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 1
`
`

`
`CONTENTS
`
`Merck
`
`Annual Report 2009
`
`More information inside the cover:
`Business development 2000 – 2009
`
`Annual Report 2009
`
`www.merck.de
`
`350210
`W 840 539
`
`Publication contributors
`Published on February 23, 2010 by Merck KGaA,
`Corporate Communications
`Frankfurter Strasse 250, 64293 Darmstadt, Germany
`Tel.: +49 (0) 6151-72 0, fax: +49 (0) 6151-72 5577
`E-mail: corpcom@merck.de
`Website: www.merck.de
`Concept, design and typesetting: XEO GmbH, Düsseldorf, Germany
`Photographs: Pages 6, 10 and 11: Catrin Moritz, Essen;
`Pages 1, 2, 4, 35, 51, 57, and 63: Reinhard Koslowski, Düsseldorf
`Printing: Franz Kuthal GmbH & Co. KG, Mainaschaff, Germany
`Paper: FSC-certified “heaven 42” by Scheufelen
`
`Page 2
`
`

`
`Contents
`
`Contents
`
`COMPANY
` 2 The history of Merck
` 3 Becoming a global, publicly listed company
` 4 Merck today
` 4 The future
`
`TO OUR SHAREHOLDERS
` 6 Letter from Karl-Ludwig Kley
` 10 Executive Board
`
`MANAGEMENT REPORT
` 13 Overall economic situation
` 15 Financial position and results of operations
` 26 Responsibility
` 29 Merck shares
` 34 Pharmaceuticals | Merck Serono
` 50 Pharmaceuticals | Consumer Health Care
` 56 Chemicals | Liquid Crystals
` 62 Chemicals | Performance & Life Science Chemicals
` 68 Corporate and Other
` 70 Risk report
` 75 Report on expected developments
` 80 Subsequent events
`
`CORPORATE GOVERNANCE
` 82 Statement on corporate governance
` 93 Report of the Supervisory Board
`
`MERCK AT A GLANCE
`
`Key figures for 2009
`
`€ million
`Total revenues
`Gross margin
`Research and development
`Operating result
`Exceptional items
`Earnings before interest and tax (EBIT)
`EBIT before depreciation and amorti-
`zation (EBITDA)
`Return on sales in % (ROS:
`operating result/total revenues)
`Free cash flow
`Underlying free cash flow
`Underlying free cash flow
`on revenues (FCR) in %
`
`Pharma-
`ceuticals Chemicals
`5,812
`1,935
`4,805
`913
`1,203
`142
`403
`324
`–40
`12
`363
`336
`
`Corporate
`and Other
`0
`0
`–
`–78
`–
`–78
`
`1,221
`
`6.9
`913
`916
`
`15.8
`
`479
`
`16.8
`410
`432
`
`22.3
`
`–75
`
`–
`–511
`–496
`
`–
`
`Total
`7,747
`5,718
`1,345
`649
`–28
`621
`
`1,625
`
`8.4
`812
`852
`
`11.0
`
`Change
`in %
`2.1
`0.6
`8.9
`–43
`–
`–15
`
`–17
`
`85
`42
`
`BUSINESS DEVELOPMENT 2000 – 2009
`This overview may include historically adjusted values in order to ensure comparability with 2009.
`
`€ million
`Total revenues 2
`Pharmaceuticals
` Merck Serono
` Generics 3
` Consumer Health Care
` Imaging 3
`Chemicals
` Liquid Crystals
` Performance & Life Science Chemicals
` Electronic Chemicals 3
`Laboratory Distribution 3
`Intragroup sales, Laboratory
`Corporate and Other
`Generics 3
`
`Operating result
` Pharmaceuticals
` Chemicals
` Laboratory Distribution 3
` Corporate and Other
` Generics 3
`
`Earnings before interest and tax (EBIT)
`EBIT before depreciation and amortization (EBITDA)
`Profit before tax
`Profit after tax
`
`2000
`6,910
`3,047
`1,941
`790
`299
`17
`1,679
`313
`1,174
`192
`2,374
`–190
`–
`–
`
`746
`455
`247
`44
`0
`–
`
`747
`1,184
`524
`262
`
`2001
`7,721
`3,484
`2,228
`936
`320
`–
`1,729
`297
`1,216
`216
`2,754
`–246
`–
`–
`
`877
`581
`204
`92
`0
`–
`
`1,286
`1,694
`1,078
`655
`
`2002
`7,521
`3,265
`1,850
`1,096
`319
`–
`1,791
`383
`1,216
`192
`2,711
`–246
`–
`–
`
`616
`272
`260
`84
`0
`–
`
`559
`985
`412
`215
`
`2003
`7,364
`3,458
`1,546
`1,585
`327
`–
`1,707
`443
`1,083
`181
`2,427
`–228
`–
`–
`
`736
`389
`316
`79
`–48
`–
`
`538
`1,008
`423
`218
`
`2004
`6,017
`3,601
`1,619
`1,625
`357
`–
`1,696
`589
`1,107
`–
`582
`–62
`200
`–
`
`776
`391
`420
`21
`–56
`–
`
`1,044
`1,419
`961
`672
`
`2005
`5,887
`3,905
`1,817
`1,712
`376
`–
`1,906
`741
`1,165
`–
`–
`–
`76
`–
`
`883
`454
`492
`–
`–63
`–
`
`956
`1,245
`893
`673
`
`20061
`4,485
`2,338
`1,938
`–
`400
`–
`2,113
`895
`1,218
`–
`–
`–
`34
`1,825
`
`799
`217
`641
`–
`–60
`307
`
`1,031
`1,334
`982
`1,0014
`
`20071
`7,081
`4,900
`4,480
`–
`420
`–
`2,152
`916
`1,236
`–
`–
`–
`29
`1,398
`
`976
`417
`631
`–
`–72
`189
`
`2008
`7,590
`5,456
`5,014
`–
`442
`–
`2,127
`878
`1,249
`–
`–
`–
`7
`–
`
`1,131
`655
`558
`–
`–81
`–
`
`731
`1,947
`575
`379
`
`2009
`7,747
`5,812
`5,345
`–
`467
`–
`1,935
`733
`1,202
`–
`–
`–
`–
`–
`
`649
`403
`324
`–
`–78
`–
`
`621
`1,625
`486
`377
`
`Change vs. 2008
`in %
`2.1
`6.5
`6.6
`–
`5.7
`–
`–9.0
`–17
`–3.8
`–
`–
`–
`–
`–
`
`–43
`–39
`–42
`–
`–3.5
`–
`
`–15
`–17
`–15
`–0.6
`
`CONSOLIDATED FINANCIAL
`STATEMENTS
` 96 Income Statement
` 97 Balance Sheet
` 98 Segment Reporting
`100 Cash Flow Statement
`101 Free Cash Flow
`101 Statement of Comprehensive Income
`101 Statement of Changes in Net Equity
`including Minority Interest
`103 Notes
`
`FURTHER INFORMATION
`161 Responsibility Statement
`162 Auditor’s Report
`164 Glossary
`168 Financial calendar for 2010
`168 More information
`
`
`
` Publication contributors
`
`Total revenues by business sector*
`€ million
`8,000
`
`Operating result by business sector
`€ million
`1,200
`
`6,000
`
`4,000
`
`2,000
`
` 800
`
` 400
`
` 0
`
`2005 2006 2007 2008 2009
`* excluding Corporate and Other
` Chemicals
` Pharmaceuticals
`
`2005 2006 2007 2008 2009
` Chemicals
` Pharmaceuticals
` Corporate and Other
`
`Free cash flow
`Capital expenditure on property, plant and equipment
`Research and development
`
`Total assets
`Net equity
`Employees (number as of December 31)
`
`Return on sales in % (ROS: operating result/total revenues)
`
`324
`427
`546
`
`8,235
`1,947
`33,520
`
`10.8
`
`664
`470
`577
`
`8,255
`2,336
`34,294
`
`11.4
`
`Earnings per share in €
`Dividend per share in €
`One-time bonus per share in €
`1 Continuing Operations (without Generics)
`2 In 2009, commission income was reclassified from marketing and selling expenses to total revenues. All figures from the previous year were also adjusted.
`3 Business was divested
`4 Including Generics
`
`1.44
`0.90
`–
`
`3.66
`0.95
`–
`
`441
`377
`608
`
`7,511
`2,054
`34,504
`
`8.2
`
`1.18
`1.00
`–
`
`442
`281
`605
`
`6,982
`2,363
`34,206
`
`10.0
`
`1.15
`0.80
`–
`
`1,889
`234
`599
`
`5,754
`2,800
`28,877
`
`12.9
`
`3.47
`0.80
`0.20
`
`657
`268
`713
`
`7,281
`3,329
`29,133
`
`15.0
`
`3.40
`0.85
`–
`
`–1,0734
`2534
`615
`
`8,102
`3,807
`25,531
`
`17.8
`
`5.074
`0.90
`0.15
`
`200
`1,858
`–111
`3,5204
`
`–1,4734
`2834
`1,028
`
`14,922
`8,688
`30,968
`
`13.8
`
`16.214
`1.20
`2.00
`
`438
`395
`1,234
`
`15,645
`9,563
`32,800
`
`14.9
`
`1.69
`1.50
`–
`
`812
`467
`1,345
`
`16,713
`9,514
`33,062
`
`8.4
`
`1.68
`1.00
`–
`
`85
`18
`8.9
`
`6.8
`–0.5
`0.8
`
`–0.6
`–33
`
`Page 3
`
`

`
`Pharmaceuticals
`
`Chemicals
`
`Merck
`serono
`
`consumer
`health care
`
`liquid
` crystals
`
`performance &
`life science
`chemicals
`
`Page 4
`
`

`
`2
`
`Merck Annual Report 2009
`
`ABout MeRck
`At Merck, the pharmaceuticals and chemicals businesses are under one roof. we are convinced
`that in both sectors, the market will reward successful research and technological advances
`with attractive margins. we focus on specialty businesses within both chemicals and pharma-
`ceuticals. we are not interested in engaging in commodity markets or businesses where
`competition is dictated by price alone.
`
`THE HISTORY OF MERCK
`
`It all started with a pharmacy in 1668. The Angel Pharmacy, which is still owned by members
`of the Merck family today, is where Merck originated. Like his contemporaries, the pharmacist
`Friedrich Jacob Merck prepared all medicinal substances himself. At that time, the “art of
`pharmacy” was still a manual craft.
`In 1816 – several generations of pharmacists later – Emanuel Merck took over his father’s
`pharmacy and initiated the move from a manual craft to industrial production in 1827. In his
`laboratory, he succeeded in extracting alkaloids, a class of highly effective plant constituents
`whose medicinal effect attracted interest from the scientific community. By 1860, the
`company already offered more than 800 organic and inorganic substances for sale, including
`many still used in laboratories today.
`The roots of the Liquid Crystals business – one of the outstanding Merck success stories –
`date back to 1904. For decades, liquid crystals remained a laboratory oddity, and their sale
`was handled by the Laboratory business.
`Serono, which was acquired by Merck in 2007, also started out by extracting active substances.
`In 1906, Cesare Serono founded the “Istituto Farmacologico Serono” in Rome and developed
`a new method of extracting lecithin from egg yolk. In 1949, the company discovered a way
`to successfully isolate pure gonadotropin from urine. Gonadotropin plays an important role
`in reproduction. The production of recombinant gonadotropin transformed Serono into a
`biotechnology company.
`
`in the early 19th century, the scientific community took particular
`interest in the extraction of alkaloids, highly effective plant constituents
`with a medicinal action. Quinine, depicted here, was one such alkaloid.
`
`Page 5
`
`

`
`3
`
`BECOMING A GLOBAL, PUBLICLY LISTED COMPANY
`
`Initial business relationships with European neighbors were established in the 1820s. Since
`1900, Merck has had business relationships on all continents.
`In the United States, Georg (later on “George“) Merck, a grandson of Emanuel Merck, founded
`a trading company called Merck & Co. in 1891. As a result of World War I, Merck in Darmstadt
`lost its entire stake in this company under the “Trading with the Enemy Act” of 1917. George
`Merck succeeded in reacquiring his interest and became president of the public company
`Merck & Co. Today, the two companies are no longer linked to one another. The U.S. company
`Merck & Co. owns the rights to the name within North America, while Merck in Darmstadt
`holds the rights in the rest of the world. In the United States and Canada, the company oper-
`ates under the name EMD, the abbreviation for Emanuel Merck, Darmstadt.
`Acquisitions and divestments have always played an important role at Merck. A decisive step
`in Merck’s expansion was the acquisition of a 50% interest in the Bracco Group of Italy in
`1972. Aside from commercializing contrast agents and its own pharmaceutical specialties,
`Bracco served as Merck’s representative in Italy for the entire Merck product range, helping to
`significantly boost Merck’s earning power.
`In 1991, Merck acquired Société Lyonnaise Industrielle Pharmaceutique (Lipha), which employed
`around 2,700 people and generated sales of DM 723 million. In the mid-1990s, Merck
`expanded its consumer health care business by acquiring Seven Seas in the United Kingdom
`and Monot in France. At the same time, with the acquisition of Amerpharm of the United
`Kingdom, Merck achieved a critical mass in the generic drugs business. The takeover of a
`large number of laboratory distribution businesses was rounded off by the purchase of VWR
`Scientific Products, a U.S. laboratory distributor, in 1999.
`In order to secure the financing of these acquisitions, Merck went public in 1995. A 26%
`interest in Merck KGaA was sold to shareholders. Thereafter, the Merck family held the
`remaining 74% via the general partner E. Merck. Following a capital increase in 2007, ownership
`shifted slightly to its current 30:70 ratio.
`The first half of the decade just ended saw a significant number of disposals and divestments.
`In 2000, Merck divested its interests in Bracco and vitamin chemicals. In 2004, the company
`exited from the laboratory distribution and electronic chemicals businesses. In 2006, Merck
`was debt-free. In 2007, Merck succeeded with the transformational acquisition of Serono.
`Involving a purchase price of € 10.3 billion, this was by far the largest acquisition ever made
`by Merck. As the generics business was sold in the same year for € 4.9 billion, the company
`lowered its debt to less than € 1 billion by year-end.
`
`Page 6
`
`

`
`4 Merck Annual Report 2009
`
`MERCK TODAY
`
`Merck runs its operating business in four divisions: Merck Serono, Consumer Health Care,
`Liquid Crystals, and Performance & Life Science Chemicals.
`The Merck Serono division markets prescription medicines. It discovers, develops and manu-
`factures both chemical and biological molecules. Merck holds strong positions in neurode-
`generative diseases and oncology. In addition, the division markets fertility treatments, a field
`in which we are the market leader, growth hormones, as well as a broad portfolio of classic
`products, especially for cardiovascular diseases and metabolic disorders.
`The Consumer Health Care division offers over-the-counter products for preventive health
`care and the self-treatment of minor ailments.
`Merck is the global leader in the liquid crystals market. Besides the display materials business,
`the Liquid Crystals division focuses on the development of molecules for printable organic
`electronics, on the use of alternative energy, as well as on lighting materials for energy-saving
`LEDs (light-emitting diodes) and OLEDs (organic LEDs).
`Performance & Life Science Chemicals, the second division within the Chemicals business
` sector, mainly supplies specialty chemicals to regulated markets, for example the pharma-
`ceutical, cosmetics and food industries. Analytical and scientific laboratories use our reagents
`and test kits. Moreover, the division is the market leader for pearl luster effect pigments –
`a highly specialized niche within the pigment market.
`
`THE FUTURE
`
`Merck will continue to operate in both Pharmaceuticals and Chemicals and to focus on specialty
`products. We will also continue to invest significantly in research and development. We want to
`grow both organically and through acquisitions. We will adhere to our conservative finance policy.
`
`Flexible solar cells are an energy source of the future
`made possible by materials from Merck.
`
`Page 7
`
`

`
`5
`
`to ouR shAReholdeRs
`
`Letter from Karl-Ludwig Kley
` 6
`10 Executive Board
`
`Page 8
`
`

`
`6
`
`Merck Annual Report 2009
`
`“our balanced business model proves its
`
`worth, especially in times of crisis.“
`Dr. Karl-Ludwig Kley
`
`
`
`Page 9
`
`

`
`When we look back 12 months ago and to the uncertainties at that time, we can
`now be glad that the impact of the financial and economic crisis on Merck was
`milder than originally feared. Of course, fiscal 2009 was also a year of highs and
`lows for us. Overall, however, we are presenting a satisfactory set of financial
`statements despite the environment in which we operated.
`Total revenues increased by 2.1%. Return on sales was 8.4% and underlying free
`cash flow rose to € 852 million. As a result, underlying free cash flow on revenues
`(FCR), one of our key financial performance indicators besides return on sales, rose
`to 11.0%. Our profit after tax remained virtually constant. This ensures a high degree
`of liquidity and – against the background of low debt – solid balance sheet ratios.
`Were there any special formulas for mastering the crisis?
`None that were new for us. First, due to their strong focus on specialty businesses,
`our Pharmaceuticals and Chemicals business sectors are only moderately affected
`by fluctuations in economic activity. Second, our well-balanced business model
`proves its worth, especially in times of crisis. And lastly, our rapid response to the
`downturn helped. We adjusted our production levels quickly, introduced reduced
`working hours where necessary, limited hiring to a minimum, and applied the
`brake on spending. Our employees not only demonstrated their commitment and
`flexibility, they also behaved in a very cost-conscious manner. For this they
`deserve my special thanks.
`As expected, the Pharmaceuticals business proved to be resilient to economic
`conditions, generating growth of 6.5%.
`While 2009 was a very successful year for the Merck Serono division, we once
`again realized that the discovery and development of new medicines always involve
`risk. At the beginning of the year, we had to withdraw Raptiva ® from the market.
`Then we were confronted with a very surprising negative opinion from the
` European Medicines Agency regarding the use of Erbitux ® in the treatment of
`lung cancer. Lastly, we received a refuse to file letter in response to our regulatory
`submission of cladribine tablets in the United States. Yet these setbacks are counter-
`balanced by just as many successes. We further consolidated our position as a
`leading manufacturer of biopharmaceuticals.
`
`Page 10
`
`

`
`8
`
`Two products are prominent examples of our range of biotech medicines, which
`accounted for 60% of sales by the Merck Serono division:
`– Erbitux ® is now a standard first-line therapy for colorectal cancer; it achieved
`the breakthrough in head and neck cancer, and successfully entered the Japan ese
`market. All three factors contributed to a 23% increase in sales.
`– The success story of Rebif ® for the treatment of multiple sclerosis continued,
`with sales totaling € 1,537 million. The launch of Rebismart ®, the first electronic
`injection device, contributed considerably to growth of 15%.
`We launched Kuvan ® in the EU, which could help around 50,000 patients who
`suffer from hyperphenylalaninemia – a very rare and previously untreatable
`metabolic disorder.
`Our Consumer Health Care business posted sales growth of 5.7%, which significantly
`exceeded market growth. The focus on four health themes and key regional markets
`is paying off.
`Our Chemicals business sector fared better in the crisis than some competitors
`and delivered a brilliant finish at year-end.
`Above all, the Liquid Crystals division caught up in the fourth quarter, generating
`a 23% increase in sales, with a return on sales that is still exceptional for a
`chemicals business. That was despite the substantial drop in demand and intense
`price competition. Our innovative PS-VA liquid crystal mixtures are increasingly
`becoming the preferred technology for high-quality displays, primarily in tele-
`visions. This enabled us to further secure our market and technology leadership.
`For the Performance & Life Science Chemicals division, 2009 was to some extent
`a highly problematic year. While developments in the Laboratory and Life Science
`Solutions businesses were for the most part stable, we sustained a 10% decline in
`sales in our Pigments business – despite a good fourth quarter. We quickly adapted
`our output at all sites to the order situation, temporarily shut down production
`units and introduced reduced working hours for the first time. Nevertheless, our
`faith in the Pigments business did not diminish, also demonstrated by our acqui-
`sition of Taizhu, a leading manufacturer of effect pigments in China.
`
`Page 11
`
`

`
`9
`
`What do we expect in the near future?
`The global economic crisis is not over yet. Therefore, we assume that 2010 will
`also be a difficult year. And unfortunately, at Merck we don’t live on an island
`of the blessed, around which the rushing waters of the crisis flow. It’s certain that
`we will focus on innovations, perhaps even to a greater extent than before. They
`are our elixir of life. It’s also clear that we want to balance the inherent risks of
`research through the diversity of our business areas. Both these intents are con-
`sistent with the corporate strategy entitled “Sustain – Change – Grow”, which we
`continue to actively pursue.
`Despite setbacks, our current pharmaceutical pipeline is the best in the history of
`Merck and one of our key growth drivers. With ten projects in the final phase of
`clinical development alone, we do not fear the future. Technological innovations
`are also tremendously important in the Chemicals business. Here we want to find
`answers to urgent issues such as the shortage of energy supplies and resource
`conservation. That’s why we spend far more than € 1 billion on research and
` development annually.
`Achieving growth also involves the regional expansion of our businesses. In 2009,
`this was primarily the case in Japan, where we grew significantly. The year 2009
`was also very successful in China, where we are establishing our Asian pharma-
`ceutical research and development center and plan to create 200 new positions.
`We see unexploited market potential for Merck in both the United States and India,
`and we are working on ways to tap this potential.
`We can only grow if everyone pulls together. On behalf of the Executive Board,
`I would therefore like to thank our employees, the Merck family and, last but not
`least, you – our shareholders – for your support. We appreciate your loyalty and
`will work further to justify your trust.
`
`Page 12
`
`

`
`10
`
`Merck Annual Report 2009
`
`eXecutiVe BoARd
`
`Elmar Schnee
`Head of the Pharmaceuticals
` business sector
`born in 1959, business graduate
`
`joined Merck in 2003,
`Member of the Executive Board
`since November 2005
`Responsibility for Group-wide
`functions:
`Pharmaceuticals business sector
`Regional responsibilities: Europe;
`United States (Pharmaceuticals);
`Canada; Latin and Central America;
`Africa; Middle East
`
`elmar schnee
`
`Page 13
`
`

`
`company
`
`to our shareholders
`
`Management Report
`
`corporate governance
`
`consolidated Financial statements
`
`Further information
`
`11
`
`Dr. Karl-Ludwig Kley
`Chairman of the Executive Board
`
`born in 1951, lawyer
`Member of the Supervisory Board
`and Board of Partners of Merck
`from March 2004 to June 2006,
`Member of the Executive Board
`since joining Merck in September
`2006
`Responsibility for Group-wide
`functions:
`Information Services; Human
`Resources (global); Legal and
` Compliance; Patents; Auditing
`and Risk Management; Strategic
` Planning; Inhouse Consulting;
`Corporate Communications;
` Environment, Health and Safety
`
`Dr. Michael Becker
`Chief Financial Officer
`born in 1948, lawyer
`joined Merck in 1998, Member of
`the Executive Board since January
`2000
`Responsibility for Group-wide
`functions:
`Accounting and Controlling, Finance;
`Taxes; Insurance; Mergers and
`Acquisitions; Investor Relations;
`Purchasing
`
`Dr. Bernd Reckmann
`Head of the Chemicals
`business sector
`Born in 1955, biochemist
`joined Merck in 1986, Member of
`the Executive Board since January
`2007
`Responsibility for Group-wide
`functions:
`Chemicals business sector
`Regional responsibilities:
`Germany (including HR);
`Site Management Darmstadt and
`Gernsheim; Asia; United States
`(Chemicals); Russia, Australia;
`New Zealand
`
`dr. karl-ludwig kley
`
`dr. Michael Becker
`
`dr. Bernd Reckmann
`
`Page 14
`
`

`
`12 Merck Annual Report 2009
`
`MAnAGeMent RepoRt
`
`13 Overall economic situation
`15 Financial position and results of operations
`26 Responsibility
`29 Merck shares
`34 Pharmaceuticals | Merck Serono
`50 Pharmaceuticals | Consumer Health Care
`56 Chemicals | Liquid Crystals
`62 Chemicals | Performance & Life Science Chemicals
`68 Corporate and Other
`70 Risk report
`75 Report on expected developments
`80 Subsequent events
`
`Page 15
`
`

`
`company
`
`to our shareholders
`
`Management Report
`corporate governance
`overall economic situation
`
`consolidated Financial statements
`
`Further information
`
`13
`
`oVeRAll econoMic situAtion
`Following a steep decline, global economic activity stabilized in the course of 2009.
`the pharmaceutical market still grew slightly yet the chemical industry sustained sharp
`losses. india and china remained growth markets.
`
`Global economy in crisis
`At the end of 2008 and the beginning of 2009, the global economy and global trade experi-
`enced the strongest collapses since World War II – perhaps even since the Great Depression.
`Globally, central banks lowered their interest rates and supplied banks with liquidity to a
`virtually unlimited extent in order to replace the interbank markets, which had dried up. In
`parallel, governments propped up the distressed banks by issuing guarantees and making
`capital injections, and they raised the level of guarantees for private bank account balances.
`In addition, governments around the world set up programs in order to support and boost
`their economies. Many countries increased their debt levels substantially for this purpose,
`which in the opinion of many economists represents a greater threat to the global economic
`system than the financial crisis.
`
`Global economy shrinks – Growth in India and China
`For 2009, experts assume a decline in average global economic output. Whereas growth
`resumed in many countries in the second quarter, and no later than the third, this did not
`compensate for the steep drop at the beginning of the year.
`In January 2010, the International Monetary Fund (IMF) reported that the global economy
`declined by 0.8% in 2009. Gross domestic product (GDP) decreased by 2.5% in the United
`States and by 3.9% in the euro zone. However, according to IMF estimates, India achieved an
`increase of 5.6% and China even grew by 8.7%.
`The Organization for Economic Cooperation and Development (OECD) assumes that GDP
`decreased by 3.5% for all of its 30 member countries. In terms of GDP, the U.S. economy
`contracted by 2.5%, the Japanese economy declined by 5.3% and the GDP of the EU OECD
`member countries decreased by 4%.
`
`Pharmaceutical market hardly affected by the crisis
`The market research firm IMS Health assumed that in 2009, the global pharmaceutical market
`achieved a volume of between US$ 775 billion and US$ 785 billion with growth ranging
`between 5.5% and 6.5%. This volume exceeded the expectations of April 2009 amounting to
`US$ 750 billion, but fell short of the optimistic forecasts made in October 2008 of more than
`US$ 820 billion. According to IMS calculations, the U.S. pharmaceutical market also grew
`more strongly than expected and achieved an increase of between 4.5% and 5.5%. In April
`2009, IMS had assumed this market would decline by 1% to 2%.
`In 2009, growth in countries in which medicines are reimbursed by government health care
`systems was less affected by the financial and economic crisis. This applied for instance to
`Germany, Japan and Spain. By contrast, in countries where patients largely finance their
`health care themselves, such as Russia, Mexico and South Korea, the pharmaceutical market
`grew at a slower pace.
`
`Page 16
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`

`
`14
`
`Merck Annual Report 2009
`
`In the consumer health care business with over-the-counter (OTC) pharmaceutical and health
`products, both China and Russia moved into the ranks of the top ten countries worldwide.
`In 2008, sales growth of the OTC market for the first time exceeded that of the prescription
`drugs market. Consequently, the consumer health care business could become attractive to
`big pharmaceutical companies again, especially since according to the market research firm
`Nicholas Hall, the consumer health care market grew by 3%.
`
`Chemical sector suffers owing to economic downturn
`According to calculations by the VCI (German Chemical Industry Association) global chemical
`output, including pharmaceutical substances, decreased by 3.1% in 2009. Japan and Germany
`were at the bottom of the ranking, sustaining declines of 9% and 10%, respectively. The EU
`recorded a decline of 4.9% and the United States a decline of 4.2%. India and China stood out
`positively with chemical output rising by 6.7% and 7.2%, respectively. The VCI reported that
`sales by the German chemical industry fell by 15%.
`The CEFIC (European Chemical Industry Council) noted a 12% drop in European chemical out-
`put in 2009 as compared with a decline of 4.5% in 2008. These figures exclude the production
`of pharmaceutical substances.
`According to CEFIC data, manufacturers of inorganic products suffered especially from the
`20% collapse in output, followed by polymer producers, who experienced a drop of just under
`20%. Manufacturers of consumer chemicals fared best, whose output declined by 6.5%, fol-
`lowed by that of specialty chemicals producers. The latter two are more or less the segments
`in which Merck is positioned with the Chemicals business sector.
`
`Page 17
`
`

`
`company
`
`to our shareholders
`
`Management Report
`corporate governance
`overall economic situation
`Financial position and results of operations
`
`consolidated Financial statements
`
`Further information
`
`15
`
`FinAnciAl position And Results oF opeRAtions
`thanks to its diversified portfolio of innovative pharmaceuticals and chemicals, Merck coped
`more successfully with the crisis than some other companies. total revenues increased 2.1%
`and profit after tax remained virtually constant.
`
`Stable business development
`Total revenues increased by 2.1% to € 7,747 million in 2009. While both Pharmaceuticals
`divisions grew continually, the Chemicals divisions recovered from the economic crisis in the
`course of the year. Detailed information on the revenue and profit figures of the divisions, as
`well as developments by region and product, can be found in the chapters on the individual
`divisions starting on page 34.
`Royalty and commission income declined by 4.8% to € 369 million. In 2009, we reclassified
`commission income from marketing and selling costs to total revenues (€ 24 million in 2009,
`€ 32 million in 2008), since these now represent regular business revenues for Merck. The
`previous year’s figures and key indicators have been adjusted accordingly.
`
`Total revenues by business sector*
`€ million
`8,000
`
`6,000
`
`4,000
`
`2,000
`
`2005
`
`2006
`
`2007
`
`2008
`
`2009
`
`* excluding corporate and other
` Chemicals
` Pharmaceuticals
`
`
`At € 5,718 million, gross margin rose only slightly, by 0.6%, over 2008 because the 6.5%
`increase in cost of sales exceeded the increase in sales. This was primarily the result of a
`high level of inventory write-downs and capacity underutilization in the Chemicals business
`sector. Marketing and selling expenses increased by 6.8% because the Merck Serono division
`launched new medicines and introduced existing products in new indications. The ratio of
`these expenses to total revenues increased slightly from 28% to 29%. Marketing and selling
`expenses also include royalty and commission expenses. These are incurred for sales of
`products which we either co-market with partners or for which we pay royalty fees in order
`to market. The sum of both items increased significantly over 2008 since sales of the relevant
`products developed well, consequently increasing marketing and selling expenses.
`
`Page 18
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`

`
`16
`
`Merck Annual Report 2009
`
`Royalty and commission income and expenses include the royalty and commission income
`reported in total revenues. They also include the expenses for marketing licenses, which are
`disclosed in marketing and selling expenses, as well as to a lesser extent expenses for production
`licenses, which are reported in cost of sales.
`
`Royalty and commission income and expenses by division in 2009
`Consumer
`Health
`Care
`–1
`2
`1
`
`Total
`–172
`345
`173
`
`Merck
` Serono
`–151
`328
`177
`
`€ million
`Royalty expenses
`Royalty income
`Total
`
`Performance
`& Life
` Science
`Chemicals
`–4
`8
`4
`
`Liquid
` Crystals
`–16
`7
`–9
`
`Corporate
`and Other
`0
`0
`0
`
`Commission expenses
`Commission income
`Total
`
`–257
`24
`–233
`
`–253
`23
`–230
`
`0
`0
`0
`
`0
`0
`0
`
`–4
`1
`–3
`
`−
`−
`−
`
`Royalty and commission income and expenses by division in 2008
`Consumer
`Health
`Care
`–2
`2
`0
`
`Total
`–199
`356
`157
`
`Merck
` Serono
`–180
`337
`157
`
`€ million
`Royalty expenses
`Royalty income
`Total
`
`Performance
`& Life
` Science
`Chemicals
`–4
`5
`1
`
`Liquid
` Crystals
`–13
`12
`–1
`
`Corporate
`and Other
`0
`0
`0
`
`Commission expenses
`Commission income
`Total
`
`–165
`32
`–133
`
`–157
`27
`–130
`
`0
`0
`0
`
`0
`1
`1
`
`–7
`4
`–3
`
`–1
`−
`–1
`
`Administration expenses decreased by 4.8% to € 425 million in 2009. The line item “other
`operating income and expenses” increased sharply from € -170 million to € -373 million.
`This mainly reflects additions of € 167 million to provisions for litigation relating primarily
`to the Merck Serono division. Furthermore, we recorded € 38 million in impairments of mainly
`intangible assets since research projects had to be discontinued. We also recorded write-downs
`of € 28 million for trade accounts receivable. Expenses amounting to € 68 million were
`recorded for currency risks in Venezuela. Of this amount, € 59 million was attributable to the
`Merck Serono division, € 7 million to Consumer HealthCare, and € 2 million to Performance &
`Life Science Chemicals. This is in contrast to the exchange-rate gains from currency hedging
`transactions for the Merck Serono and Liquid Crystals divisions.
`We increased our research and development (R & D) spending because, for the first time in its
`history, Merck is conducting studies on ten projects in the final phase of clinical testing prior
`to a potential market launch. At € 1,345 million, we spent 8.9% more on R & D than in 2008.
`Thus, the ratio of R & D expenses to total revenues was 17%.
`
`R & D spending increased sharply –
`especially owing to
`late-stage clinical trials.
`
`Page 19
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`

`
`company
`
`to our shareholders
`
`Management Report
`corporate governance
`Financial position and results of operations
`
`consolidated Financial statements
`
`Further information
`
`17
`
`Research and development by business sector
`€ million
`1,400
`
`1,050
`
` 700
`
` 350
`
`2005
`
`2006
`
`2007
`
`2008
`
`2009
`
` Chemicals
`
` Pharmaceuticals
`
`Amortization of intangible assets, which for the most part includes ongoing amortization
`from the Serono purchase price allocation, was also affected by one-time expenses in 2009.
`As a result of altered estimates of the future amount of royalty income for the products
`Enbrel ® (Amgen) and