Merck 2007 Annual Report Download

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Table of contents

  • Page 1
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  • Page 2
    Annual Report 2007 Grow Change Sustain

  • Page 3
    ... information inside the cover: Business Development 2003-2007 Business Sectors and Divisions Merck 2007 at a glance Key figures for 2007* â,¬ million Pharmaceuticals Chemicals Corporate and Other Total Total revenues Gross margin Research and development Operating result Exceptional items Earnings...

  • Page 4
    ... - In order to harmonize accounting practices, as of 2006 the way in which certain customer rebates in the Pharmaceuticals business sector are reported has been changed. Following its acquisition, the Swiss biopharmaceutical company Serono was integrated with the Ethicals division into Merck Serono...

  • Page 5
    Pharmaceuticals business sector Merck develops, manufactures and markets innovative prescription drugs as well as over-the-counter products. The Serono acquisition was completed in early January 2007 and the sale of the Generics business to Mylan closed in early October 2007. We develop therapies ...

  • Page 6
    ...employees support the principle of sustaining and changing in order to remain successful. In 2007, the acquisition of the biotech company Serono was successfully completed and the Generics business was divested. With these steps, Merck has created a wide range of new development opportunities. Merck...

  • Page 7
    ... Merck Group Sales development Financial position and results of operations Responsibility for employees, the environment and the community Merck shares Pharmaceuticals business sector 36 Merck Serono 50 Consumer Health Care Chemicals business sector 56 Liquid Crystals 60 Performance & Life Science...

  • Page 8
    ... not least to special factors, which lead us to propose to the Annual General Meeting on March 28 not only a higher dividend of â,¬ 1.20 per share, but also a special dividend of â,¬ 2.00 per share. In this way, we want our capital providers to benefit from the proceeds from the sale of the Generics...

  • Page 9
    ... markets, we also have stable businesses in mature market segments - for example our Consumer Health Care and Performance & Life Science Chemicals divisions. We don't bet everything on one horse. Financially, we're on solid footing: Adjusted for the effect of acquisitions and divestments, free cash...

  • Page 10
    ...641 people in the Generics division, which was sold in early October, for their contributions. I wish them every success as employees of Mylan. Secondly, the change in the leadership of the Executive Board took effect at the 2007 Annual General Meeting. Here too, I would like to thank Michael Römer...

  • Page 11
    ... Board since January 2007 Responsibility for Group-wide functions Site Management Darmstadt and Gernsheim, Production and Engineering, Purchasing and Logistics, Environment, Health and Safety, Central Process Development, Information Services Regional responsibility: Germany (including Human...

  • Page 12
    ...in 1959, degree in Marketing Management, joined Merck in 2003, Member of the Executive Board since November 2005 Responsibility for Group-wide functions Pharmaceuticals business sector Regional responsibility: Europe, United States (Pharmaceuticals), Canada, Latin and Central America, Africa, Middle...

  • Page 13
    ...the cancer drug Erbitux® resolutely point the way to the future - with a clear goal for Merck: to expand its expertise and to drive growth. Merck means innovation by tradition. Pharmaceuticals and Chemicals. These are the sources of new ideas that bring about decisive change and make Merck stronger...

  • Page 14
    9

  • Page 15
    ...biopharmaceutical company Serono creates potential for more: The best of both Merck and Serono is converging and crosspollinating. Merck has the courage and the strength to pursue new avenues in pharmaceutical research with a research and development budget that has nearly doubled. We are working to...

  • Page 16

  • Page 17
    ... and homes. Co-developments with customers are the decisive factors here. Merck's increased economic strength has also received objective confirmation: On June 18, 2007, our company became part of the DAX ®, the blue-chip index of the 30 largest German securities, on the Frankfurt Stock Exchange.

  • Page 18

  • Page 19
    ... and Chemicals, gives us the best possible preconditions for growth and makes it possible to fully unlock the entrepreneurial potential inside Merck. It gives our workforce of nearly 31,000 employees around the world orientation for their daily work. We enable them to share in the company's success...

  • Page 20
    Grow Change Sustain

  • Page 21
    Management Report of the Merck Group 17 Sales development 21 Financial position and results of operations 28 Responsibility for employees, the environment and the community 30 Merck shares 34 Pharmaceuticals business sector 36 Merck Serono 50 Consumer Health Care 54 Chemicals business sector 56 ...

  • Page 22
    ... largest pharmaceutical market and grew by 4% to US$ 58 billion. The five most important European pharmaceutical markets, France, Germany, Italy, Spain and the United Kingdom, together achieved a market volume of US$ 107 billion, growing by 3%. Total revenues by business sector â,¬ million Total...

  • Page 23
    ..., see the Merck Serono section of the management report on page 37). Special mention should be made here of the good development of Erbitux ®, Rebif ® as well as the products of the Concor ® and Glucophage ® families. The Consumer Health Care division generated total revenues of â,¬ 420...

  • Page 24
    MANAGEMENT REPORT Sales development 19 The Chemicals business sector increased total revenues by 1.8% to â,¬ 2,150 million in 2007, accounting for around 30% of total Merck revenues. The Liquid Crystals division generated sales of â,¬ 916 million, corresponding to an increase of 2.3%. On the one ...

  • Page 25
    ... royalty income) in European countries. Accounting for sales of â,¬ 3,322 million, Europe was the most important region again in 2007. As in 2006, the largest market was France, where sales grew by 28% to â,¬ 738 million, followed closely by the home market of Germany, where sales increased by 46...

  • Page 26
    ... in Merck's history. Both events had a lasting effect on the balance sheet, the income statement and cash flow. The closing of the Serono acquisition took place on January 5, 2007. Thereafter, the company was merged with the former Ethicals division of Merck to form the new Merck Serono division...

  • Page 27
    ... the amortization of intangible assets that Pharmaceuticals* | Operating result by division â,¬ million Chemicals | Operating result by division â,¬ million 60 14% 357 86% 144 23% 487 77% Consumer Health Care Merck Serono Performance & Life Science Chemicals Liquid Crystals * excluding the...

  • Page 28
    ... for more details). Since a causal allocation of the financial result to the divisions is not possible, as of 2007 it is reported entirely in the segment Corporate and Other. The Chemicals business sector remained highly profitable and accounted for 60% of the Merck Group's operating result.

  • Page 29
    ...2008 the payment of a dividend of â,¬ 1.20 per share, plus a one-time bonus of â,¬ 2.00 per share. Free cash flow before acquisitions and divestments As a key indicator of the financial position of Merck, free cash flow was strongly impacted on the one hand by the purchase of Serono and on the other...

  • Page 30
    ... to include additional therapeutic areas. Within the scope of the realignment of the research and development portfolio, Merck is reviewing its activities in diabetes (please see the Merck Serono section of the Management Report on page 44). In the Chemicals business sector, R&D spending remained...

  • Page 31
    ... by the Pharmaceuticals business sector totaled â,¬ 154 million, with the Merck Serono division accounting for the vast majority of this amount. Around 30% thereof related to headquarters in Darmstadt, Germany. Another area of focus is the expansion of biotechnological production capacities in...

  • Page 32
    MANAGEMENT REPORT Financial position and results of operations 27 Net equity of the Merck Group increased sharply. Both the capital increase and the aftertax gain on the disposal of the Generics business had a positive impact. Gearing (ratio of net debt and pension provisions to net equity) was 0....

  • Page 33
    ... 278 in France, taking into account the employees added by the Serono acquisition. In terms of function, 24% of employees work in production, 34% in marketing and sales, 14% in research and development, and 6.6% in logistics. The remainder work in central functions such as engineering, IT and human...

  • Page 34
    ...facilitate the sale and purchase of chemicals, by 2008 this guideline will harmonize national regulations on classifying and labeling substances, transport law as well as safety data sheets worldwide. Merck has already started with the implementation. The aim is to launch the first products with the...

  • Page 35
    ...price development and factors influencing Merck shares in 2007 in â,¬ Positive clinical trial results support increases in the Merck share price in the first half. 110 100 90 80 Positive sentiment on Serono acquisition and strengthening of Pharmaceuticals Closing of the Serono acquisition Start of...

  • Page 36
    ... the free float increased to 29.7%. The new shares began trading on the Frankfurt Stock Exchange (Prime Standard) on February 7. The performance of Merck shares vs. the DAX®/MDAX® in 2007 in % www.investors.merck.de 140 125 110 95 Jan. March June Sept. Dec. Bloomberg Europe Pharmaceuticals Index...

  • Page 37
    ... & Management Company, Los Angeles, CA (USA): 5-10% - Fidelity International Ltd.: 3-5% - Sun Life Financial Inc., Toronto (Canada): 5-10% At the same time, Merck is aiming to achieve a more balanced distribution of its regional shareholder structure. In 2007, Merck attracted additional investors...

  • Page 38
    ...'s share capital exceeding 10% of the voting rights. According to the Articles of Association of the company, the general partners not holding an equity interest who form the Executive Board are admitted by E. Merck OHG with the consent of a simply majority of the other general partners. A person...

  • Page 39
    34 Pharmaceuticals Merck Serono: From living cells to effective therapies Recent major breakthroughs in the treatment of complex diseases are increasingly due to the use of biopharmaceuticals, in other words active ingredients that have been developed or produced using biotechnology. With the ...

  • Page 40
    ... and commercial operations but also research and clinical development. Another research center, along with a pilot plant, is located in Billerica north of Boston. Altogether, more than 850 employees work for EMD Serono to discover, develop and commercialize drugs for use in the therapeutic areas of...

  • Page 41
    ... success factor for Merck Serono in this business - supported by a high level of competence in research and development as well as production and sales. In 2007, Merck Serono generated around 60% of total revenues with six innovative biotechnology products. Products from Merck Serono are marketed...

  • Page 42
    MANAGEMENT REPORT Pharmaceuticals | Merck Serono 37 Growth through the Serono acquisition Merck Serono is the largest division of Merck. In 2007, total revenues were â,¬ 4,458 million. In order to achieve comparability with 2006, pro forma figures are used in the following section. They compare ...

  • Page 43
    38 Therapeutic areas Research Development Commercialization Oncology (colorectal cancer, head and neck cancer) Neurodegenerative Diseases (multiple sclerosis) Fertility Endocrinology (different areas) Autoimmune and Inflammatory Diseases CardioMetabolic Care and other products Dermatology n n n n...

  • Page 44
    MANAGEMENT REPORT Pharmaceuticals | Merck Serono 39 Personal support for patients with multiple sclerosis: Nurse Sarah Batchhelder listens to patients and their families and offers them support. "MS Lifelines" is a service that EMD Serono in the United States provides free of charge to all ...

  • Page 45
    ... further development of its products and delivery devices. A new generation of the Gonal-f ® pen was launched in Australia and several European countries. The global roll-out of this new product will continue in 2008. Market launch of PergoverisTM begins Merck Serono has developed Pergoveris™ for...

  • Page 46
    ... the lives of people with a range of endocrine and metabolic disorders. The division's Endocrinology business unit offers a unique portfolio of specialized therapies along with innovative drug delivery devices. Merck Serono markets recombinant human growth hormone (somatotropin) under the brand name...

  • Page 47
    ... hypertension, diabetes and thyroid disorders has steadily improved. Merck Serono offers physicians and patients the possibility to more effectively treat an often complex clinical picture by using an integrated therapeutic approach. Sales in the CardioMetabolic Care business unit increased by...

  • Page 48
    MANAGEMENT REPORT Pharmaceuticals | Merck Serono 43 two-thirds of sales were attributable to Europe. Sales of the thyroid ...Germany. Products for other therapeutic areas The Women's Health business is managed by Théramex, a Merck subsidiary in Monaco. With the establishment of the Merck Serono...

  • Page 49
    ...2 diabetes were returned to Glenmark Pharmaceuticals of India. The required write-off amounted to â,¬ 28 million. Instead, Merck Serono is targeting resources toward reinforcing the leadership position already achieved in the division's therapeutic areas. Realigning research and development opens up...

  • Page 50
    MANAGEMENT REPORT Pharmaceuticals | Merck Serono 45 Status of our innovative compounds Therapeutic area Compound Indication Status Oncology Erbitux ® (cetuximab)1 Stimuvax ®2 Cilengitide Erbitux ® (cetuximab)1 Matuzumab (EMD 72000)3 Tucotuzumab celmoleukin (EMD 273066/huKS-IL2) EMD 273063 (...

  • Page 51
    ... Based on these positive results, Stimuvax ® is now being studied in Phase III trials. The START trial is the first Phase III study to investigate a vaccine in inoperable stage III non-small-cell lung cancer. With cilengitide, Merck Serono is developing a highly effective drug to treat glioblastoma...

  • Page 52
    MANAGEMENT REPORT Pharmaceuticals | Merck Serono 47 Continuous further development of Rebif ® In the Neurodegenerative Diseases therapeutic area, Merck Serono is conducting research to develop innovative drugs for multiple sclerosis (MS) and Parkinson's disease, where high medical needs for new ...

  • Page 53
    ... to early pregnancy. The development pipeline contains many promising new products for initiating ovulation and for improved administration of follicle-stimulating hormone (FSH). Proteins as factors in autoimmune and inflammatory diseases Research activities by Merck Serono in the therapeutic area...

  • Page 54
    ... diseases are being pursued in the therapeutic area of Endocrinology. Merck Serono can build upon its long-standing experience in these therapeutic indications. The furthest advanced project is the development of high-dose recombinant human growth hormone (r-hGH) for the treatment of HIV-associated...

  • Page 55
    ... products for preventive health care and self-treatment of minor ailments. Many of these are sold under well-known brand names. Through them, Merck is helping to promote better health and improve quality of life. The business model The Consumer Health Care division sees itself as a niche marketer...

  • Page 56
    ... hand to the increase in working capital in order to conduct a higher level of business. Return on sales (ROS) increased by 14.2%. Growth in Europe - the key market Europe remains the most important market for the Consumer Health Care division. 70% of total revenues were generated in this region...

  • Page 57
    ... Latin America In Latin America, sales increased by 17%. Sales in Venezuela rose sharply by 49% thanks to the success of Cebion ® and the fish oil product Maxepa ®. In Mexico, the largest market for CHC in the region, the division continued to build on the sustained success of its strategic brands...

  • Page 58
    ... key role in the success of this brand. By developing new distribution channels, the division has further improved its access to customers. As a result, consumers in Singapore can now also purchase high-quality nutritional supplements from the British CHC subsidiary Seven Seas directly by mail order...

  • Page 59
    54 Chemicals Merck maintains technological leadership in the LCD market Merck is the world market leader in manufacturing and marketing liquid crystals for liquid crystal displays (LCDs). Products from Merck are used in displays for LCD televisions, notebooks and PC monitors, mobile phones, clocks ...

  • Page 60
    ... optical compensation films. These improve contrast and viewing angle dependency and are used in special foils found in LCD televisions. By leveraging the technological competence existing in the company and cooperating closely with its LC customers, Merck is working to profitably expand the product...

  • Page 61
    56 Liquid Crystals Profile Highlights of 2007 - Market leadership in liquid crystals successfully defended - Gross margin increases by 3.3%, operating result stable at â,¬ 487 million - Return on sales at 53.1%, free cash flow improves by 14% - LCD televisions remain the largest growth driver and ...

  • Page 62
    ... was 14%. The division thus successfully asserted its position in an increasingly competitive environment. Again, Merck generated most of its business with major display manufacturers in Asia. In the year-on-year comparison of total revenues, it should be noted that the business with ITO (indium tin...

  • Page 63
    ... again increased its investments in research and development, which rose by 18% to â,¬ 79 million in 2007. New mixture techniques were developed to secure the technology leadership. In Darmstadt, South Korea and Taiwan, new reliability laboratories were established to test the long-term stability of...

  • Page 64
    ... merged with Merck KGaA on April 1, 2007. The research and business activities were integrated into the Liquid Crystals division. OLEDs (organic light-emitting diodes) are an innovative field of work, which could develop long-term into a promising technology for displays. OLEDs can also be used as...

  • Page 65
    ... slight growth in Latin America, core European market shows stable growth Specialty chemicals from Merck are used throughout the entire pharmaceutical production process from development in the laboratory up to industrial-scale manufacture. They ensure reliable analysis in research and dependable...

  • Page 66
    ... & Life Science Chemicals division operates in very different market segments that must be served simultaneously. Merck's success in this area is founded on a strict focus on customer needs. Application-optimized solutions, modern services and new products stand for quality, value, speed and...

  • Page 67
    ... decorative effect pigments but also functional skin care and protection solutions, for example UV protection Key products Life Science Solutions supports the entire life sciences process chain from research to market launch - Separation and purification materials - Ionic liquids, which are used to...

  • Page 68
    MANAGEMENT REPORT Chemicals | Performance & Life Science Chemicals 63 Laboratory Business High growth rates in food and water analysis Total revenues of the Laboratory Business subdivision, which is represented with its own employees in 42 countries worldwide, remained stable in comparison with ...

  • Page 69
    ... the Consumer Health Care division for global marketing of the products Femibion ® and Diabion ® is an example of successful, cross-divisional collaboration that benefits customers. Business with ionic liquids got off to a promising start. Ionic liquids can be used in many areas of chemistry, for...

  • Page 70
    MANAGEMENT REPORT Chemicals | Performance & Life Science Chemicals 65 Effect pigments add sparkle to everyday life: Atsuko Nishimagi works in research and development in Onahama, Japan. Merck has several units there that produce the successful range of aluminum oxide-based Xirallic ® pigments. ...

  • Page 71
    ... in Europe, where good business developments were responsible for a 23% increase in sales to â,¬ 672 million. The largest market was France, where sales totaled â,¬ 280 million, equivalent to a 26% increase over 2006. In Germany, the Generics division benefited from renewed changes in health care...

  • Page 72
    ... risk of a supply bottleneck for important products. Total revenues and the 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...

  • Page 73
    ... the positive operating cash flow, the centralization of liquidity in the Group and the credit facility agreement with a term of seven years, long-term liquidity is ensured. Thanks to its broad customer base, Merck is likewise only exposed to a low credit risk in its sales markets. Accounting risks...

  • Page 74
    ... the program is the Merck Code of Conduct, which defines ethical behavior guidelines. This is supplemented by an intranet-based training and testing program, as well as by employees in a global network of compliance officers. Insofar as possible and practical, the company limits liability and damage...

  • Page 75
    ...will be the largest drug group in terms of sales. To date, they have ranked second following drugs to treat metabolic disorders. For the Pharmaceuticals business sector, Merck expects total revenues to increase in a range between 7% and 11% and a high double-digit increase in the operating result in...

  • Page 76
    ... total revenues and the operating result in 2009. In its markets, Consumer Health Care is focusing on achieving higher brand recognition, primarily in Europe. Forecast for the Chemicals business sector The European chemical industry association CEFIC, which represents around 50% of all global...

  • Page 77
    ... & Life Science Chemicals division will continue, step by step, to focus on profitable sub-segments. Within these customer segments, the breadth of the Merck product range and customer-centric development are the success factors for the further profitable development of the business. Merck therefore...

  • Page 78
    ...by shares (Kommanditgesellschaft auf Aktien) to serve the interests of shareholders. In order to enable shareholders to compare the situation at other companies more easily, we have decided to base corporate governance on the conduct recommendations made by the Code Commission relating to management...

  • Page 79
    ... equity interest) Annual General Meeting Supervisory Board 12 members (sections 1, 7 MitbestG) Board of Partners E. Merck OHG, 9 members Human Resources Committee Finance Committee General partners with no equity interest (with power of management and representation) = Executive Board Merck KGaA

  • Page 80
    ... of compensation received by the members of the Supervisory Board can be calculated in accordance with the Articles of Association of Merck KGaA, making a separate disclosure unnecessary. Main features of the Executive Board compensation system (Section 4.2.3 of the German Corporate Governance Code...

  • Page 81
    76 Ownership, 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, 2007, the members of the Executive Board and the Supervisory Board held 32,275 shares. Their total ownership ...

  • Page 82
    ...Merck Group. In particular, the Supervisory Board was informed about the market and sales situation of the company against the background of macroeconomic developments, the financial position of the company and its subsidiaries, as well as their earnings development and corporate planning. The major...

  • Page 83
    ... 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 for the Merck Group prepared by the Executive Board, as well as the report presented by the auditors in accordance with Art...

  • Page 84
    Consolidated Financial Statements of the Merck Group 80 81 82 84 85 85 86 87 Income Statement Balance Sheet Segment Reporting Cash Flow Statement Free Cash Flow Statement of Recognized Income and Expense Statement of Changes in Net Equity Notes 93 Accounting policies 99 Notes to the income statement...

  • Page 85
    ... Total revenues Cost of sales Gross margin Marketing and selling expenses Administration expenses Other operating income and expenses Research and development Amortization of intangible assets Investment result Operating result Exceptional items Earnings before interest and tax (EBIT) Financial...

  • Page 86
    ...81 Balance Sheet ¤ million Note Dec. 31, 2007 Dec. 31, 2006 Current assets Cash and cash equivalents Marketable securities and financial assets Trade accounts receivable Inventories Other current assets Tax receivables Assets held for sale Non-current assets Intangible assets Property, plant and...

  • Page 87
    ...page 131 Performance & Life Science Chemicals 2007 2006 Merck Serono ¤ million 2007 2006 Consumer Health Care 2007 2006 Pharmaceuticals 2007 2006 Liquid Crystals 2007 2006 Sales Royalty income Total revenues Gross margin Selling, general and administration Research and development Operating result...

  • Page 88
    CONSOLIDATED FINANCIAL STATEMENTS Segment Reporting 83 Chemicals 2007 2006 Corporate and Other 2007 2006 Discontinued Operations (Generics) 2007 2006 Reversal Discontinued Operations (Generics) 2007 2006 Group/ Continuing Operations 2007 2006 2,140.7 9.8 2,150.5 1,226.4 -452.4 -137.1 631.0 -...

  • Page 89
    ... plant and equipment Acquisitions and investments in other financial assets Disposal of non-current assets Changes in securities Changes in other financial assets Net cash flows from investing activities thereof: Discontinued Operations Dividend payments Capital increase Profit transfers to E. Merck...

  • Page 90
    ...Expense 85 Free Cash Flow ¤ million Note 2007 2006 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...

  • Page 91
    ... capital Merck KGaA Minority interest ¤ million Total Balance as of January 1, 2006 Profit 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...

  • Page 92
    ... the Merck Group - with Merck KGaA as parent company - have been prepared in accordance with consistent accounting policies. Pursuant to Section 315a HGB (German Commcercial Code), the International Financial Reporting Standards (IFRS) in force on the reporting date and adopted by the European Union...

  • Page 93
    ... the Merck Serono and Consumer Health Care divisions increased by â,¬ 25.7 million and â,¬ 11.2 million, respectively, as did that of Generics, a discontinued operation, by â,¬ 9.2 million. The free cash flow reported in 2006 for the Liquid Crystals and Performance & Life Science Chemicals divisions...

  • Page 94
    ... the disposal of Generics. Acquisitions With the closing of the share purchase agreement on January 5, 2007, Merck acquired from the Bertarelli family the majority of the shares and voting rights of the Swiss pharmaceutical and biotechnology company Serono S.A., Coinsins, Switzerland, and renamed it...

  • Page 95
    ...recognized at fair values in the balance sheet and are as follows: Pre-acquisition book-values ¤ million Adjustment Fair value Cash and cash equivalents, marketable securities, financial assets Inventories Other current assets Goodwill Other intangible assets Property, plant and equipment Other...

  • Page 96
    CONSOLIDATED FINANCIAL STATEMENTS Notes 91 Disposals/Discontinued operations On May 13, 2007, Merck and Mylan Inc., Canonsburg, PA (USA), entered into an agreement concerning the sale of the Generics business. The business was transferred to the acquirer with the closing on October 2, 2007. The ...

  • Page 97
    ...492.1 141.0 633.1 Assets and liabilities held for sale within the scope of the purchase option granted to Mylan Inc. are as follows: ¤ million Dec. 31, 2007 Inventories Receivables and other assets Assets held for sale Liabilities Provisions Liabilities held for sale 11.3 15.6 26.9 7.4 0.6 8.0

  • Page 98
    ... auditors. Acquisitions are accounted for using the purchase method in accordance with IFRS 3. Subsidiaries consolidated for the first time in the reporting period are measured at the carrying values at the time of acquisition on the basis of corresponding annual and interim financial statements...

  • Page 99
    ... 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 by...

  • Page 100
    ... of clinical trials. The costs of research and development are expensed in full in the period in which they are incurred. Development expenses in the Pharmaceuticals business sector cannot be capitalized since the high level of risk up to the time that pharmaceutical products are marketed means that...

  • Page 101
    ... at fair value on the date of acquisition. If such assets have not yet reached market maturity, they are disclosed as intangible assets with indefinite useful lives and are not amortized. Assets with a finite useful life are depreciated using the straight-line method. The useful lives of acquired...

  • Page 102
    ... IAS 17 and depreciated over its useful life. The corresponding payment obligations from future lease payments are recorded as liabilities. Marketable securities, investments and other financial assets Marketable securities and financial assets are recorded in the balance sheet in accordance with...

  • Page 103
    ... other post-employment benefits, such as accrued future health care costs for pensioners (U.S.A.). The obligations of our companies 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...

  • Page 104
    ... statement [1] Sales Merck Group sales totaled â,¬ 6,775.1 million in 2007. This corresponds to an increase of 52.6% over the previous year. Adjusted for a negative currency impact and the effect of the acquisition of Serono, organic growth amounted to 10.7%. Sales are presented by business sector...

  • Page 105
    ... 2007 2006 Exchange rate differences from operating activities Losses on disposals of assets Impairment losses Write-downs on receivables Project costs Bonuses, fees and contributions Special environmental protection costs Restructuring and Serono integration costs Litigation Other operating...

  • Page 106
    ...of the Electronic Chemicals provision Restructuring Gain on sale of the Schering shares Litigation Exceptional items -734.0 -38.5 -11.5 6.4 2.0 - - -775.6 - -16.5 - - -56.4 377.9 -72.4 232.6 Within the scope of the Serono purchase price allocation, inventories were remeasured at fair value. These...

  • Page 107
    ... rate derivatives Income from financial interests -59.5 8.5 - 2.5 -311.3 -55.1 -8.9 0.2 11.6 -49.0 The increase in net interest expense is due to outside financing of the Serono acquisition. [12] Income tax ¤ million 2007 2006 Taxes in the period under review on operating activities Taxes in...

  • Page 108
    ... from the remeasurement of inventories within the scope of the purchase price allocation with the acquisition of the Serono companies in January 2007. The reconciliation between deferred tax assets and liabilities shown in the balance sheet and deferred taxes in the income statement is presented...

  • Page 109
    ... balance sheet items: Dec. 31, 2007 ¤ million Assets Liabilities Dec. 31, 2006 Assets Liabilities 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...

  • Page 110
    ... consolidated". [14] Minority interest Minority interest in net profit is primarily composed of the minority interests in Merck Marker Ltd., Pakistan, Merck Ltd., Thailand, Merck S.A., France, Merck Serono SpA, Italy, as well as the listed companies Merck Ltd., India, and the Merck Indonesia Group.

  • Page 111
    ...interest by the weighted 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...

  • Page 112
    CONSOLIDATED FINANCIAL STATEMENTS Notes | Notes to the income statement | Notes to the balance sheet 107 Notes to the balance sheet [16] Cash and cash equivalents The item comprises: Dec. 31, 2007 Dec. 31, 2006 ¤ million Cheques, cash and bank balances Short-term cash investments 292.6 134.0 ...

  • Page 113
    ... The fair value of inventories that were written down amounts to â,¬ 340.0 million (2006: â,¬ 274.9 million). As of the balance sheet date, no inventories were used to secure liabilities. There were no significant contracts to be accounted for in accordance with IAS 11 (Construction Contracts) as of...

  • Page 114
    CONSOLIDATED FINANCIAL STATEMENTS Notes | Notes to the balance sheet 109 [20] Other assets This item comprises: Other current assets Dec. 31, 2007 Dec. 31, 2006 ¤ million Other receivables from associates Other receivables from other affiliates Other receivables from third parties Receivables ...

  • Page 115
    ... to tax audits as well as withholding tax credits. [22] Assets/liabilities held for sale The balance sheet items allocable to the Generics business are presented collectively under "Assets/liabilities held for sale". A detailed breakdown of the components is provided under "Companies consolidated".

  • Page 116
    CONSOLIDATED FINANCIAL STATEMENTS Notes | Notes to the balance sheet 111 [23] Intangible assets Patents, licenses and similar rights, as well as brands, trademarks/Other â,¬ million Finite useful life Indefinite useful life Goodwill Software Advance payments Total Acquisition cost January 1, ...

  • Page 117
    ... useful lives are not amortized, these are subjected to an annual impairment test. Here, book values were compared with values in use. Consequently, impairment losses of â,¬ 90.1 million result in fiscal 2007. Due to changes in sales expectations for a product from the Merck Serono division...

  • Page 118
    ...rights and buildings, including buildings on third-party land Construction in progress and advance payments to vendors and contractors ¤ million Plant and machinery Other facilities, operating and office equipment Total Acquisition cost January 1, 2006 Currency translation Changes in companies...

  • Page 119
    ... restructuring of diabetes research in France. Likewise in the Merck Serono division, impairment losses of â,¬ 3.1 million were recognized on the originally planned expansion of the production site in Corsier-sur-Vevey, Switzerland. With the decision to build a new large-scale technical facility for...

  • Page 120
    ...and equity method financial assets Investments in available for sale companies Securities available for sale financial investments financial investments held to maturity Loans and other non-current financial assets Equity method financial assets ¤ million other affiliates Total Acquisition cost...

  • Page 121
    ... in equity as of the balance sheet date: Available for sale investments Available for sale securities Total Dec. 31, 2007 Available for sale investments Available for sale securities Total Dec. 31, 2006 ¤ million Fair values/ Book values Amortized acquisition cost Unrealized gains/losses 74...

  • Page 122
    ... Major companies of the Merck Group by region Employees Germany/Europe Merck KGaA, Darmstadt, Germany Ares Trading S.A., Aubonne, Switzerland Merck Serono S.p.A., Rome, Italy Merck Lipha Santé S.A.S., Lyon, France Merck Santé S.A.S., Lyon, France Serono Benelux B.V., Den Haag, Netherlands Merck...

  • Page 123
    ... comprises: Current financial liabilities Dec. 31, 2007 Dec. 31, 2006 ¤ million Bonds Commercial Paper Bank loans and overdrafts Loans from third parties Liabilities to related parties Other financial liabilities Financial liabilities to other affiliates Financial leasing liabilities Liabilities...

  • Page 124
    ... requirements, Merck KGaA issued a commercial paper program with a volume of â,¬ 500 million, which had not been utilized as of the reporting date. Merck companies in Taiwan issued commercial paper for an equivalent of â,¬ 7.0 million as of the balance sheet date. Liabilities from financial leasing...

  • Page 125
    ... due to associates Liabilities due to other affiliates Liabilities due to third parties - 0.3 646.6 646.9 - 0.4 607.6 608.0 Trade accounts payable include accrued amounts of â,¬ 355.5 million (2006: â,¬ 222.6 million) for outstanding invoices and accrued reductions in sales revenues. [28] Other...

  • Page 126
    CONSOLIDATED FINANCIAL STATEMENTS Notes | Notes to the balance sheet 121 Other non-current liabilities Dec. 31, 2007 Dec. 31, 2006 ¤ million Other liabilities to associates Other liabilities to other affiliates Other liabilities to third parties Advance payments received from customers Payroll ...

  • Page 127
    ... â,¬ 131.8 million). [30] Provisions Provisions developed as follows: ¤ million Restructuring Personnel Litigation Other Total January 1, 2007 Exchange differences Utilizations Additions Release Changes in companies consolidated/Other December 31, 2007 thereof current thereof non-current 46...

  • Page 128
    ... post-employment benefits The calculation of obligations as well as the relevant plan assets is based on the following actuarial parameters: in % 2007 2006 Discount rate Future salary increases Future pension increases Staff turnover Expected return on plan assets Future increases in health care...

  • Page 129
    ... Plan assets for funded benefit obligations primarily comprise equities, fixedincome securities and real estate. They do not include financial instruments issued by Merck Group companies or real estate used by Group companies. The balance sheet item "Provisions for pensions and other post-employment...

  • Page 130
    ... 2007 2006 Fair value of the plan assets on January 1 Currency translation differences Expected return on plan assets Other effects recognized in income Actuarial losses/gains Employer contributions Employee contributions Pension payments in the reporting period Transfers/Changes in companies...

  • Page 131
    ...of the plan assets can be allocated to the individual asset categories as follows. Weighted average values are used here: Dec. 31, 2007 Dec. 31, 2006 in % Equity instruments Debt instruments Real estate Other assets 44.2 39.7 5.8 10.3 53.3 37.4 2.1 7.2 On average, the expected rate of return on...

  • Page 132
    CONSOLIDATED FINANCIAL STATEMENTS Notes | Notes to the balance sheet 127 Over the past five years, the funded status, composed of the present value of the defined benefit obligations and the fair value of the plan assets, has changed as follows: ¤ million as of Dec. 31 2007 2006 2005 2004 ...

  • Page 133
    ...equity A strong equity position is important for Merck to ensure the continued existence of the company. Based on our financial strategy, the Executive Board regularly reviews various key figures that reflect the capitalization of the company. Gearing (ratio of net debt and pension provisions to net...

  • Page 134
    ... 2.00 per share will be proposed. This corresponds to a total dividend payment of â,¬ 206.8 million to the limited liability shareholders. The following table shows the development of changes taken directly to equity as a result of recognizing financial instruments at fair value in accordance with...

  • Page 135
    ... weighted average price of Merck KGaA's shares in XETRA trading at the time of exercise of the stock options was â,¬ 93.85 in 2007. Moreover, options that have not been exercised or converted into cash are neither recorded in the balance sheet nor recognized in income in these financial statements...

  • Page 136
    ... reporting of the Merck Group. The financial result and taxes on income are allocated in full in the Corporate and Other segment. The operating segments are described in detail in the chapter about the divisions in this Annual Report. With the sale of our Electronic Chemicals business in April 2005...

  • Page 137
    ... of and investments in other financial assets. The majority of this amount was attributable to the acquisition of Serono. Together with the acquisition of the holding company Bertarelli Biotech S.A., a total of â,¬ 9,267.2 million was paid in 2007. The acquired liquid assets amount to â,¬ 1,987...

  • Page 138
    ... dividend payments and profit transfers totaled â,¬ -2,085.9 million (2006: â,¬ -1,352.5 million). [36] Cash and cash equivalents The composition of cash and cash equivalents is presented under "Notes to the Balance Sheet". [37] Free cash flow Free cash flow is an indicator that we use internally...

  • Page 139
    ...the hedging of our business operations and related financing transactions. The following derivative financial positions were held as of the balance sheet date: Nominal volume ¤ million Dec. 31, 2007 Dec. 31, 2006 Fair value Dec. 31, 2007 Dec. 31, 2006 Forward exchange contracts Interest rate swaps...

  • Page 140
    ... in the operating result, or in the financial result if liabilities have been hedged. Hedge accounting in accordance with IAS 39 was used for some hedging transactions: Nominal volume ¤ million Dec. 31, 2007 Dec. 31, 2006 Fair value Dec. 31, 2007 Dec. 31, 2006 Forward exchange contracts Interest...

  • Page 141
    ... JPY TWD USD Foreign exchange risk from balance sheet items Foreign exchange risk from contingent business and anticipated transactions Transaction-related foreign exchange position Position hedged by derivatives Open-end foreign exchange risk position Change in foreign exchange position due to...

  • Page 142
    ...carried in the balance sheet and derivative financial instruments with a negative market value: Book value Dec. 31, 2007 Cash flows 2008 Interest Repayment Cash flows 2009-2013 Interest Repayment Cash flows 2014-2020 Interest Repayment ¤ million Debt securities and Commercial Paper Bank loans and...

  • Page 143
    ... values of financial instruments by category are as follows: Balance sheet measurement according to IAS 39 Book value Dec. 31, 2007 Fair value recognized in equity Fair value included in profit/loss ¤ million Amortized cost Acquisition cost Assets Cash and cash equivalents Trade receivables...

  • Page 144
    ... 139 Balance sheet measurement according to IAS 39 Carrying value according to IAS 17 Fair value Dec. 31, 2007 Book value Dec. 31, 2006 Fair value recognized in equity Fair value included in profit/loss Carrying value according to IAS 17 Fair value Dec. 31, 2006 Amortized cost Acquisition cost...

  • Page 145
    ... for sale Held for trading Liabilities of the category Carried at amortized cost Held for trading 43.2 2.0 4.0 - -37.6 - -2.0 - -0.2 - - - 15.4 - -0.2 - - - - - 378.0 - - - In 2007, exchange rate gains of â,¬ 3.8 million resulting from receivables and payables in operating business were...

  • Page 146
    ...the companies of the former Serono Group. [42] Other financial obligations Other financial obligations comprise the following: Dec. 31, 2007 thereof subsidiaries Dec. 31, 2006 thereof subsidiaries ¤ million Obligations to acquire intangible assets Orders for capital expenditure on property, plant...

  • Page 147
    ... salaries Compulsory social security contributions and special financial assistance Pension expenses (in both years excluding discontinued operations (Generics)) 1,586.8 225.1 121.5 1,933.4 1,144.2 185.6 82.7 1,412.5 As of December 31, 2007, the companies of the Merck Group had 30,968 employees...

  • Page 148
    ... of Merck KGaA, associates and joint ventures of the Merck Group as well as pension funds that are classified as funded defined benefit plans in accordance with IAS 19, are also related parties within the meaning of IAS 24. Members of the Executive Board and the Supervisory Board of Merck KGaA, the...

  • Page 149
    ...for example the provision of services or the extension of loans, between companies of the Merck Group and members of the Executive Board and the Supervisory Board of Merck KGaA, the Board of Management and the Board of Partners of E. Merck OHG or close members of their families did not take place in...

  • Page 150
    ... assets, liabilities, financial position and profit or loss of the Group, and the Group 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 principal opportunities and risks associated with the...

  • Page 151
    ... Kommanditgesellschaft auf Aktien, Darmstadt, comprising the balance sheet, the income statement, statement of recognized income and expense, the cash flow statement and the notes to the consolidated financial statements together with the group management report, for the Merck Group for the business...

  • Page 152
    ... of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group's position and suitably presents the opportunities and risks of future development." Mannheim...

  • Page 153
    ... the Community Merck - Facts & Figures A Strong Site 2007 Report (also available in French and Spanish) A Global Player Rooted in Darmstadt You can order these publications from Corporate Communications, Merck KGaA, 64271 Darmstadt, Germany, or via the following e-mail address: [email protected].

  • Page 154
    ... on February 18, 2008 by Merck KGaA, Corporate Communications, Frankfurter Strasse 250, 64293 Darmstadt, Germany Fax: +49 (0) 6151-72 5577, e-mail: [email protected], Web site: www.merck.de Concept, design, and typesetting: XEO GmbH, Düsseldorf, Germany Photographs: Pages 6 and 7: Cathrin Moritz...

  • Page 155
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