Merck 2006 Annual Report Download

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Disclaimer Publication of
Merck KGaA, Darmstadt, Germany. In the United States and Canada the
subsidiaries of Merck KGaA, Darmstadt, Germany operate under the
umbrella brand EMD.

Table of contents

  • Page 1
    Disclaimer Publication of Merck KGaA, Darmstadt, Germany. In the United States and Canada the subsidiaries of Merck KGaA, Darmstadt, Germany operate under the umbrella brand EMD.

  • Page 2
    Annual Report 2006 More potential 2

  • Page 3
    ... Development 2002 - 2006 Business Sectors and Divisions Merck 2006 at a glance Key figures for 2006 â,¬ million Sales Gross margin Research and development (R&D) Operating result Exceptional items Free cash flow Return on sales (ROS) in % Return on capital employed (ROCE) in % Pharmaceuticals...

  • Page 4
    ... 0.90 0.15 49.1 5.9 * In order to harmonize accounting practices within the Merck Group, as of 2006 the way in which certain customer rebates are reported has been changed. Costs previously included mainly under marketing and selling expenses are now deducted from sales. The previous year's figures...

  • Page 5
    ... Life Science Chemicals Specialty chemicals from Merck are used in all stages of pharmaceutical production from development in the laboratory up to industrial-scale manufacture for patients. They ensure reliable analysis in research and dependable production processes. Merck's expertise in chemistry...

  • Page 6
    ... to join forces with Serono, Europe's number one biopharmaceutical company. This acquisition and combination with the Merck Ethicals division will create a new powerhouse in drug research. "Merck Serono" will stand for the link between innovative biotechnology and established pharmaceutical science...

  • Page 7
    ... Board of Merck KGaA 8 More potential 20 Management Report of the Merck Group 21 Sales development 24 Financial position and results of operations 29 Background on the Serono acquisition 30 Subsequent events 31 Cross-divisional topics 34 Merck shares 38 Pharmaceuticals business sector 40 Ethicals...

  • Page 8
    .... The competencies in chemical and biotech drug research complement each other ideally. Advantages from both worlds will now converge and grow in the new "Merck Serono" division, thereby increasing our strength exponentially. It is helpful that also as a family-owned company, Serono shares our basic...

  • Page 9
    ... & Life Science Chemicals division in early 2006, as well as our range of classic pharmaceuticals. Long-term company management calls for trust from the providers of capital. Apart from regular contacts with our Supervisory Board and particularly with the representatives of the Merck family, two...

  • Page 10
    ...accept the Merck family's offer to move to the Board of Management of E. Merck OHG - the parent company of the Group. With the new Executive Board, a strong team has been created. The members of the new Board have my full confidence. I kindly ask you, dear shareholders and friends of Merck, to place...

  • Page 11
    From left: Bernd Reckmann, Karl-Ludwig Kley, Michael Römer, Elmar Schnee, Walter W. Zywottek, Michael Becker 6

  • Page 12
    ... Services, Environmental Protection, Health, Safety and Quality, Purchasing Elmar Schnee Born in 1959, degree in Marketing Management from the Swiss Institute for Business Administration in Zurich; with Merck for four years; Member of the Executive Board since November 2005 Pharmaceuticals business...

  • Page 13
    ... at our 63 research and production sites, stand for recognized quality. The acquisition has made Merck a major player in the capital market. Its increased performance capacity will create value for customers and investors. The "Merck Serono" division will have an annual R&D budget of around...

  • Page 14

  • Page 15
    ... few companies at global level. Merck Serono - a powerhouse of scientific expertise with 31 different projects in clinical development. The higher budget available for research and development will further increase the potential offered, especially by the biological drugs of the future, the market...

  • Page 16
    11

  • Page 17
    ... for Merck to develop further in specific areas, especially in neurology and reproductive health. At the same time, the acquisition of Serono is an addition that makes strategic sense for the entire company. Merck now has a well-balanced mix in both its Pharmaceuticals and Chemicals business sectors...

  • Page 18

  • Page 19
    ...Serono, Merck will also directly market patented active ingredients in the United States. Complementing its traditionally strong market positions in Europe and Latin America, the Ethicals division will achieve a strong presence in the world's largest pharmaceutical market: the United States accounts...

  • Page 20

  • Page 21
    ...centuries for the world's oldest pharmaceutical and chemical company. One of the defining features of our culture is a mission statement that places high demands on entrepreneurial thinking and actions. This is also where perhaps the most important development ever made at Merck comes in: a sense of...

  • Page 22
    Heinrich Emanuel Merck (1794-1855) took over the sixth generation of the Angel Pharmacy in 1816 and began the industrial-scale production of highly active drugs in 1827.

  • Page 23
    ... company with even more talented people. Well-positioned products. Technology and market leadership in liquid crystals. A research budget exceeding one billion euros. A much stronger presence in the U.S. pharmaceutical market. A clear focus on core therapeutic areas. All these factors represent...

  • Page 24
    2 19

  • Page 25
    Management Report of the Merck Group 21 Sales development 24 Financial position and results of operations 29 Background on the Serono acquisition 30 Subsequent events 31 Cross-divisional topics 34 Merck shares 38 Pharmaceuticals business sector 40 Ethicals 43 Background on Erbitux® 47 Background on...

  • Page 26
    ... and benefited from the positive development especially in the information technology and electronics sectors. For Latin America, economic researchers expect output to grow by 4.6%, with the situation being very heterogeneous in the region. The economy of the euro area experienced an upswing in 2006...

  • Page 27
    ... -0.6 8.5 2005 10.8 11.6 10.8 1.4 -2.2 9.9 * In order to harmonize accounting practices within the Merck Group, as of 2006 the way in which certain customer rebates are reported has been changed. Costs previously included mainly under marketing and selling expenses are now deducted from sales. The...

  • Page 28
    ...Performance & Life Science Chemicals division. The latter was formed in early 2006 by combining the previous Life Science & Analytics and Pigments divisions. Double-digit growth in France - our largest market Accounting for sales of â,¬ 2,891 million, Europe remained the Merck Group's most important...

  • Page 29
    ... financial position and results of operations of the Merck Group developed positively once again in 2006. However, the balance sheet and the cash flow statement were heavily influenced by the acquisition of the shares in Serono. More information can be found in the consolidated financial statements...

  • Page 30
    ... of the Electronic Chemicals division in 2005. Pharmaceuticals | Operating result by division â,¬ million 55 10 % Chemicals | Operating result by division â,¬ million 155 24 % 486 76 % 163 31 % 307 59 % Consumer Health Care Generics Ethicals Performance & Life Science Chemicals Liquid Crystals...

  • Page 31
    ... Kingdom. Owing to strong price competition, our sales declined sharply there and we decided to close down a manufacturing facility at Generics UK in 2007. Impairment losses of â,¬ 34.5 million were recorded in the Pigments business field (Performance & Life Science Chemicals division). This was due...

  • Page 32
    ... America and Latin America totaled â,¬ 24 million and â,¬ 11 million, respectively. Companies in Asia accounted for a total capital spending volume of â,¬ 36 million. Spending was targeted mainly to the production of liquid crystal mixtures in Japan and Taiwan. The Pharmaceuticals business sector...

  • Page 33
    ..., i.e. salaries, social security contributions and pension expenses. Taxes accounted for nearly 9% while net income was responsible for an especially large share, or 32%, due to the exceptional gain of â,¬ 378 million on the sale of Merck's shareholding in Schering AG. Net value added statement...

  • Page 34
    ... pipeline, with knowhow in research and production - strengths that distinguish the company in the same way as they do Merck. The ability to ensure absolutely high-quality manufacturing is the key to success, particularly in the biopharmaceutical industry. Serono focuses on four therapeutic areas...

  • Page 35
    ...as sellers, concluded a purchase agreement on September 21, 2006 pertaining to the acquisition of a majority shareholding in Serono S.A., Coinsins, Switzerland (now known as "Merck Serono S.A.") The shares of the Bertarelli family were largely held by the holding company Bertarelli Biotech S.A. (now...

  • Page 36
    ... In 2006, we invested a total of â,¬ 752 million in research and development (R&D). This was 5.4% more than in 2005. The Pharmaceuticals business sector accounted for â,¬ 615 million or 82% of the Group total. R&D intensity, or R&D as a percentage of pharmaceutical sales, was 15%. In the Ethicals...

  • Page 37
    ... currently offered via the platform. Number of employees as of December 31, 2006 Number of employees by area 6,362 21 % 17,167 57 % 7,019 24 % 17,797 59 % 3,767 13 % 2,703 9% Asia, Africa, Australasia Latin America North America Europe 5,183 17 % Central functions Chemicals Pharmaceuticals...

  • Page 38
    ... of the new Code of Conduct in early 2006, we updated "Merck's Pharmaceutical Marketing Best Practices" with global effect from January 1, 2007. This guideline defines detailed global standards for various areas, from product promotion, through the remuneration of the sales force, to sponsoring...

  • Page 39
    ... influence development In 2006, our share price was mainly influenced by news from the LCD industry and the new strategic direction of the Ethicals division. In early 2006, shares rose within only a few weeks from â,¬ 69.95 (year-end share price in XETRA trading) to more than â,¬ 85. The share price...

  • Page 40
    ... 15,001 4 5 Share-price relevant figures relate to the closing price in XETRA trading on the Frankfurt Stock Exchange. The previous year´s figure has been adjusted (for details, see page 107 of the Consolidated financial statements). The calculation of the theoretical number of shares is based on...

  • Page 41
    ... price" (see chart). Investor Relations program introduced In 2006, we finalized and introduced an extensive Investor Relations program. We will continue to explain our complex business activities in depth and report on company developments in a timely manner to the capital markets. Using targeted...

  • Page 42
    ... the members of the Executive Board or employees in the event of a takeover offer. More information on the structure of company can be found starting on page 77. Investors by type in % 10 % 29 % 13 % 22 % 26 % Other Index GARP* Growth Value *Growth at reasonable price Source: Company data 37

  • Page 43
    ... to generics and consumer health care products. By acquiring Serono, Europe's leading biopharmaceutical company, we are gaining additional research and development strength. Ethicals In its Ethicals division, Merck has been especially active in two core areas: oncology and cardiometabolic disorders...

  • Page 44
    ... of Latin America again posted the strongest growth: With a growth rate of 18%, Argentina was ahead of Mexico and Brazil. Double-digit increases in France, Italy and Spain Sales in the Pharmaceuticals business sector increased by 8.6% in 2006. Thanks to the good development of the Generics division...

  • Page 45
    ... Unit CardioMetabolic Care). Following the successful acquisition of Serono, the Ethicals division was combined with the Swiss company to form the new Merck Serono division in early 2007. The business model A strict focus on selected therapeutic areas and markets is a key success factor for Merck in...

  • Page 46
    ...return figures ROS and ROCE to decline; in the case of ROCE, the higher level of operating assets resulting from the share purchase also had an impact. Strongest growth in Latin America The Ethicals division generated two-thirds of its sales in Europe. Sales rose by 8.2% to â,¬ 1,265 million in 2006...

  • Page 47
    ...Business Insight predicts that sales in these three groups will more than double from US $ 28 billion to US $ 60 billion from 2005 to 2011. Market researchers expect monoclonal antibodies for use in oncology - the group that also includes Erbitux® - to achieve average annual growth of 23% and sales...

  • Page 48
    MANAGEMENT REPORT | PHARMACEUTICALS BUSINESS SECTOR | ETHICALS For more and more patients, Erbitux® stands for a new therapeutic advance. Worldwide recognition for a new antibody The battle against head and neck cancer is one of the greatest challenges facing the field of oncology. In Europe ...

  • Page 49
    ... twentieth anniversary in 2006, thus remained our top-selling product group. Increasing by 11%, sales of branded products from the Concor® family developed very well. The results of the DECREASE II study recommend perioperative therapy with Concor®. Preoperative cardiac stress testing can thus be...

  • Page 50
    ... particularly in Latin America and China, where sales increased by 23% and 38%, respectively. In Europe, the growth markets include Spain and Poland. Products for other therapeutic areas Our Women's Health business is managed by our subsidiary Théramex of Monaco. In 2005, Théramex transferred the...

  • Page 51
    Research High level of investment in the future In 2006, research spending in the Ethicals division increased by 6.8% to â,¬ 472 million. This again corresponded to 25% of the division's sales, well above the global average of research-based pharmaceutical companies. Our focus was on drugs for which...

  • Page 52
    MANAGEMENT REPORT | PHARMACEUTICALS BUSINESS SECTOR | ETHICALS Regular exercise is important in preventing cardiovascular disease and supporting therapy. New success in the battle against chronic heart failure Sudden cardiac death remains the most frequent cause of death in the early stages of ...

  • Page 53
    ... cancer, colorectal cancer specific monoclonal antibody Cilengitide (EMD 121974), angiogenesis inhibitor EMD 273063 (hu14.18-IL2), immunocytokine Tucotuzumab celmoleukin (EMD 273066/ huKS-IL2), immunocytokine CardioMetabolic Care GRC 8200 / EMD 6759926 EMD 387008 EMD 503982, oral factor Xa inhibitor...

  • Page 54
    MANAGEMENT REPORT | PHARMACEUTICALS BUSINESS SECTOR | ETHICALS Matuzumab: Studies in different tumor types Matuzumab (EMD 72000) is a humanized monoclonal antibody targeting the epidermal growth factor receptor (EGFR). We have been co-developing this compound, which was discovered by Merck, with ...

  • Page 55
    ... of 2006: • Strong performance in a competitive market, sales up 6.9%, operating result up 29% • Market leadership expanded in France • First to market with 25 products • Acquisition of Prasfarma, a Spanish firm specializing in urology and oncology Key products We offer two strong branded...

  • Page 56
    ... health care costs. Mature markets, meaning countries where generic drugs already account for a large share of the pharmaceutical market, are primarily experiencing volume growth. At the same time, price pressure is rising. The mature markets include countries such as the United States, Canada, the...

  • Page 57
    ... generics and branded generics. The Generics Group is one of the three leading generic drug companies worldwide, employing nearly 5,000 people and comprising more than 35 companies operating under different names in more than 90 countries. Superb market position in France further expanded In Europe...

  • Page 58
    ...strategy. Dey develops and markets respiratory medicines and allergy drugs based on generic substances. Their special dosage forms offer added value for patients. We have also taken this strategy into Europe and in 2006, we launched Clickhaler®, a patient-friendly, cost-effective dry powder inhaler...

  • Page 59
    ... with high consumer benefit • Sale of the Moustifluid® brand in France • Strong development of the Lamberts Healthcare (UK) mail-order business by 6.4% • European market launch of the first patented product containing Metafolin® The business model The Consumer Health Care division sees...

  • Page 60
    ...strategic brands. Free cash flow increased by 7.0%, return on sales (ROS) and return on capital employed (ROCE) improved to 13.7% and 19.6%, respectively. Sales increase in Europe - our largest market Europe accounted for more than 70% of sales, which rose slightly by 4.2% to â,¬ 284 million. France...

  • Page 61
    ...UK mail order business, operating under the name Lamberts Healthcare, achieved a good growth rate of 6.4% in 2006. Customers can choose from an extensive range of over 160 products. We will secure our strong position in the consumer health care market by achieving further growth, especially in Latin...

  • Page 62
    ... new developments that hold the promise of therapeutic progress, without neglecting the still important development of small molecules based on the methods used in pharmaceutical chemistry. Researchers at Merck have expertise and experience in both technologies and apply both to drug development in...

  • Page 63
    ...Science Chemicals Merck's second Chemicals division comprises three large business fields: laboratory products such as solvents, analytical reagents and test kits; products and services along the entire process chain of the pharmaceutical, cosmetics and biotech industries; as well as effect pigments...

  • Page 64
    ... Free cash ï¬,ow ROS in % ROCE in % 2006 2005 ∆ in % 2,106 1,234 137 641 -35 521 30.5 33.0 1,900 1,058 132 492 -10 357 25.9 27.2 11 17 3.6 30 246 46 Chemicals | Sales by region â,¬ million 2400 2,400 1800 1,800 1200 1,200 600 600 0 Asia, Africa, Australasia Latin America North America Europe...

  • Page 65
    ... market with high innovation rates, and a large number of patents. More than 100 researchers are responding in particular to the ever-increasing demand for shorter switching times. Like our production facilities, they are based in Germany as well as close to our customers in Japan, Korea and Taiwan...

  • Page 66
    ... of investment in this area, particularly in research and development, which we increased again in 2006 to â,¬ 70 million. Return on capital employed (ROCE) was 57.2%, compared to 50.3% in 2005. Liquid crystals sales grow with the booming LCD market Again in 2006, Merck benefited from the trend...

  • Page 67
    ... the Korean company Shin An SNP, was completed in December 2006. Investing in a growth market In 2005 we commissioned a new Liquid Crystal Center in Taiwan for customized mixtures and in 2006 we opened the new research building in Darmstadt. In addition, further modernization of the plants began in...

  • Page 68
    ... of the global success story of LC displays. It also describes the development of liquid crystals from Merck, the undisputed global leader in liquid crystals. There's hardly a flatscreen television, PC monitor, notebook, mobile phone or navigation system not containing our key product. Yet the...

  • Page 69
    ... Life Science Chemicals Profile Specialty chemicals from Merck are used in all stages of the pharmaceutical production process from development in the laboratory up to industrial-scale manufacture. They ensure reliable analysis in research and dependable production processes. Expertise in chemistry...

  • Page 70
    ... Good sales developments in Mexico, Argentina and Colombia contributed significantly to the growth in Latin America. www.pls.merck.de Performance & Life Science Chemicals | Key figures â,¬ million Sales Gross margin R&D Operating result Exceptional items Free cash flow ROS in % ROCE in % 2006 2005...

  • Page 71
    ... The business model The success of this business field is based on a long tradition of offering researchers, teachers and industry a broad spectrum of laboratory chemicals in a range of quality grades with certificates of analysis ensuring consistent and comparable results. Today we offer specific...

  • Page 72
    ... "Ready-to-use Media" product range for microbiology developed particularly well. We also increased sales of the two largest product groups, reagents and inorganic salts. The still young product line CertiPUR® comprising 68 chemical element solutions sold very well, for example, to customers who...

  • Page 73
    ....com Successful again with innovative effect pigments The Pigments business field expanded its market position also in 2006 with high-grade effect pigments and first-rate technical service. All applications contributed to the high single-digit sales growth of 8.5%: Pigments for automotive...

  • Page 74
    ... easy to process them in all fields of application. In view of the growing demand for these pigments, we commissioned a third production plant in Onahama, Japan, in February 2006. Xirallic® is meanwhile a main pillar of Merck's Pigments business field and a brand enjoying double-digit growth. www...

  • Page 75
    ... supply bottleneck for its main products. The sales and operating result of the Merck Group are sustained by a large number of pharmaceutical and chemical products for various industries. This diversification itself minimizes risk, since the markets differ in their structure and economic cycles. 70

  • Page 76
    ... with generic drug pricing. We have taken all possible measures to protect our own legal position. More information can be found on page 122 of the Consolidated Financial Statements. As a research-based company, Merck has a valuable portfolio of industrial property rights, such as patents and brands...

  • Page 77
    ... continually available thanks to redundant technical components, networks and sites. Access to business-related data is secure. There are global security guidelines that include appropriate organizational, technical and software-related precautions for access control, access rights, virus protection...

  • Page 78
    ... predict exchange rates. For Serono, we have used forecasts that we prepared in connection with the acquisition. Our planning assumes a moderate development of energy and raw material prices as well as rising personnel costs. Forecast for the Pharmaceuticals business sector The pharmaceutical market...

  • Page 79
    ...resulting from the purchase price allocation. We expect the Merck Serono division to post increases in both sales and operating result. Sales by the Generics division depend heavily on DuoNeb®: with â,¬ 269 million, or a share of around 15%, it was the division's top-selling product in 2006. DuoNeb...

  • Page 80
    ...innovative offers, and the operating result. Development of Merck Taking into consideration the aforementioned uncertainties in the Generics division, we expect that the sales and operating result of the Merck Group - excluding Serono - will increase by a single-digit percentage in 2007. Since early...

  • Page 81
    ... following gives a general explanation of the KGaA company form followed by the specific situation at Merck. Partnership limited by shares (Kommanditgesellschaft auf Aktien) "The partnership limited by shares (Kommanditgesellschaft auf Aktien or KGaA) is a company with its own legal personality, at...

  • Page 82
    ...foreseen by the Code. This is illustrated in the following chart. Total capital Merck KGaA â,¬ 565,137,635.95 Share capital â,¬ 167,941,321.60 Equity interest â,¬ 397,196,314.35 Limited liability shareholders General partner E. Merck OHG (with equity interest) Annual General Meeting Supervisory...

  • Page 83
    ... as follows: fixed salary â,¬ 3.0 million, profit sharing (based on the results of 2006, 2005 and 2004) â,¬ 10.5 million. This compensation is paid by the general partner E. Merck OHG. Merck KGaA's Annual General Meeting in 2000 resolved a stock option program for senior executives, in which members...

  • Page 84
    ..., purchase or sale of shares in the company by members of the Executive Board and the Supervisory Board (Section 6.6 of the German Corporate Governance Code) As of December 31, 2006, the members of the Executive Board and the Supervisory Board held 28,375 shares. Their total ownership represents...

  • Page 85
    ... employees in the event of a takeover offer. During fiscal year 2006, 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...

  • Page 86
    ... the Supervisory Board found no objections and thus approves the annual financial statements and management report for Merck KGaA, the consolidated financial statements of the Merck Group and the management report of the Merck Group prepared by the Executive Board, as well as the report presented by...

  • Page 87
    ... auf Aktien (partnership limited by shares). They additionally emphasized his extensive business experience, which he applied to serve the company. Dr. Karl-Ludwig Kley did also not stand for reelection. Since September 1, 2006, Dr. Kley is Vice Chairman of the Executive Board of Merck KGaA. The...

  • Page 88
    Consolidated Financial Statements of the Merck Group 84 85 86 88 89 89 90 91 Income Statement Balance Sheet Segment Reporting Cash Flow Statement Free Cash Flow Presentation of Comprehensive Income Statement of Changes in Net Equity Notes 95 Accounting policies 100 Notes to the income statement 108 ...

  • Page 89
    ... Notes to the Income Statement: see page 100 ¤ million Sales Cost of sales Gross margin Marketing and selling expenses Administration expenses Other operating income and expenses Research and development Patent and license revenues Investment result Operating result Exceptional items Earnings...

  • Page 90
    ... assets Cash and cash equivalents Marketable securities and financial assets Trade accounts receivable Inventories Other current assets Tax receivables Non-current assets Intangible assets Property, plant and equipment Investments at equity Non-current financial assets Other non-current financial...

  • Page 91
    ...0.8 44.4 9.6 0.2 Pharmaceuticals 2006 4,119.2 2,606.8 524.2 -35.1 489.1 4,159.8 659.4 108.1 53.0 -1,289.6 614.7 13.2 2005 3,792.1* 2,325.9* 454.3 - 454.3 2,416.8 688.7 104.2 13.5 406.1 579.5 4.7 Germany ¤ million External sales by customer location* External sales by company* Intragroup sales with...

  • Page 92
    CONSOLIDATED FINANCIAL STATEMENTS | SEGMENT REPORTING Liquid Crystals 2006 892.4 612.4 486.1 - 486.1 897.2 96.2 72.8 0.6 376.5 70.0 0.3 2005 739.1 477.3 346.0 -10.0 336.0 802.4 80.5 92.6 16.9 165.6 69.2 7.1 Performance & Life Science Chemicals 2006 1,213.3 622.0 155.4 -34.5 120.9 1,073.4 178.0 68...

  • Page 93
    ... Purchase of intangible assets Purchase of property, plant and equipment Acquisitions and investments in other financial assets Disposal of assets Changes in securities Changes in other financial assets Net cash flows from investing activities Dividend payments Capital increase Profit transferred...

  • Page 94
    ... Net cash flows from operating activities Purchase of intangible assets Purchase of property, plant and equipment Acquisitions and investments in other financial assets Disposal of assets Changes in securities Free cash flow Free cash flow before acquisitions and divestments [34] Note 2006 811...

  • Page 95
    ...after tax Dividend payments Profit transfers to /from E. Merck OHG including transfers to reserves Capital increase due to the exercise of stock options Other changes in equity Changes in companies consolidated /Other Balance as of December 31, 2006 Minority interest Total 363.2 363.2 363.2 363...

  • Page 96
    ... in a Specific Market - Waste Electrical and Electronic Equipment". Neither the new nor the amended rules had any material effects on the consolidated financial statements of the Merck Group. The amendment to IAS 19 "Employee Benefits" was applied in advance in fiscal 2005. The following...

  • Page 97
    ... million and marketing and selling expenses fell by â,¬ 99.9 million. Companies consolidated Including the parent company Merck KGaA, Darmstadt, 176 companies are fully consolidated in the annual financial statements of the Merck Group. A further 2 associates are included using the equity method. 34...

  • Page 98
    ... in the companies consolidated due to acquisitions had the following effects on the consolidated balance sheet: Disposals/ Deconsolidations Fair value Disposal at book value Acquisitions ¤ million Goodwill Other intangible assets Property, plant and equipment Other non-current assets Cash and cash...

  • Page 99
    .... The majority of the Merck Group companies conduct their operations independently. The functional currency of these companies is the respective local currency. Business transactions that are conducted in currencies other than the local currency are recorded using the current exchange rate on the...

  • Page 100
    ... of ownership have been transferred. In addition, payment must be sufficiently probable. Sales also include revenue from services, but the volume involved is insignificant. Interest revenue is recognized on a time-proportionate basis using the effective rate method. Compensation for use of assets...

  • Page 101
    ... under "Segment Reporting". In a few cases, the cash-generating unit is a company or a business field (reporting level within a segment). The recoverable amount of a cash-generating unit is determined by the higher of the two following values: Fair value less costs to sell or value in use, which is...

  • Page 102
    ..., plant and equipment is depreciated by the straight-line method over the useful life of the asset concerned. The useful life applied to production buildings is a maximum of 33 years. Administration buildings are depreciated over a maximum of 40 years. The useful lives of machinery and technical...

  • Page 103
    ... in subsidiaries reported under "Other investments" that are not consolidated due to their secondary importance are likewise carried at cost. Interests in companies over which Merck has significant influence but does not control are normally included using the equity method of accounting and are...

  • Page 104
    ... country, different retirement benefit systems are provided for the employees of the Merck Group. In principle, these systems are based on length of service and salary of the employees. Pension obligations of the Merck Group include both defined benefit and defined contribution plans and comprise...

  • Page 105
    Notes to the income statement [1] Sales In order to harmonize accounting practices within the Merck Group, as of 2006 certain customer rebates previously reported mainly under marketing and selling expenses and to a small extent under cost of sales are now deducted from sales. The previous year's ...

  • Page 106
    ... ingredients such as bisoprolol, metformin and isotretinoin. In 2005, Merck received an upfront payment of â,¬ 60.0 million from Takeda Pharmaceutical Company Ltd. to co-develop and co-market matuzumab, a humanized monoclonal antibody for cancer treatment. This item also includes income...

  • Page 107
    ... the Ethicals division in France, the United States and Germany. Restructuring charges for the closure of the manufacturing facility at Generics UK amounted to â,¬ 13.2 million. Impairment losses of â,¬ 34.5 million were recorded in the Pigments business field (Performance & Life Science Chemicals...

  • Page 108
    ...THE INCOME STATEMENT [10] Financial result ¤ million Interest income and similar income Interest expenses and similar expenses 2006 55.9 -55.5 0.4 2005 31.4 -33.6 -2.2 Interest component of the addition to pension provisions and other provisions for personnel expenses Exchange rate differences...

  • Page 109
    ... in Germany as well as comparable income taxes for foreign companies. As a result of changes in tax rates at individual companies, a total deferred tax expense of â,¬ 0.4 million was recorded. Taxes for exceptional items relate mainly to taxes on the gain on the sale of the Schering shares as...

  • Page 110
    ... items: Dec. 31, 2006 ¤ million Intangible assets Property, plant and equipment Current and non-current financial assets Inventories Current and non-current receivables /Other assets Provisions for pensions and other post-employment benefits Current and non-current other provisions Current and non...

  • Page 111
    ... companies Merck Ltd., India and Merck Indonesia Group. [13] Earnings per share Basic earnings per share are calculated by dividing the net profit after minority interest by the weighted average number of theoretical shares outstanding. The use of a theoretical number of shares takes into account...

  • Page 112
    ... average number of theoretical shares outstanding, plus all potentially dilutive shares. Potentially dilutive shares in the Merck Group are stock options under the Merck stock option program, provided that their exercise requirements are met at the balance sheet date. In this case, for fiscal 2006...

  • Page 113
    ... due largely to the purchase of shares in Serono S.A. up until December 31, 2006. Cash and cash equivalents include short-term receivables due from related parties and affiliates amounting to â,¬ 24.8 million (previous year: â,¬ 2.3 million). [15] Marketable securities and financial assets This item...

  • Page 114
    CONSOLIDATED FINANCIAL STATEMENTS | NOTES | NOTES TO THE BAL ANCE SHEET [16] Trade accounts receivable This item comprises: Dec. 31, 2006 - - 1,252.9 1,252.9 Dec. 31, 2005 - 0.1 1,161.2 1,161.3 ¤ million Receivables from associates Receivables from other affiliates Receivables from third parties...

  • Page 115
    ...Prepaid expenses Deferred pension payments Other assets Other non-current assets Dec. 31, 2006 - - 2.7 2.7 26.6 5.1 34.4 Dec. 31, 2005 - - ...in the form of profits resulting from comarketing agreements with other companies for various products are recorded in this item. [19] Tax receivables Tax ...

  • Page 116
    ... losses January 1, 2006 Currency translation Changes in companies consolidated Amortization and impairment losses Disposals Transfers Write-ups December 31, 2006 Net carrying amount as of December 31, 2006 Finite useful life Indefinite useful life Goodwill Software Advance payments Total 242...

  • Page 117
    ... to any material impairment losses. Goodwill can be allocated to the divisions as follows: Dec. 31, 2006 255.4 357.4 148.0 88.7 4.1 853.6 Dec. 31, 2005 255.8 343.6 147.9 87.5 4.1 838.9 ¤ million Ethicals Generics Consumer Health Care Performance & Life Science Chemicals Liquid Crystals Total 112

  • Page 118
    ... losses January 1, 2006 Currency translation Changes in companies consolidated Depreciation and impairment losses Disposals Transfers Write-ups December 31, 2006 Net carrying amount as of December 31, 2006 Plant and machinery Other facilities, operating and office equipment Total 1,205.5 45...

  • Page 119
    ... & Life Science Chemicals division likewise includes write-downs resulting from amended sales forecasts at Merck in Brazil. The adjustment for the value in use amounting to â,¬ 1.6 million is disclosed under other operating expenses and is based on a discount factor of 10.8 %. Changes in companies...

  • Page 120
    CONSOLIDATED FINANCIAL STATEMENTS | NOTES | NOTES TO THE BAL ANCE SHEET [22] Non-current financial assets and investments at equity Investments in companies classified as "availablefor-sale" other affiliates Securities classified as "availablefor-sale" classified as "held-tomaturity" Loans ...

  • Page 121
    Additions to "available-for-sale" investments result mainly from the acquisition of shares in Serono S.A., Switzerland, (â,¬ 1,575.4 million). As of December 31, 2006, non-current financial investments classified as available for sale with a book value of â,¬ 2.1 million were carried at cost since a...

  • Page 122
    ...Net equity1 ¤ million Major companies of the Merck Group by region Employees Germany/Europe Merck KGaA, Darmstadt, Germany Merck Santé S.A.S., Lyon, France Merck Lipha Santé S.A.S., Lyon, France Merck Génériques S.A.S., Lyon, France Merck Pharma GmbH, Darmstadt, Germany Merck Farma y Quimica...

  • Page 123
    ... Liabilities to related parties Liabilities from derivatives Other financial liabilities Non-current financial liabilities Dec. 31, 2006 477.5 74.4 0.6 61.0 - 0.1 613.6 Dec. 31, 2005 495.5 74.1 0.5 83.9 - - 654.0 ¤ million Bonds Bank loans and overdrafts Liabilities from finance lease obligations...

  • Page 124
    ... credit line of â,¬ 2 billion to be used for business purposes with a maturity of five years. The current and non-current liabilities of the Merck Group to banks are denominated in the following currencies: Dec. 31, 2006 Euros U.S. dollars Pounds sterling Swiss francs Yen Other currencies 78...

  • Page 125
    ... due to third parties Trade accounts payable include accrued amounts of â,¬ 222.6 million (previous year: â,¬ 212.5 million) for outstanding invoices and accrued reductions in sales revenues. [25] Other liabilities This item comprises: Other current liabilities Dec. 31, 2006 - 1.6 66.2 67.8 6.3 51...

  • Page 126
    ... due to insurance companies as well as contractually agreed payment obligations vis-Ã -vis other companies are also disclosed here. The deviation in liabilities due to related parties results compared with 2005 is mainly the result of an increase in the profit transfers to E. Merck OHG. [26...

  • Page 127
    [27] Provisions Provisions developed as follows: ¤ million January 1, 2006 Exchange rate differences Utilizations Additions Release Changes in companies consolidated/Other December 31, 2006 thereof current thereof non-current Restructuring Personnel Litigation Other Total 33.3 -0.6 -30.7 43...

  • Page 128
    ... actuarial parameters: 2006 Discount rate Future salary increases Future pension increases Staff turnover Expected return on plan assets Future increases in health care benefits 4.6 % 3.2 % 2.2 % 2.1 % 6.0 % 10.0 % 2005 4.6 % 3.2 % 2.2 % 2.2 % 6.4 % 12.0 % These are average values weighted by the...

  • Page 129
    ... differences Current service cost Interest cost on pension obligations Other effects recognized in income Actuarial gains/losses Pension payments in the reporting period Transfers/Changes in companies consolidated/Other changes Present value of all defined benefit obligations on December 31 2006...

  • Page 130
    ... Expected return on the plan assets Other effects recognized in income Actuarial gains/losses Employer contributions Employee contributions Pension payments in the reporting period Transfers/Changes in companies consolidated/Other changes Fair value of the plan assets on December 31 2006 276...

  • Page 131
    ... pension insurance systems abroad. [29] Net equity The subscribed capital of Merck KGaA is composed of 51,313,889 no-par value shares with equivalent rights on December 31, 2006. Owing to the issue of new shares within the scope of the stock option program of Merck KGaA, the number of shares...

  • Page 132
    ... losses are now also used for reciprocal profit/loss transfers. In 2006, E. Merck OHG reported a net loss of â,¬ 1.7 million. Added to the loss from 2005, a total loss of â,¬ 14.8 million results. This amount will be used for the distribution of profit/loss. Consequently, Merck KGaA will take over...

  • Page 133
    ...,970 340,660 - 96,310 96,310 11.7 The weighted average price of Merck KGaA's shares in XETRA trading at the time of exercise of the stock options was â,¬ 83.67 in 2006. Moreover, options that have not been exercised or converted into cash are neither recorded in the balance sheet nor recognized in...

  • Page 134
    ... in accordance with the internal reporting of the Merck Group. The operating segments are described in detail in the business sector sections in the Annual Report. With the sale of our Electronic Chemicals business in April 2005, the remaining contract manufacture business as well as the previous...

  • Page 135
    ... third and fourth quarters of 2006, 2,308,865 shares of Serono S.A., Switzerland, were purchased on the capital market for â,¬ 1,575.4 million. Merck Seiyaku Ltd. Société de Part. Pharmaceutique ¤ million Purchase price Cash and cash equivalents acquired Net cash outflows Prasfarma Survac ApS...

  • Page 136
    ... carried forward of Merck KGaA Profit transfer from Merck & Cie KG to E. Merck OHG Total dividend payments and profit transfers 2006 -43.6 -6.1 -49.7 2005 -51.0 -6.8 -57.8 -4.0 - -400.9 203.8 -201.1 -28.3 -150.5 3.2 -147.3 -29.9 -279.1 -235.0 This resulted in free cash flow for the year...

  • Page 137
    ....6 51.1 - 2,073.8 Fair value Dec. 31, 2006 -65.8 -22.0 - 0.9 -86.9 Dec. 31, 2005 3.4 -1.8 -0.6 - 1.0 The nominal volume is the aggregate of all buy and sell amounts relating to derivatives contracts. The fair values result from the valuation of open positions at market prices, ignoring any opposite...

  • Page 138
    ... of the balance sheet date: Remaining maturity less than 1 year Remaining maturity more than 1 year Total Dec. 31, 2006 Remaining maturity less than 1 year Remaining maturity more than 1 year Total Dec. 31, 2005 ¤ million Forward exchange contracts Interest rate swaps Cross-currency swaps Currency...

  • Page 139
    ... rate risk with a total nominal volume of â,¬ 8,410.4 million primarily serve to hedge the Serono S. A. purchase price. For this purpose, CHF hedge contracts amounting to â,¬ 7,085.0 million had been entered into as of December 31, 2006. In addition, to a large extent loans granted to companies...

  • Page 140
    ...-month EURIBOR. Overall, the interest rate structure of the Merck Group's assets and liabilities is presented in the following table: Total Dec. 31, 2006 Total Dec. 31, 2005 ¤ million Loans granted Cash and cash equivalents, marketable securities and financial assets Other assets/Tax receivables...

  • Page 141
    ... its interest in Bracco, Italy, in 2000. It was agreed that a portion of the purchase price would be paid in installments. These outstanding payments have been secured by way of a bank guarantee in favor of Merck. In 2002, Merck KGaA sold the residual claim from Bracco amounting to â,¬ 322.1 million...

  • Page 142
    ... and salaries Compulsory social security contributions and special financial assistance Pension expenses 2006 2005 1,382.4 219.2 96.7 1,698.3 1,284.3 208.8 87.9 1,581.0 As of December 31, 2006, the companies of the Merck Group had 29,999 employees (previous year: 29,133). The average number of...

  • Page 143
    ...Their total ownership represents less than 1 % of the issued shares of Merck KGaA. In accordance with Section 15a of the German Securities Trading Act (Wertpapierhandelsgesetz), reportable purchases and sales of non-par-value shares of Merck KGaA (ISIN: DE 000 659 990 5) by Board Members in 2006 can...

  • Page 144
    ... concluded a purchase agreement on September 21, 2006 pertaining to the acquisition of a majority shareholding in Serono S.A., Coinsins, Switzerland, (now known as "Merck Serono S.A."). The shares of the Bertarelli family were largely held by the holding company Bertarelli Biotech S.A. (now known as...

  • Page 145
    ... the pre-acquisition book values: Pre-acquisition book-values1 ¤ million Cash and cash equivalents, marketable securities, financial assets Inventories Other current assets Goodwill Other intangible assets Property, plant and equipment Other non-current assets Current financial obligations Other...

  • Page 146
    ... syndicate at a subscription price of â,¬ 78.00 per share in accordance with market practice. The new shares have been included in the quotation of the shares of Merck KGaA on the Frankfurt Stock Exchange since February 7, 2007 and are entitled to full dividends for 2006. E. Merck OHG has increased...

  • Page 147
    ... are taken into account in the determination of audit procedures. The effectiveness of the accountingrelated internal control system and the evidence supporting the disclosures in the consolidated financial statements and the group management report are examined primarily on a test basis within the...

  • Page 148
    ... and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group's position and...

  • Page 149
    ... Care Chemistry with a Future Top Topics Liquid Crystals The History of the Future A Strong Site 2005 Report (also available in French and Spanish) History of Merck - The World's Oldest Pharmaceutical and Chemical Company Merck Breaks New Ground in Cancer Therapy Integrated Management...

  • Page 150
    Publication contributors Published on March 1, 2007 by Merck KGaA, Corporate Communications, Frankfurter Strasse 250, 64293 Darmstadt, Germany Fax: +49-6151-72 87 93, e-mail: [email protected], Web site: www.merck.de Editing: Judith Rahner, Tobias Engel English translation: Colette Roell, Diane ...

  • Page 151
    www.merck.de