targeted investments worldwide to expand our regional capacities and drive sustainable growth in all
three of our business sectors.
Opportunities arising from capacity expansion
Risks and opportunities related to the quality and availability of products
86
To proactively address project execution risks, we apply well-established project planning and internal control
practices, collaborate closely with stakeholders, and conduct regular project reviews through teams and
steering committees. This approach enables us to detect risks early on and implement corrective actions or
discontinue projects that are unlikely to succeed. Through comprehensive planning, accurate cost estimations
and re-evaluations, we monitor costs and ensure efficient resource allocation. Effective project governance and
prioritization further contribute to desired project outcomes.
Report on Risks and Opportunities
More detailed descriptions on our R&D activities worldwide can be found under "Research and Development"
in "Fundamental Information about the Group".
In addition, we see opportunities in organic light-emitting diode (OLED) materials in high-quality display
applications. We have been conducting R&D in the area of OLED technology for more than 15 years and have
grown into a well-positioned material supplier for OLEDs. Through our semiconductor and display knowledge,
we will be able to contribute to the new display devices including foldable displays and Augmented Reality/
Virtual Reality applications, which require a broad set of materials.
Moreover, in Electronics, we will also continue to invest heavily in R&D in leading-edge material solutions. The
aim is to seize growth opportunities arising from the increasing global demand for innovative semiconductors.
Promising opportunities for innovation are constantly arising throughout our Semiconductor Solutions business.
We work closely with our customers to exploit these. Technology inflection points bring opportunities to our
material solutions and the chance to differentiate from competition. We are further developing new dielectric
platforms in cooperation with our key customers for 3D NAND applications.
The aforementioned development opportunities are associated with different types of risks. There is the risk
that regulatory authorities either do not grant or delay approval or grant only restricted approval. The risk that
undesirable side effects of a pharmaceutical product could remain undetected until after approval or registration
could result in a restriction of approval or withdrawal from the market. Furthermore, we cannot guarantee that
all the assets we are currently developing will achieve the desired commercial success. The failure to meet
targets in this area could have significant effects, for example due to lower net sales or the non-occurrence of
milestone payments from collaboration agreements. These risks are evaluated with probabilities ranging from
possible to likely.
In addition to in-house R&D efforts, strategic alliances with external partners and the in- and out-licensing of
programs also form part of the catalog of measures to develop innovative medicine and ensure the efficient
allocation of resources. Strategic alliances with partners as well as in- and out-licensing transactions always
follow a stringent selection process along clear strategic and financial decision criteria. An example of such in-
licensing deals is the recently announced partnership with Jiangsu Hengrui Pharmaceuticals Co. Ltd. for a next-
generation selective PARP1 (poly (ADP-ribose) polymerase 1) inhibitor and ADC (antibody drug conjugate)
which represents a strong strategic fit leveraging our internal DNA damage response expertise and in-house
ADC capabilities. This agreement provides the opportunity to advance more therapeutic options for patients
with difficult-to-treat cancers. However, in general, there is a possibility that we may not be able to identify a
sufficient number of in-licensing assets on financially acceptable terms.
Innovation driven by R&D is a major element of the Group strategy – including fostering innovation at the
intersection of our business sectors and is particularly important in the Healthcare business sector. In regular
portfolio management reviews, we continually evaluate and, if necessary, realign research areas and R&D
pipeline projects to focus our investments in areas where patient needs are served best. Nevertheless, R&D
projects can experience delays, expected budgets can be exceeded, or targets can remain unmet. Sometimes,
development projects are discontinued after high levels of investment at a late phase of clinical development.
Decisions - such as those relating to the transition to the next clinical phase - are taken with a view to balance
risks and opportunities.
-
Risks and opportunities of research and development
Combined Management Report_
Assessment by independent rating agencies
The capital market uses the assessments published by rating agencies to help lenders assess the risks of
financial instruments used by Merck. We are currently rated by Standard & Poor's and Moody's. Standard &
Poor's has issued a long-term credit rating of A with a stable outlook and Moody's a rating of A3 with a stable
outlook. In line with market procedures, our financing conditions are closely tied to our rating. The better the
rating, the more favorably we can generally raise funds on the capital market or from banks.
Overview of Rating Development
€ 10 25 million
< € 10 million
Explanation
Critical negative impact on EBITDA pre and/or Operating Cash Flow
Significant negative impact on EBITDA pre and/or Operating Cash Flow
Moderate negative impact on EBITDA pre and/or Operating Cash Flow
Minor negative impact on EBITDA pre and/or Operating Cash Flow
Immaterial negative impact on EBITDA pre and/or Operating Cash Flow
To enable a thorough evaluation of both financial and non-financial risks, a qualitative rating scale is available
to evaluate the indirect financial impact. The use of this scale is mandatory for the assessment of non-
quantifiable and qualitative risks such as Environmental, Social, and Governance (ESG), reputational, strategic,
and operational risks as well as for material risks that also require a qualitative evaluation. The scale
categorizes the risks as low, moderate, significant, or critical and provides a comprehensive reference for
assessment.
Opportunities are assessed within their respective business environment. During short-term and strategic
planning, general measures of business functions are quantified, typically in relation to EBITDA pre (earnings
before interest, taxes, depreciation, and amortization), and operating cash flow. In addition, we identify and
leverage opportunities as part of our regular business operations and through our daily observation of internal
processes and markets.
Investment opportunities are primarily evaluated and prioritized using metrics such as net present value,
internal rate of return, return on capital employed (ROCE), and the payback period of the investment. These
indicators are used to assess the potential of investment projects and prioritize them accordingly. Similarly,
scenarios are used to simulate the impact of possible fluctuations and changes in the respective parameters on
results.
Combined Management Report_
Report on Risks and Opportunities
82
82
Business-related risks and opportunities
Political and regulatory risks and opportunities
As a global corporate group, we face political and regulatory changes in a large number of countries and markets.
Risk of more restrictive regulatory requirements regarding drug pricing and reimbursement as well
as pricing-related opportunities
Our business is affected by numerous regulations that are continuously changing - and could even become
more stringent. For example, in the Healthcare business sector, the known trend towards increasingly
restrictive requirements in terms of drug pricing, reimbursement, and the expansion of rebate groups is
continuing. With globally rising healthcare expenditures, both in absolute amounts and relative to GDP,
healthcare budgets around the globe face increasing pressure. Specifically, in the United States, a pricing
reform on prescription drugs is part of the agenda of the current administration. These requirements can
negatively influence the profitability of our products, as can market referencing between countries, and the
success of market launches. Foreseeable effects are considered as far as possible in the business sector's plans.
Close communication with health and regulatory authorities serves as a preventive measure to avert such risks.
The remaining risks beyond the current plans resulting from restrictive regulatory requirements are possible to
likely with a moderate to significant impact. While we consider the possibility of resulting price cuts in our
forecasts, there is also an opportunity that price pressure from healthcare systems worldwide is less
pronounced than expected or materializes at a later point in time versus the base assumption. Additionally, as a
global specialty innovator that pursues a focused leadership approach in attractive therapeutic areas, we are
positioned to benefit from attractive pricing schemes for demonstrated major therapeutic improvements.
Risk of stricter regulations for the manufacturing, testing, and marketing of products
We must adhere to a multitude of regulatory requirements regarding the manufacturing, testing and marketing
of many of our products. Specifically, in the European Union, we are subject to the EU chemicals regulation
REACH. Similar regulations are emerging globally in relevant markets, particularly in Asia. These regulations
demand comprehensive tests for chemicals. Moreover, the use of chemicals, such as per- and polyfluorinated
alkyl substances (PFAS), in production and final products could be restricted, which would negatively impact the
ability to manufacture and market certain products. With the EU Chemicals Strategy for Sustainability, an
initiative of the European Green Deal, we expect increasing demands concerning the substitution of specific
hazardous substances. We are constantly pursuing research and development (R&D) in substance
characterization and the possible substitution of critical substances so as to mitigate this risk. Nevertheless,
risks of stricter regulations are classified as possible to likely with moderate to significant impacts.
Risk of negative political and macroeconomic developments
€ 25 100 million
€ 100 500 million
> € 500 million
Degree of impact
Report on Risks and Opportunities
81
Risk and opportunity assessment
The significance of a risk is evaluated based on its potential unfavorable deviation from our financial and non-
financial targets in conjunction with the probability of occurrence of the respective risk.
The underlying scales for measuring these factors are shown below:
Probability of occurrence
Probability of occurrence
< 1%
The current political and macroeconomic situation, characterized by high uncertainty and volatile global
developments, is a strategic factor for us as potential negative developments can also impact our businesses. The
ongoing general trend of bloc building and reshoring of critical supplies and processes is leading to a further
increase in the establishment of trade barriers and the general weaponization of trade to assert interests. While
the global economy continues to gradually recover from the aftermath of the Covid-19 pandemic and Russia's
invasion of Ukraine, the increased threat from armed conflicts including the resurgent conflict in the Middle East as
well as the tensions between the United States and China could lead to further sanctions and economic measures
that harm global trade and affect bilateral and multilateral relationships. For example, multiple countries have
already implemented measures to restrict the export and transfer of technology to China, particularly in relation to
advanced chips that could be utilized for AI, quantum computing and military applications.
1 - 5%
20 - 50%
> 50%
Explanation
Highly improbable
Improbable
Possible
Likely
More likely than not
Degree of impact
5 -20%
These risks can have a negative impact on our supply chains and sales in our key countries and regions. Such
risks are considered as fully as possible in the business plans of the affected countries and regions, and are
mitigated through product, industry and regional diversification as well as measures to ensure resilience of
supply chains and networks. For instance, in the Electronics business sector, a strong local presence in China
enables us to remain competitive in the country while our global footprint could provide opportunities to capture
Combined Management Report_
Report on Risks and Opportunities
2019
2018
2017
2016
2015
2014
2013
2012
2020
2011
• Moody's
• S&P
BBB / Baa2
BBB+ / Baa1
A- / A3
A / A2
A+ / A1
S&P/Moody's
BBB-/Baa3
The portfolio of our Process Solutions business unit encompasses a broad range of pharmaceutical development
and manufacturing solutions, including filtration devices, chromatography resins, single-use assemblies and
systems as well as processing chemicals and excipients. We have strategically positioned ourselves to capture
numerous opportunities from the industry's shift towards biologics, coupled with the growing demand for
bioproduction driven by many drug candidates and more regulatory approvals. In addition, we are well-
prepared to benefit from our customers' investments in expanding bioreactor capacity. Our commitment to
innovation and our customer-focused approach positions us to advance the field of biomanufacturing.
2021
2023
83
the demand shifting from Asia to other geographies (i.e. the United States and Europe). Also, given the
considerable investments of several countries in the domestic chip industry (e.g. the U.S. Chips Act, EU Chips
acts) to establish local supply of this critical component. Besides that, strategic geopolitical risk management is
in place at the Group and business sector levels to continuously monitor and assess the global developments
and to prepare Merck holistically for foreseeable risks.
Global economic growth is projected to slow down with growing regional divergences. Weak economic growth or
even a recession could lead to less government spending or other cost-containment policies. Global inflation
declined gradually in 2023, but remained significantly above target levels, keeping costs at an elevated level
which could negatively impact our business. Persistently high inflation could increase our operating expenses
(e.g. raw materials, operating costs and logistics) as well as capital expenditures. It could also prompt central
banks to increase interest rates further and curb fiscal policy for some economies. In the course of 2022 and
2023, the European Central Bank as well as the U.S. Federal Reserve increased key interest rates significantly,
which may affect our refinancing costs. Financial markets remain volatile, which could have numerous potential
impacts.
The net risks of negative geopolitical and macroeconomic developments are seen as possible and might have
significant to critical effects. However, our assumptions on geopolitical developments exclude extreme scenarios
with severe escalation of tensions. The materialization of such scenarios would jeopardize entire industries and the
balance of geopolitical and economic structures, posing a substantial challenge for us, as for any other company.
Further details on the macroeconomic development can be found under "Macroeconomic and Sector-
Specific Environment”.
Market risks and opportunities
We compete with numerous companies in the pharmaceutical, chemical, and life science sectors. Rising
competitive pressure can have a significant impact on the quantities that can be sold and prices attainable
for our products.
Due to long statutes of limitations or in some cases the absence thereof, it is not possible to rule out that we
will face third-party claims arising from the same issue despite the conclusion of legal proceedings. Court or
official rulings or settlements that we consider as "highly improbable" to "more likely than not” could lead to
expenses with a significant to critical impact on our business and earnings. Despite extensive precautionary
measures, non-compliance with laws and regulations leading to related consequences can never be completely
excluded. In our opinion, the lawsuits described below constitute the most significant legal risks. This should
not be seen as an exhaustive list of all legal disputes currently ongoing.
Generally, we strive to minimize and control our legal risks. To this end, we have taken the necessary
precautions to identify threats and defend our rights where necessary. Nevertheless, we are still exposed to
risks from litigations or legal proceedings. In particular, these include risks in the areas of product liability,
competition and antitrust law, pharmaceutical law, patent law, trademark law, data protection law, tax law, and
environmental protection. As a research-based company, we have a valuable portfolio of industrial property
rights, patents, and brands that could become the target of attacks and infringements. The outcome of future
proceedings or those currently pending is difficult to foresee. For instance, we are currently involved in litigation
with Merck & Co. Inc., Rahway, New Jersey (USA) (outside the United States and Canada: MSD), against whom
we have filed lawsuits in various countries. This company has also sued us in the United States for trademark
infringement, among other things.
2022
Legal risks
Findings of the national audit authorities of the various countries may lead to higher tax expenses and
payments and may also have an impact on the amount of tax receivables, and tax liabilities as well as on
deferred tax assets and liabilities.
Merck and its subsidiaries operate worldwide and are consequently subject to different national tax laws and
regulations. National tax audits of our entities are conducted on an ongoing basis by the tax authorities of the
respective countries in which we operate. Tax risks originate particularly from the changes in national tax laws
and regulations, and case laws and interpretations by national tax authorities as well as from significant
transactions such as acquisitions, divestments and reorganizations.
Tax risks
Successfully acquiring and subsequently integrating new businesses entails risks. These are primarily centered
around the uncertainty of achieving business targets and synergy goals as well as remaining within the planned
integration budget. Divestments, on the other hand, could lead to liabilities and additional expenses related to
potential indemnifications and commitments guaranteed in the sale transaction. We leverage our solid
acquisition track record to reduce the probability of any transaction-associated risks by integrating lessons
learned from past transactions, strong due diligence, and closely managed integration processes. Currently, we
are not aware of any significant risks in this area.
Risks due to the divestment, acquisition and integration of companies and
businesses
90
90
Combined Management Report_ Report on Risks and Opportunities
The tax function at Merck regularly and systematically assesses the relevant tax risks. Appropriate standards are
put in place to identify tax risks at an early stage in order to review, assess and mitigate them effectively and
efficiently. Group Tax coordinates mitigation measures with the subsidiaries. Risks in addition to those already
accounted for in the balance sheet are classified as improbable to possible with moderate to significant impact.
Information on the accounting and measurement policies for income taxes can be found under "Income tax"
in the "Notes to the Consolidated Financial Statements".
Risk of a temporary ban on products/production facilities or of non-registration of products due to
non-compliance with quality standards