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
`
`

`
`Annual Report 2006
`
`More potential
`
`2
`
`Page 2
`
`

`
`More information inside the cover:
`Business Development 2002 – 2006
`Business Sectors and Divisions
`
`Merck 2006 at a glance
`
`Key figures for 2006
`
`€ 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 %
`
`Pharma­
`ceuticals
`4,119
`2,607
`615
`524
`–35
`–1,290
`12.7
`15.9
`
`Chemicals
`2,106
`1,234
`137
`641
`–35
`521
`30.5
`33.0
`
`Corporate
`and Other
`34
`4
`0
`–60
`289
`–304
`–
`–
`
`Total
`6,259
`3,845
`752
`1,105
`219
`–1,073
`17.7
`21.0
`
`Sales by business sector
`€ million
`8000
`8,000
`
`Operating result by business sector
`€ million
`1,200
`
`1200
`
`6000
`6,000
`
`4000
`4,000
`
`2000
`2,000
`
`0
`
`900
`
`600
`
`300
`
`900
`
`600
`
`300
`
`0
`
`
`
` Corporate and
`Other
` Laboratory
` Distribution
` Chemicals
` Pharmaceuticals
`
`2002
`
`2003
`
`2004
`
`2005
`
`2006
`
`2002
`
`2003
`
`2004
`
`2005
`
`2006
`
`Major achievements of 2006
`
`Group sales rose by 8.5% to € 6,259 million while gross margin increased by 13%. The operating
`result climbed by 25% to exceed the € 1 billion mark for the first time. Profit after tax also surpassed
`this threshold. Return on sales (ROS) increased to 17.7%, return on capital employed (ROCE)
`to 21.0 %.
`
`Erbitux® was approved in April 2006 by the European Medicines Evaluation Agency (EMEA) for an
`additional indication in head and neck cancer in the 27 Member States of the European Union as
`well as Iceland and Norway.
`
`The acquisition of Serono S.A., which was announced in September, creates a strategically com-
`pelling combination, the scope of which will raise Merck’s competitiveness in the global pharma-
`ceutical market. The relevant antitrust authorities cleared the transaction in the fourth quarter of
`2006. Merck attained majority ownership in January 2007.
`
`The tremendous success of LCD televisions impressively shows the superiority of this technology.
`Thanks to Merck’s technology and market leadership, sales by the Liquid Crystals division grew by
`21% and the operating result soared 40%.
`
`Annual Report 2006
`
`More potential
`
`2
`
`Merck
`
`More potential
`
`Annual Report 2006
`
`www.merck.de
`
`Page 3
`
`

`
`070207
`W 840 497
`
`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: corpcom@merck.de, Web site: www.merck.de
`Editing: Judith Rahner, Tobias Engel
`English translation: Colette Roell, Diane Davies
`Concept, design and typesetting: XEO GmbH, Düsseldorf, Germany
`Photographs: Page 9: Matthias Kulka, page 13: Mauritius, pages 11 and 15: Getty Images,
`Management Report: Marco Moog, except page 29: ddp,
`and page 60: Marco Moog/Thomas Willemsen
`Printing: Frotscher Druck GmbH, Darmstadt, Germany,
`Thomas-Grafische Veredelung GmbH & Co. KG, Gelsenkirchen, Germany
`
`Business Development 2002 – 2006
`
`Pharmaceuticals business sector
`
`Chemicals business sector
`
`€ million
`Sales
` Sales excluding VWR**
`Pharmaceuticals
` Ethicals
` Generics
` Consumer Health Care
`Chemicals
` Liquid Crystals
` Performance & Life Science Chemicals
` Electronic Chemicals
`Laboratory Distribution**
`Laboratory Distribution intragroup sales
`Corporate and Other***
`
`Operating result
` Operating result excluding VWR**
`Pharmaceuticals
`Chemicals
`Laboratory Distribution**
`Corporate and Other***
`
`Earnings before interest and tax (EBIT)
`Profit before tax
`Profit after tax
`
`Free cash flow
`EBITDA
`Capital expenditure on property, plant and equipment
`Research and development
`
`Total assets
`Net equity
`
`2002
`7,400
`4,935
`3,153
`1,779
`1,064
`309
`1,782
`377
`1,212
`192
`2,711
`–246
` –
`
`616
`532
`272
`260
`84
` –
`
`559
`412
`215
`
`441
`985
`377
`608
`
`7,511
`2,054
`
`2003
`7,202
`5,003
`3,303
`1,467
`1,515
`321
`1,700
`438
`1,081
`180
`2,427
`–228
` –
`
`736
`656
`389
`316
`79
`–48
`
`538
`423
`218
`
`442
`1,008
`281
`605
`
`6,982
`2,363
`
`2004
`5,859
`5,339
`3,452
`1,504
`1,597
`352
`1,687
`583
`1,104
` –
`582
`–63
`200
`
`776
`755
`391
`420
`21
`–56
`
`1,044
`961
`672
`
`1,889
`1,419
`234
`599
`
`5,754
`2,800
`
`2005
`5,768*
`5,768*
`3,792*
`1,717*
`1,701*
`374*
`1,900
`739
`1,161
` –
` –
` –
`76
`
`883
`883
`454
`492
` –
`–63
`
`956
`893
`673
`
`657
`1,245
`268
`713
`
`7,281
`3,329
`
`2006
`6,259
`6,259
`4,119
`1,902
`1,819
`398
`2,106
`892
`1,213
` –
` –
` –
`34
`
`1,105
`1,105
`524
`641
` –
`–60
`
`1,325
`1,273
`1,001
`
`–1,073
`1,628
`253
`752
`
`8,102
`3,807
`
`Change in %
`8.5
`8.5
`8.6
`10.8
`6.9
`6.3
`10.8
`20.7
`4.5
`–
`–
`–
`–55.5
`
`25.1
`25.1
`15.4
`30.4
`–
`–4.5
`
`38.6
`42.5
`48.8
`
`–
`30.7
`–5.4
`5.4
`
`11.3
`14.4
`
`Employees (number as of Dec. 31)
`
`34,504
`
`34,206
`
`28,877
`
`29,133
`
`29,999
`
`3.0
`
`Return on sales (ROS) in %
`(ROS: operating result/sales)
`Return on capital employed (ROCE) in %
`(ROCE: operating result/average operating assets)
`
`Earnings per share**** in €
`Dividend per share in €
`One–time bonus per share in €
`
`8.3
`
`9.6
`
`1.18
`1.00
`–
`
`10.2
`
`12.1
`
`1.15
`0.80
`–
`
`13.2
`
`15.9
`
`3.47
`0.80
`0.20
`
`15.3*
`
`20.5
`
`3.40
`0.85
`–
`
`17.7
`
`21.0
`
`5.07
`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 have been
`presented accordingly on a comparable basis (for more information, please see page 100).
` ** The Laboratory Distribution business sector (VWR) was sold in April 2004.
` *** This segment, which was introduced in 2004, includes for example the gain on the sale of the Electronic Chemicals division in April 2005 and the
` exceptional gain from the sale of the shareholding in Schering AG in the second quarter of 2006.
` **** The previous year´s figure has been adjusted (for details, see page 107).
`
`Merck develops, manufactures and markets its pharmaceutical
`products for the three main drug markets: innovative prescrip-
`tion drugs, generics for cost-efficient basic health care, and over-
`the-counter products for consumer health care. Our aim is to
`improve quality of life.
`
`Merck offers a very wide range of specialty chemicals for techno-
`logically sophisticated applications in laboratories and industry.
`Many of these chemicals can be found in products that we en-
`counter in everyday life. Top quality, technology-driven research
`and a customer-centric approach to product development char-
`acterize the two large divisions that make up this business sector.
`
`Ethicals
`The portfolio of the Ethicals
`division includes prescription
`drugs to treat major widespread
`successes
` diseases. Notable
`have recently been achieved in
` oncology as well as in cardiometabolic care, i.e. diabetes, cardio-
`vascular diseases as well as thyroid and lipid disorders. By acquiring
`Serono, we will strengthen our product portfolio as well as our
`research efforts in key therapeutic areas.
`
`Liquid Crystals
`Close cooperation in developing
`and producing liquid crystals
`with the world’s leading display
`manufacturers has made Merck
`number one worldwide in this
`market of the future. Modern life would be hard to imagine
`without displays based on LC technology. Merck continues to ex-
`pand this important area together with industry customers, offer-
`ing them customized mixtures and greater synthesis capacities.
`
`Performance &
`Life Science Chemicals
`Specialty chemicals from Merck
`are used in all stages of pharma-
`ceutical production from devel-
`opment 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, technology, quality assurance and
`approval processes has made the company a successful supplier
`not only to the pharmaceutical industry, but also to the cosmetics,
`food, optics, plastics, coatings and printing industries.
`
`Generics
`Merck offers affordable stand-
`ard therapies in nearly all major
`therapeutic areas through high-
`quality drugs containing active
`ingredients that are no longer
`patent-protected. A wide assortment of more than 400 different
`substances is available to patients and physicians; special dosage
`forms and delivery systems with high patient benefit round off
`the range.
`
`Consumer Health Care
`More and more consumers trust
`a large number of well-known
`over-the-counter brands that
`Merck develops, manufactures
`and markets in its Consumer
`Health Care division. The portfolio ranges from products for every-
`day health such as Bion®3 to classic cold remedies such as the
`well-known brand Nasivin® up to products for joint care.
`
`Page 4
`
`

`
`070207
`W 840 497
`
`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: corpcom@merck.de, Web site: www.merck.de
`Editing: Judith Rahner, Tobias Engel
`English translation: Colette Roell, Diane Davies
`Concept, design and typesetting: XEO GmbH, Düsseldorf, Germany
`Photographs: Page 9: Matthias Kulka, page 13: Mauritius, pages 11 and 15: Getty Images,
`Management Report: Marco Moog, except page 29: ddp,
`and page 60: Marco Moog/Thomas Willemsen
`Printing: Frotscher Druck GmbH, Darmstadt, Germany,
`Thomas-Grafische Veredelung GmbH & Co. KG, Gelsenkirchen, Germany
`
`Business Development 2002 – 2006
`
`Pharmaceuticals business sector
`
`Chemicals business sector
`
`€ million
`Sales
` Sales excluding VWR**
`Pharmaceuticals
` Ethicals
` Generics
` Consumer Health Care
`Chemicals
` Liquid Crystals
` Performance & Life Science Chemicals
` Electronic Chemicals
`Laboratory Distribution**
`Laboratory Distribution intragroup sales
`Corporate and Other***
`
`Operating result
` Operating result excluding VWR**
`Pharmaceuticals
`Chemicals
`Laboratory Distribution**
`Corporate and Other***
`
`Earnings before interest and tax (EBIT)
`Profit before tax
`Profit after tax
`
`Free cash flow
`EBITDA
`Capital expenditure on property, plant and equipment
`Research and development
`
`Total assets
`Net equity
`
`2002
`7,400
`4,935
`3,153
`1,779
`1,064
`309
`1,782
`377
`1,212
`192
`2,711
`–246
` –
`
`616
`532
`272
`260
`84
` –
`
`559
`412
`215
`
`441
`985
`377
`608
`
`7,511
`2,054
`
`2003
`7,202
`5,003
`3,303
`1,467
`1,515
`321
`1,700
`438
`1,081
`180
`2,427
`–228
` –
`
`736
`656
`389
`316
`79
`–48
`
`538
`423
`218
`
`442
`1,008
`281
`605
`
`6,982
`2,363
`
`2004
`5,859
`5,339
`3,452
`1,504
`1,597
`352
`1,687
`583
`1,104
` –
`582
`–63
`200
`
`776
`755
`391
`420
`21
`–56
`
`1,044
`961
`672
`
`1,889
`1,419
`234
`599
`
`5,754
`2,800
`
`2005
`5,768*
`5,768*
`3,792*
`1,717*
`1,701*
`374*
`1,900
`739
`1,161
` –
` –
` –
`76
`
`883
`883
`454
`492
` –
`–63
`
`956
`893
`673
`
`657
`1,245
`268
`713
`
`7,281
`3,329
`
`2006
`6,259
`6,259
`4,119
`1,902
`1,819
`398
`2,106
`892
`1,213
` –
` –
` –
`34
`
`1,105
`1,105
`524
`641
` –
`–60
`
`1,325
`1,273
`1,001
`
`–1,073
`1,628
`253
`752
`
`8,102
`3,807
`
`Change in %
`8.5
`8.5
`8.6
`10.8
`6.9
`6.3
`10.8
`20.7
`4.5
`–
`–
`–
`–55.5
`
`25.1
`25.1
`15.4
`30.4
`–
`–4.5
`
`38.6
`42.5
`48.8
`
`–
`30.7
`–5.4
`5.4
`
`11.3
`14.4
`
`Employees (number as of Dec. 31)
`
`34,504
`
`34,206
`
`28,877
`
`29,133
`
`29,999
`
`3.0
`
`Return on sales (ROS) in %
`(ROS: operating result/sales)
`Return on capital employed (ROCE) in %
`(ROCE: operating result/average operating assets)
`
`Earnings per share**** in €
`Dividend per share in €
`One–time bonus per share in €
`
`8.3
`
`9.6
`
`1.18
`1.00
`–
`
`10.2
`
`12.1
`
`1.15
`0.80
`–
`
`13.2
`
`15.9
`
`3.47
`0.80
`0.20
`
`15.3*
`
`20.5
`
`3.40
`0.85
`–
`
`17.7
`
`21.0
`
`5.07
`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 have been
`presented accordingly on a comparable basis (for more information, please see page 100).
` ** The Laboratory Distribution business sector (VWR) was sold in April 2004.
` *** This segment, which was introduced in 2004, includes for example the gain on the sale of the Electronic Chemicals division in April 2005 and the
` exceptional gain from the sale of the shareholding in Schering AG in the second quarter of 2006.
` **** The previous year´s figure has been adjusted (for details, see page 107).
`
`Merck develops, manufactures and markets its pharmaceutical
`products for the three main drug markets: innovative prescrip-
`tion drugs, generics for cost-efficient basic health care, and over-
`the-counter products for consumer health care. Our aim is to
`improve quality of life.
`
`Merck offers a very wide range of specialty chemicals for techno-
`logically sophisticated applications in laboratories and industry.
`Many of these chemicals can be found in products that we en-
`counter in everyday life. Top quality, technology-driven research
`and a customer-centric approach to product development char-
`acterize the two large divisions that make up this business sector.
`
`Ethicals
`The portfolio of the Ethicals
`division includes prescription
`drugs to treat major widespread
`successes
` diseases. Notable
`have recently been achieved in
` oncology as well as in cardiometabolic care, i.e. diabetes, cardio-
`vascular diseases as well as thyroid and lipid disorders. By acquiring
`Serono, we will strengthen our product portfolio as well as our
`research efforts in key therapeutic areas.
`
`Liquid Crystals
`Close cooperation in developing
`and producing liquid crystals
`with the world’s leading display
`manufacturers has made Merck
`number one worldwide in this
`market of the future. Modern life would be hard to imagine
`without displays based on LC technology. Merck continues to ex-
`pand this important area together with industry customers, offer-
`ing them customized mixtures and greater synthesis capacities.
`
`Performance &
`Life Science Chemicals
`Specialty chemicals from Merck
`are used in all stages of pharma-
`ceutical production from devel-
`opment 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, technology, quality assurance and
`approval processes has made the company a successful supplier
`not only to the pharmaceutical industry, but also to the cosmetics,
`food, optics, plastics, coatings and printing industries.
`
`Generics
`Merck offers affordable stand-
`ard therapies in nearly all major
`therapeutic areas through high-
`quality drugs containing active
`ingredients that are no longer
`patent-protected. A wide assortment of more than 400 different
`substances is available to patients and physicians; special dosage
`forms and delivery systems with high patient benefit round off
`the range.
`
`Consumer Health Care
`More and more consumers trust
`a large number of well-known
`over-the-counter brands that
`Merck develops, manufactures
`and markets in its Consumer
`Health Care division. The portfolio ranges from products for every-
`day health such as Bion®3 to classic cold remedies such as the
`well-known brand Nasivin® up to products for joint care.
`
`Page 5
`
`

`
`Merck is a global pharmaceutical and chemical group
`with a history of more than 300 years. Our employees
`develop, manufacture and market pharmaceuticals
`and chemicals to improve the quality of life of people
`everywhere. Their pioneering spirit and wealth of
`experience are assets to the many business fields in
`which they work.
`
`In 2006, Merck took a significant step to strengthen
`itself in a highly promising sector by announcing its
`intention 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 bio-
`technology and established pharmaceutical science –
`a link that is widely considered to offer tremendous
`potential. More evidence that Merck continues to
`explore and discover, to assess and analyze, and to
`seize breakthrough opportunities at the right time.
`
`Merck – more potential.
`
`Page 6
`
`

`
`Contents
`
`    3 Letter from Michael Römer
`
`  76  Corporate Governance Report
`
`    6 The Executive Board of Merck KGaA
`
`  79 Board of Partners of E. Merck OHG
`
`    8 More potential
`
`  80 Report of the Supervisory Board
`
`  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 
` 
` 
`  43  Background on Erbitux®
` 
`  47  Background on the CIBIS III study
` 
`50 Generics
`54 Consumer Health Care 
` 
` 
`  57  Background on biopharmaceuticals 
`  58  Chemicals business sector
`60 Liquid Crystals 
` 
` 
`  63  Background on liquid crystals
`64 Performance & Life Science Chemicals 
` 
` 
`  69  Background on Xirallic® effect pigments
`  70  Corporate and Other
`  70  Risk report
`  73  Report on expected developments
`
`  82 The Supervisory Board of Merck KGaA
`
`  83 Consolidated Financial Statements
`of the Merck Group
`  84  Income Statement
`  85  Balance Sheet
`  86  Segment Reporting
`  88  Cash Flow Statement
`  89  Free Cash Flow
`  89  Presentation of Comprehensive Income
`  90  Statement of Changes in Net Equity
`  91  Notes 
` 
`  95  Accounting policies
`100  Notes to the income statement
` 
` 
`108  Notes to the balance sheet
` 
`129  Notes to the segment reporting
` 
`130  Notes to the cash flow statement
` 
`132  Other disclosures
`
`142 Auditor‘s Report
`
`144 Financial calendar for 2007
`144 More information
`
`Publication contributors
`
`
`
`
`Page 7
`
`

`
`LETTER FROM MiCHAEL RöMER
`
`The year 2006 was not only an extremely successful but also a very eventful
`time for Merck – putting us in the public spotlight as never before in our his-
`tory of well over 300 years.
`
`Undoubtedly, this was triggered by the realignment of our Pharmaceuticals
`business sector. We seized the opportunities that were open to us. Following
`the refusal of our offer to acquire Schering in March 2006, we announced
`the acquisition of Serono just six months later and are now Europe’s leading
`biopharmaceutical company. On January 5, 2007, we acquired the majority
`of the capital in Serono S.A. of Geneva, Switzerland. Since then, the integra-
`tion has been in full swing. 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 in-
`creasing our strength exponentially. It is helpful that also as a family-owned
`company, Serono shares our basic entrepreneurial convictions – Merck will
`become more.
`
`With the largest acquisition in our corporate history and the preparation of a
`potential divestment of the Generics division, we are resolutely continuing
`our strategy of “focused diversification”. Going forward, Merck will continue
`to stand on two pillars: Pharmaceuticals and Chemicals. In both business
`sectors, we are focusing on markets that need and reward innovation.
`
`Our success confirms this. We increased the operating result by 25% and ex-
`ceeded the € 1 billion mark for the first time. Profit after tax also surpassed
`this threshold for the first time. By distributing a dividend of € 0.90 plus a
`bonus of € 0.15 per share, we want you – our shareholders – to participate
`in this good result.
`
`The performance of our Chemicals business sector was again superb. The oper-
`ating result increased by a notable 30% and accounted for 58% of the Group
`operating result. Once again we were especially pleased with the Liquid
`Crystals business, which is being driven by the dynamic LCD market and
`Merck’s leading market position. I would also like to make special mention of
`
`3
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`
`our oncology drug Erbitux®. In 2006, we obtained approval for this innovative
`and targeted therapy in the additional indication of head and neck cancer.
`Investments in product innovations such as these are also made possible by
`a wide range of established products with good market positions. These in-
`clude the businesses combined in the Performance & 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 developments make me
`very optimistic: On the one hand, the development of our share price since
`I became chairman, and on the other hand the positive reaction to the capital
`increase that we announced on January 21, 2007. Here I would like to high-
`light the sustained commitment of the Merck family to the company: The
`family of owners took part in the capital increase with over € 1 billion.
`At the same time, the number of shares in free float increased and now the
`family holds an interest of 70% in the company.
`
`Even in times of great change and major accomplishments, we will not forget
`that entrepreneurial success starts with people. My Executive Board colleagues
`and I would like to especially thank our nearly 30,000 employees for their
`commitment and flexibility in 2006. At the same time, I would like to warmly
`welcome the approximately 5,000 employees who have joined Merck as a
`result of our acquisition of Serono. Together, we want to continue writing
`the Merck success story.
`
`We have made several important changes to the executive management of
`the Merck Group: Walter W. Zywottek, who had already been appointed to
`the Executive Board in 2005, assumed the leadership of the Chemicals busi-
`ness sector at the beginning of the year. On September 1, Karl-Ludwig Kley
`joined the company as Vice Chairman of the Executive Board. And last
`but not least, Bernd Reckmann was appointed to the Executive Board as of
`January 1, 2007. At the end of 2006, Jan Sombroek retired after 31 success-
`ful years with Merck.
`
`
`
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`

`
`LETTER FROM MiCHAEL RöMER
`
`I myself will hand over my Executive Board responsibilities upon conclusion
`of the Annual General Meeting on April 27, 2007 to Karl-Ludwig Kley, who
`has been appointed as my successor. As a former member of the Supervisory
`Board and the Board of Partners as well as Vice Chairman of the Executive
`Board, he knows the company well. Since becoming a Member of the Execu-
`tive Board, he has been responsible for the integration of Serono and has
`consequently set the course for the future – a future with more potential.
`
`After 29 years with Merck, including 14 on the Executive Board, no one would
`find it easy to say farewell. I was therefore delighted to 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 your trust in the new Executive Board just as
`you did with my team.
`
`Michael Römer
`Chairman of the Executive 
`Board of Merck KGaA
`
`
`
`Page 10
`
`

`
`From left:
`Bernd Reckmann, Karl-Ludwig Kley, Michael Römer, Elmar Schnee, Walter W. Zywottek, Michael Becker
`
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`

`
`ExECuTivE BOARd
`
`The Executive Board of Merck KGaA
`
`Michael Römer | Chairman of the Executive Board
`Born in 1946, doctorate in Chemistry from the Technical University of Darmstadt; with Merck  
`for 29 years; Member of the Executive Board for 14 years; Chairman since November 2005 
`  Legal, Patents, Trademarks, Auditing, Corporate Communications, Inhouse Consulting
`
`www.management.merck.de
`
`Karl-Ludwig Kley | vice Chairman of the Executive Board
`Born in 1951, doctorate in Law from Ludwig-Maximilians University in Munich;  
`Member of the Executive Board since September 2006
` 
`Integration of Serono, Human Resources
`
`Michael Becker
`Born in 1948, doctorate in Law from the University of Augsburg; with Merck for eight years;  
`Member of the Executive Board for six years
`  Accounting and Controlling, Finance, Tax, Insurance, Business Development
`
`Bernd Reckmann
`Born in 1955, doctorate in Biochemisty from the University of Hannover; with Merck for 20 years; 
`Member of the Executive Board since January 2007
` 
` Management of the Darmstadt and Gernsheim sites, Polyproduction and Development,  
`Engineering, Information Services, Environmental Protection, Health, Safety and Quality,  
`Purchasing
`
`Elmar Schnee
`Born in 1959, degree in Marketing Management from the Swiss Institute for Business Admini-
`stration in Zurich; with Merck for four years; Member of the Executive Board since November 2005
`  Pharmaceuticals business sector
`
`Walter W. Zywottek
`Born in 1947, industrial manager; with Merck for 40 years; Member of the Executive Board  
`since September 2005
`  Chemicals business sector
`
`
`
`Page 12
`
`

`
`MORE POTENTiAL
`
`More 
`   strength
`
`The integration of Serono, Europe‘s leading biopharma-
`ceutical company, will transform Merck’s scale, making
`it even more fit for the future and global competition.
`In 2006, around 3,000 people generated pro forma sales
`exceeding €  billion. Our people and the results of their
`work, especially 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 € 1 billion to bring more new active
`ingredients even faster to the market. Two biopharma-
`ceuticals have already completed the lengthy approval
`process and are notably successful: the blockbuster Rebif®
`to treat multiple sclerosis and the monoclonal antibody
`Erbitux®, a targeted cancer therapy that has already been
`approved in more than 60 countries.
`
`
`
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`
`

`
`Page 14
`
`

`
`MORE POTENTiAL
`
`More 
`opportunities
`
`In research too, the impact of the integration will be
`greater than the sum of the individual parts. Serono
`and the Ethicals division will not simply be put together,
`but interwoven to truly leverage the research strength
`of the entire organization. Special dynamism will be
`created by combining two fundamentally different ap-
`proaches: the search for biological active ingredients
`and research into the mode of action of new chemical
`substances. This will permit the cross-fertilization of
`methods and results only possible in very few compa-
`nies 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 for which is expected to grow by more than
`1 % in 200. Chemical research also offers new oppor-
`tunities: for example in the emerging field of organic
`light-emitting diodes, or OLEDs, as materials for displays
`and lighting; likewise, the core liquid crystals business
`still offers vast potential for growth and continues to
`remain an excellent source of earnings for Merck.
`
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`Page 15
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`

`
`11
`
`Page 16
`
`

`
`
`
`MEHR POTENZiALMORE POTENTiAL
`
`More 
`   growth
`
`Size alone is not the only important factor when it
`comes to further growth – even though the highly posi-
`tive development of the Liquid Crystals division may
`make it seem so as it benefits impressively from the
`trend towards increasingly large panel sizes. Merck has
`grown sustainably through successful innovations and
`has focused on specific technologies such as liquid
`crystals for displays and on specific therapeutic areas
`such as oncology. The acquisition of Europe‘s leading
`biopharmaceutical firm will open up entirely new possi-
`bilities 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: leading technologies
`and dynamic growth drivers on the one hand, constant
`and reliable sources of income on the other. For the most
`part, this focused diversification balances out product
`and economic cycles, permits sustainable growth and is
`the best possible way for us to secure our future.
`
`12
`
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`1'
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`
`III
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`Page 18
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`

`
`MORE POTENTiAL
`
`More 
`   presence
`
`By integrating Serono, Merck will also directly market
`patented active ingredients in the United States. Com-
`plementing its traditionally strong market positions
`in Europe and Latin America, the Ethicals division will
`achieve a strong presence in the world’s largest pharma-
`ceutical market: the United States accounts for roughly
`half of the market volume of all industrialized countries
`or around € 200 billion. Serono is superbly positioned in
`the United States, which will help Merck to achieve the
`size needed to be able to launch new drugs in this market
`faster and better – and to successfully grow sales in
`clearly focused therapeutic areas in the United States
`as well. Overall, Merck Serono‘s pharmaceutical market-
`ing and sales force will increase to around ,000 people
`worldwide.
`
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`

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`Page 20
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`

`
`MORE POTENTiAL
`
`More 
`   courage
`
`In 2006, Merck triggered the largest acquisition in its
`history. No doubt, the integration of Serono not only
`offers many opportunities but also poses many chal-
`lenges. Major tasks inevitably involve major endurance
`tests. Yet we feel up to the challenge. Not least due to
`the exceptionally strong corporate culture that has
`developed through the diversity of experiences made
`by people working over the centuries for the world‘s
`oldest pharmaceutical and chemical company. One of
`the defining features of our culture is a mission state-
`ment that places high demands on entrepreneurial think-
`ing and actions. This is also where perhaps the most
`important development ever made at Merck comes in:
`a sense of responsibility – for individuals, for the whole,
`for the world in which we live. For thinking in genera-
`tions. This is how the biggest strategic move that Merck
`has ever made will be understood, supported and imple-
`mented – with judgment and courage, with a new joy
`for discovery and the pioneering spirit that has served
`us so well for so long.
`
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`
`Page 21
`
`

`
`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 22
`
`

`
`More 
`   potential
`
`A much larger company with even more talented people.
`Well-positioned products. Technology and market leader-
`ship 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 thera-
`peutic areas. All these factors represent the new and
`expanded potential of Merck to increase value – the
`ability to create innovations for customers as well as
`value for its owners and shareholders. We will make
`the best possible use of this potential, with enthusiasm
`for decision-making, creativity and patience. Our long-
`standing integration experience will enable us to engage
`and involve people with a wide variety of backgrounds.
`Customers, employees, business partners, investors –
`there’s a lot for all of us to discover. And even more to
`achieve. That is what we’ll work toward, and it is what
`we look forward to.
`
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`
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`

`
`
`
`22
`
`19 19
`
`PPPP 24
`
`Page 24
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`

`
`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 the CIBIS III study
`
`50 Generics
`54 Consumer Health Care
`
`
` 57 Background on biopharmaceuticals
` 58 Chemicals business sector
`60 Liquid Crystals
`
`
` 63 Background on liquid crystals
`64 Performance & Life Science Chemicals
`
`
` 69 Background on Xirallic® effect pigments
` 70 Corporate and Other
` 70 Risk report
` 73 Report on expected developments
`
`Page 25
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`

`
`ManageMent RepoRt | SaleS Development
`
`Sales development
`
`global upswing continues
`In 2006, the global economic upswing continued: According to estimates by the six
` leading German economic research institutes, global gross domestic product increased by
`3.7%, while global trade grew by 8.5%. The much stronger dynamism in emerging econ-
`omies compensated partly for the slowdown in the United States, where output has been
`weakening since spring 2006. Private consumption lost