`
`(cid:3)(cid:48)(cid:72)(cid:85)(cid:70)(cid:78)(cid:3)(cid:46)(cid:42)(cid:68)(cid:36)(cid:15)(cid:3)(cid:39)(cid:68)(cid:85)(cid:80)(cid:86)(cid:87)(cid:68)(cid:71)(cid:87)(cid:15)(cid:3)(cid:42)(cid:72)(cid:85)(cid:80)(cid:68)(cid:81)(cid:92)(cid:17)(cid:3)(cid:44)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:81)(cid:76)(cid:87)(cid:72)(cid:71)(cid:3)(cid:54)(cid:87)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:68)(cid:81)(cid:68)(cid:71)(cid:68)(cid:3)(cid:87)(cid:75)(cid:72)
`(cid:3)(cid:86)(cid:88)(cid:69)(cid:86)(cid:76)(cid:71)(cid:76)(cid:68)(cid:85)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:48)(cid:72)(cid:85)(cid:70)(cid:78)(cid:3)(cid:46)(cid:42)(cid:68)(cid:36)(cid:15)(cid:3)(cid:39)(cid:68)(cid:85)(cid:80)(cid:86)(cid:87)(cid:68)(cid:71)(cid:87)(cid:15)(cid:3)(cid:42)(cid:72)(cid:85)(cid:80)(cid:68)(cid:81)(cid:92)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)
`(cid:3)(cid:88)(cid:80)(cid:69)(cid:85)(cid:72)(cid:79)(cid:79)(cid:68)(cid:3)(cid:69)(cid:85)(cid:68)(cid:81)(cid:71)(cid:3)(cid:40)(cid:48)(cid:39)(cid:17)
`
`Page 1
`
`
`
`Annual Report 2007
`
`Grow
`
`Change
`
`Sustain
`
`Page 2
`
`
`
`More information inside the cover:
`Business Development 2003-2007
`Business Sectors and Divisions
`
`Merck 2007 at a glance
`
`Key figures for 2007*
`
`€ million
`Total revenues
`
`Gross margin
`
`Research and development
`
`Operating result
`
`Exceptional items
`
`Earnings before interest and tax (EBIT)
`
`EBIT before depreciation
`and amortization
`
`Return on sales (ROS)
`
`Free cash flow (FCF)
`
`Free cash flow adjusted for acquisitions
`and disposals
`
`* excluding the Generics division
`
`Pharma-
`ceuticals
`4,877
`
`4,048
`
`891
`
`417
`
`–744
`
`–327
`
`
`1,173
`
`8.5
`
`–6,458
`
`
`821
`
`Chemicals
`2,150
`
`1,226
`
`137
`
`631
`
`–
`
`631
`
`
`766
`
`29.3
`
`557
`
`
`557
`
`Corporate
`and Other
`29
`
`2.5
`
`–
`
`–72
`
`–32
`
`–104
`
`
`–81
`
`–
`
`–406
`
`
`–406
`
`Total
`7,057
`
`5,277
`
`1,028
`
`976
`
`–776
`
`200
`
`
`1,858
`
`13.8
`
`–6,308
`
`
`972
`
`Total revenues by business sector
`
`Operating result by business sector
`
`€ million
`
`8,000
`
`6,000
`
`4,000
`
`2,000
`
`€ million
`1,200
`
`800
`
`400
`
`0
`
`2003
`
`2004
`
`2005
`
`2006*
`
`2007*
`
`2003
`
`2004
`
`2005
`
`2006*
`
`2007*
`
`* excluding the Generics division
`
`* excluding the Generics division
`
`Major achievements of 2007
`
`With the acquisition of Serono, Merck became one of the world’s leading biotech companies.
`The sale of the Generics division to Mylan Inc. of the United States for € 4.9 billion was another
`milestone in the strategic realignment of Merck.
`
`Adjusted for the divestment of Generics, total revenues in 2007 amounted to € 7.1 billion.
`Profit after tax reached a record € 3.5 billion. Shareholders are participating in this success through
`a higher dividend of € 1.20 per share and a one-time bonus of € 2.00 per share.
`
`The new Merck Serono division achieved growth primarily with biopharmaceutical products:
`Sales of the multiple sclerosis therapy Rebif ® increased by 9.6% on a currency-adjusted basis.
`The cancer drug Erbitux ® continued on its strong growth course with sales increasing by 40%.
`
`The Liquid Crystals division again generated a high return on sales of 53.1% – with a marked
`increase in free cash flow. Merck successfully maintained its market and technology leadership.
`
`
`
` Laboratory
`Distribution
` Chemicals
` Pharmaceuticals
`
` Corporate and Other
`
`Page 3
`
`
`
` Business Development 2003 – 2007
`
`€ million
`
`Total revenues
` Total revenues3 (Continuing Operations)
`Pharmaceuticals3
` Merck Serono2
` Generics3
` Consumer Health Care
`Chemicals
` Liquid Crystals
` Performance & Life Science Chemicals
` Electronic Chemicals
`Laboratory Distribution3 (incl. intragroup sales)
`Corporate and Other
`Generics3 (Discontinued Operations)
`
`Operating result
` Operating result3 (Continuing Operations)
`Pharmaceuticals3
`Chemicals
`Laboratory Distribution3
`Corporate and Other
`Generics3 (Discontinued Operations)
`
`EBITDA3
`Earnings before interest and tax (EBIT)3
`Profit before tax3
`Profit after tax (incl. Generics)
`
`Free cash flow (incl. Generics)
`
`Capital expenditure on property, plant
`and equipment (incl. Generics)
`
`Research and development3
`
`Total assets
`Net equity
`
`2003
`
`7,343
`3,559
`3,438
`1,528
`1,584
`327
`1,705
`443
`1,082
`181
`2,199
`–
`–
`
`736
`512
`389
`316
`79
`–48
`–
`
`1,008
`538
`423
`218
`
`442
`
`
`281
`
`605
`
`6,982
`2,363
`
`2004
`
`5,994
`3,849
`3,579
`1,597
`1,625
`357
`1,694
`589
`1,105
`–
`520
`200
`–
`
`776
`541
`391
`420
`21
`–56
`–
`
`1,419
`1,044
`961
`672
`
`1,889
`
`
`234
`
`599
`
`5,754
`2,800
`
`2005
`
`5,865
`4,154
`3,885
`1,797
`1,712
`376
`1,905
`741
`1,163
`–
`–
`76
`–
`
`883
`646
`454
`492
`–
`–63
`–
`
`1,245
`956
`893
`673
`
`657
`
`
`268
`
`713
`
`7,281
`3,329
`
`6,284
`4,460
`2,314
`1,914
`–
`400
`2,112
`895
`1,217
`–
`–
`34
`1,824
`
`1,105
`799
`217
`641
`–
`–60
`307
`
`1,334
`1,031
`982
`1,001
`
`7,057
`7,057
`4,877
`4,458
`–
`420
`2,150
`916
`1,235
`–
`–
`29
`1,395
`
`976
`976
`417
`631
`–
`–72
`189
`
`1,858
`200
`–111
`3,520
`
`–1,073
`
`–1,473
`
`
`253
`
`615
`
`8,102
`3,807
`
`
`283
`
`1,028
`
`14,922
`
`8,688
`
`Employees (number as of Dec. 31)3
`
`34,206
`
`28,877
`
`29,133
`
`25,531
`
`30,968
`
`Return on sales3 (ROS) in %
`(ROS: Operating result/Total revenues)
`
`Earnings per share in €
`Dividend per share in €
`One-time bonus per share in €
`
`
`10.2
`
`1.15
`0.80
`–
`
`
`13.2
`
`3.47
`0.80
`0.20
`
`
`15.3
`
`3.40
`0.85
`–
`
`
`17.9
`
`5.07
`0.90
`0.15
`
`
`13.8
`
`16.21
`1.20
`2.00
`
`1 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.
`2 Following its acquisition, the Swiss biopharmaceutical company Serono was integrated with the Ethicals division into Merck Serono.
`3 The Generics division was sold in October 2007 and is thus reported as a Discontinued Operation. All revenue, profit and employee figures have been adjusted for 2006
`and 2007. The Laboratory Distribution business (VWR) was divested in 2004.
`
`20061
`
`20072
`
`Change in %
`
`12
`58
`111
`133
`–
`5.0
`1.8
`2.3
`1.5
`–
`–
`–13
`–
`
`–12
`22
`92
`–1.6
`–
`19
`–
`
`39
`–81
`–
`252
`
`37
`
`
`12
`
`67
`
`84
`
`128
`
`21
`
`–
`33
`–
`
`Page 4
`
`
`
` Pharmaceuticals business sector
`
` Chemicals business sector
`
`Merck develops, manufactures and markets innovative prescrip-
`tion 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 for high unmet medical needs. Through
`their targeted effect, these help patients to live a longer and
`better life. Our over-the-counter products can prevent disease
`and relieve minor complaints.
`
`Merck offers a very wide range of specialty chemicals for tech-
`nologically sophisticated applications. Many of these are con-
`tained in products that people encounter in everyday life, such
`as mobile phones, televisions, automotive coatings and cosmet-
`ics. Top quality, diversity and a customer-centric approach to
`research and product development characterize our Chemicals
`business.
`
`Merck Serono division
`The product portfolio of this di-
`vision includes leading prescrip-
`tion drugs such as the cancer
`drug Erbitux ® and the multiple
`sclerosis treatment Rebif ®. In
`addition, we offer therapies to treat infertility, growth disorders,
`cardiovascular or metabolic diseases, and psoriasis. The focus
`of our research activities is on Oncology, Neurodegenerative
`Diseases, Fertility, Autoimmune and Inflammatory Diseases.
`
`Liquid Crystals division
`Close cooperation in develop-
`ment and production of liquid
`crystals (LC) with the world’s
`leading display manufacturers
`has made Merck the number
`one company worldwide in this market of the future. Modern
`life would be hard to imagine without LC displays. In order to
`meet the growing demand, we continuously invest in research
`for customized LC mixtures and OLEDs (organic light-emitting
`diodes). At the same time, we adapt our production capacities
`to the dynamic market development.
`
`Consumer Health Care
`division
`Many consumers trust a wide
`range 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 everyday health such as Bion ®3,
`or Femibion ®, which is specially for women, classic cold remedies
`such as the well-known brand Nasivin ®, to products that
`strengthen the joints such as Seven Seas ® JointCare and Kytta ®.
`
`Performance & Life
`Science Chemicals division
`Our specialty chemicals and our
`expertise in application technol-
`ogies, quality assurance and
`approval processes have made
`us a successful supplier in key markets, in particular the food,
`optics, plastics, coatings, printing, cosmetics and pharmaceutical
`industries. Products and services from Merck are used through-
`out the entire process chain, from analysis, research and devel-
`opment, through to production and quality control. Our portfolio
`includes, for example, effect pigments, cosmetic actives, reagents
`and test kits.
`
`Page 5
`
`
`
`Pharmaceuticals and chemicals are important
`to people all over the world. Merck plays an active
`role in these sectors and has helped to shape them.
`Our success and corporate culture are founded
`on strong pillars, namely innovation and tradition.
`For generations, Merck has repeatedly proven
`its courage in taking the first steps while sustain-
`ing what has worked well in the past. In a world of
`constant change, it’s important to be able to rely
`on experience in things that really matter.
`
`Merck and its employees support the principle of
`sustaining and changing in order to remain suc-
`cessful. 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 de-
`velopment opportunities. Merck is clearly focused
`on profitable growth – driven by innovations that
`prolong life and improve the quality of life of many
`people around the world.
`
`Merck – Sustain. Change. Grow.
`
`Page 6
`
`
`
`Contents
`
` 3 Letter from Karl-Ludwig Kley
`
` 73 Corporate governance
`
` 6 Executive Board of Merck KGaA
`
` 76 Board of Partners of E. Merck OHG
`
` 8 Sustain. Change. Grow.
`
` 77 Report of the Supervisory Board
`
` 16 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 Liquid Crystals
`
`
` 60 Performance & Life Science Chemicals
` 66 Corporate and Other
` 66 Generics (Discontinued Operations)
` 67 Risk report
` 69 Report on expected developments
` 72 Subsequent events
`
` 78 Supervisory Board of Merck KGaA
`
` 79 Consolidated Financial Statements
`
` of the Merck Group
` 80
`Income Statement
` 81 Balance Sheet
` 82 Segment Reporting
` 84 Cash Flow Statement
` 85 Free Cash Flow
` 85 Statement of Recognized Income and Expense
` 86 Statement of Changes in Net Equity
` 87 Notes
`
`
` 93 Accounting policies
`
`
` 99 Notes to the income statement
`
`
` 107 Notes to the balance sheet
`
`
` 131 Notes to the segment reporting
`
`
` 132 Notes to the cash flow statement
`
`
` 134 Other disclosures
`
` 145 Responsibility Statement
`
`146 Auditor’s Report
`
` 148 Financial calendar for 2008
` 148 More information
`
`
`
` Publication contributors
`
`Page 7
`
`
`
`LETTER FROM KARL-LUDWIG KLEY
`
`3
`
`For Merck, 2007 was a demanding and challenging year, and in many cases,
`an exciting one as well. The main highlights were the Serono acquisition, the
`divestment of Generics, the capital increase and our admission to the DAX ®.
`
`Despite all the changes, it was our most successful year so far, as a look at
`one of the most important measures of business success shows: Profit after
`tax was € 3.5 billion. This record result is due not least to special factors,
`which lead us to propose to the Annual General Meeting on March 28 not
`only a higher dividend of € 1.20 per share, but also a special dividend of
`€ 2.00 per share. In this way, we want our capital providers to benefit from
`the proceeds from the sale of the Generics division for € 4.9 billion.
`
`In recent years, we have strategically repositioned ourselves. The most im-
`portant move was the purchase of Serono, which was completed in January
`2007 and made us one of the world’s leading biopharmaceutical companies.
`The achievements of the new Merck Serono division in its first year are im-
`pressive. The integration project was concluded in September, three months
`earlier than planned. On a pro forma basis, meaning including Serono in
`2006, total revenues increased by 7.4%. In accordance with statutory require-
`ments, most of the figures in this annual report present the legal view, mean-
`ing without Serono in 2006. From this perspective, total revenues more than
`doubled.
`
`Around 60% of Merck Serono’s sales are attributable to biopharmaceuticals.
`Such medicines are now considered indispensable for treating a large number
`of serious diseases. They represent therapeutic advances that can prolong the
`lives of patients, for example those with advanced stages of cancer. Our on-
`cology drug Erbitux ®, which generated strong sales growth again in 2007,
`is one of these biopharmaceuticals. In multiple sclerosis, modern biopharma-
`ceutical immunomodulators delay the debilitating stages of the disease,
`thereby not only helping individual patients, but also lowering the costs to
`society. In 2007, we gained European approval for a new, better tolerated
`formulation of Rebif ® – one of the most successful drugs in this market.
`
`Page 8
`
`
`
`4
`
`And, of course, Merck is not just a pharmaceutical company. Our success
`in Chemicals is likewise founded on sophisticated technologies. For many
`years we’ve held the leadership position in liquid crystals and cover two-
`thirds of global demand. When we talk about our liquid crystals business,
`I am often asked how we are dealing with the competition. My answer is:
`The market is growing. Customer needs are growing. Display sizes – from
`mobile telephones to LCD televisions – keep on growing. We pride ourselves
`on our high-quality, modern production technologies, suitable capacities,
`an innovative product portfolio and above all, superb, long-standing
`customer relationships. Organic sales growth in 2007 was 14% and returns
`remained at a very high level.
`
`Sustainable business success makes it necessary to constantly align operational
`decisions with long-term goals. The title of this annual report – “Sustain.
`Change. Grow.” – is also the motto of our corporate strategy. When you read
`the following pages, you’ll get an impression of where we are coming from
`and where we want to go.
`
`Mass markets in chemicals and pharmaceuticals are not our objective.
`Therefore, size is not the only thing that matters to us. We want to grow
`profitably – as an innovative company in specialty businesses.
`
`Nevertheless, in spite of the refocusing, we are adhering to certain principles
`that enable us to remain true to ourselves. Operating in both pharmaceuticals
`and chemicals is not in fashion. But it’s the Merck way: We diversify our
`risk within an integrated company. Apart from the research and product port-
`folio for strongly expanding 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 flow was around € 1 billion. Net debt as of
`December 31, 2007 was € 355 million. Gearing, the ratio of net debt to net
`equity, was 0.18.
`
`For our employees, the changes that took place in 2007 weren’t always easy:
`the largest acquisition in the company’s history, a rapid integration process,
`more global management of the company. I am therefore particularly pleased
`that many of our employees recognize the opportunities, enabling us to
`
`Page 9
`
`
`
`LETTER FROM KARL-LUDWIG KLEY
`
`5
`
`Dr. Karl-Ludwig Kley
`Chairman of the Executive Board
`of Merck KGaA
`
`pursue the same path. And we communicate openly with each other – based
`on a foundation of shared values such as transparency and respect. For this,
`I would like to thank all 30,968 people who work for Merck.
`
`I would like to point out two personnel-related items. First, I extend my
`thanks to the 4,641 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 for his superb contributions to the company over a period of
`nearly 30 years.
`
`My Executive Board colleagues and I cordially thank you, the shareholders
`and friends of Merck, as well as the Merck family of owners, for the trust
`you have placed in us. We want to achieve entrepreneurial success based on
`ethical values while constantly creating new economic value. This is what
`enables us to live up to our responsibility for the community, e.g. through
`the Merck-Praziquantel Donation Program with WHO, and especially for
`our customers, employees and owners.
`
`Page 10
`
`
`
`6
`
`The Executive Board of Merck
`
`Dr. Karl-Ludwig Kley
`
`Dr. Michael Becker
`
`Born in 1948,
`
`doctorate in Law from the
`University of Augsburg,
`
`joined Merck in 1998,
`Member of the Executive Board
`since 2000
`
`Responsibility for Group-wide
`functions
`Accounting, Controlling,
` Finance, Tax, Insurance,
`Mergers & Acquisitions
`
`Chairman of the
`Executive Board
`
`Born in 1951,
`
`doctorate in Law from Ludwig-
`Maximilians University in Munich,
`
`Member of the Supervisory Board
`and Board of Partners of Merck
`from March 2004 to June 2006,
`
`Member of the Executive Board
`since September 2006
`
`Responsibility for Group-wide
`functions
`Human Resources (global),
`Legal, Patents, Trademarks, Audit-
`ing, Risk Management, Strategic
`Planning, Inhouse Consulting, Cor-
`porate Communications
`
`Dr. Bernd Reckmann
`
`Born in 1955,
`
`doctorate in Biochemistry from
`the University of Hannover,
`
`joined Merck in 1986,
`Member of the Executive 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 Resources)
`
`Page 11
`
`
`
`EXECUTIVE BOARD
`
`7
`
`www.management.merck.de
`
`Elmar Schnee
`
`Born 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 (Pharma-
`ceuticals), Canada, Latin and Cen-
`tral America, Africa, Middle East
`
`Walter W. Zywottek
`
`Born in 1947,
`
`industrial manager,
`
`joined Merck in 1967,
`Member of the Executive Board
`since September 2005
`
`Responsibility for Group-wide
`functions
`Chemicals business sector
`
`Regional responsibility:
`Asia, United States (Chemicals),
`Australia, New Zealand
`
`Page 12
`
`
`
`8
`
`SUSTAIN. CHANGE. GROW.
`
` Sustaining
`
` success.
`
`Experience is the soil on which success grows. In 1668, Friedrich Jacob Merck
`purchased a pharmacy in Darmstadt, which was the foundation stone for
`today’s success. The wealth of experience gained over 340 years was not least
`also due to the pioneering spirit of Emanuel Merck, who was the first to
`offer customers a range of high-purity alkaloids. This success story continues
`to the present day. A good example is the perseverance with which Merck
`has advanced the development of liquid crystals for the LCD market. In
`addition, new biopharmaceuticals such as 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. Pharma-
`ceuticals and Chemicals. These are the sources of new ideas that bring about
`decisive change and make Merck stronger, both as a company and as a brand.
`
`Page 13
`
`
`
`9
`
`Page 14
`
`
`
`10 SUSTAIN. CHANGE. GROW.
`
` Making decisive
`
` change.
`
`With all the continuity – recent developments prove that Merck has the
`key to creating something fundamentally new at the right moment.
`The integration of the biopharmaceutical company Serono creates poten-
`tial for more: The best of both Merck and Serono is converging and cross-
`pollinating. 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 discover and develop
`new active ingredients, especially for oncology, neurodegenerative diseases,
`autoimmune and inflammatory diseases, and fertility. A new organiza-
`tional structure has enabled us to streamline our development and decision-
`making processes and clarify the prospects for the success of new active
`ingredients and technologies at a very early stage. In the future, new
`developments will happen faster, not only in the laboratory, but also in
`logistics, service and production. We’re strong on the execution side, also
`when it comes to strategic changes – as the rapid divestment of the
`Generics division in 2007 showed.
`
`Page 15
`
`
`
`Page 16
`
`Page 16
`
`
`
`12 SUSTAIN. CHANGE. GROW.
`
` Growing
`
` together.
`
`More than ever before, Merck has today what it takes to succeed world-
`wide tomorrow. There’s plenty of evidence of this. In the future-oriented
`biopharmaceuticals sector, the prospects are excellent following the
`integration of Serono. We want to further expand our leading position, not
`only in Europe. We also want to grow sustainably in all key markets and
`set new standards. For example in 2007, a new formulation of Rebif ® –
`a further development of the successful multiple sclerosis therapy – was
`approved in the European Union, and the innovative growth hormone
`injection device EasypodTM was approved by the U.S. Food and Drug Adminis-
`tration. Global market leadership in liquid crystals for displays will also
`continue to generate exceptional earning power in the Chemicals business
`sector as flat screens continue to make their way into offices 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 in-
`dex of the 30 largest German securities, on the Frankfurt Stock Exchange.
`
`Page 17
`
`
`
`Page 18
`
`Page 18
`
`
`
`14 SUSTAIN. CHANGE. GROW.
`
` Our
`
` strategy.
`
`Merck has a clear objective: profitable growth. This is based on a distinct,
`fundamental strategy that can be summed up in three words: Sustain.
`Change. Grow. It’s a strategy that suits both our culture and our competen-
`cies. It strikes the right balance between the old and the new, between
`innovation and tradition, between Pharmaceuticals 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 and, thus, also in the
`execution risk. By tradition, we will remain curious and courageous – and
`continue to seize many new opportunities in the future.
`
`Page 19
`
`
`
`Grow
`
`Change
`
`Sustain
`
`Page 20
`
`
`
`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 Liquid Crystals
`
`
` 60 Performance & Life Science Chemicals
` 66 Corporate and Other
` 66 Generics (Discontinued Operations)
` 67 Risk report
` 69 Report on expected developments
` 72 Subsequent events
`
`Page 21
`
`
`
`MANAGEMENT REPORT
`Sales development
`
`17
`
`Sales development
`
`Global economy in good condition
`According to studies by the International Monetary Fund (IMF) and the Organization for
`Cooperation and Development (OECD), the condition of the global economy in 2007
`was very robust when it was hit by a financial crisis in the summer that was triggered
`by the problems in the U.S. housing market. The impact of the turmoil on global eco-
`nomic development has, however, remained limited so far. According to IMF data, real
`global gross domestic product (GDP) increased in 2007 by 4.9% compared with growth
`of 5.0% in 2006.
`Economic growth slowed noticeably in the United States. GDP rose by 2.2% in 2007 as
`compared with 2.9% in 2006. This growth was primarily driven by private consumer
`spending, although activity in the new home construction sector declined. The Japanese
`economy lost momentum in 2007. As a result, GDP growth declined from 2.4% to 1.9%.
`Private consumption recovered from a period of weakness in 2006, however, its expansion
`was not as strong as expected. Strong economic expansion in the People’s Republic of
`China continued in 2007 with GDP growth of 11.4% as compared with 11.1% in 2006.
`Economic development within the euro zone was very favorable in 2007 despite the
`turmoil. GDP rose by 2.6% in 2007 as compared with 2.8% in 2006. According to calcu-
`lations by the German Federal Statistics Office, the German economy recorded a 2.5%
`increase in GDP in 2007 compared with 2.9% in 2006. This increase succeeded despite
`the dampening effects of the increase in value-added tax and the uncertainty in the
`capital markets. Growth was driven by an increase in investments in machinery and equip-
`ment and by higher demand from abroad, but not from private consumption, which con-
`tinued to stagnate also due to fiscal policy, for example the increase in value-added tax.
`
`Global growth of the pharmaceutical and chemical markets
`According to the market researchers at IMS Health, the global pharmaceutical market
`grew between 6% and 7% in 2007. The world’s 13 most important pharmaceutical markets
`increased by 4% and achieved a volume of US$ 415 billion. Half of this amount was attrib-
`utable to the United States, which registered growth of 4%. Japan remains the world’s
`second 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
`
`Total revenues by business sector*
`
`€ million
`
`8,000
`
`6,000
`
`4,000
`
`2,000
`
`€ million
`
`2,150
`31%
`
`29
`
`4,877
`69%
`
` Corporate and Other
`
` Laboratory
` Distribution
` Chemicals
` Pharmaceuticals
`
`2003
`
`2004
`
`2005
`
`2006*
`
`2007*
`
`* excluding the Generics division
`
`* excluding the Generics division
`
`Page 22
`
`
`
`18
`
`Pharmaceuticals business
`sector doubles total revenues
`to € 4.9 billion.
`
`The European chemical industry association CEFIC, which represents around one-half of
`all global chemical companies, expects production in the European chemical industry
`to increase by 2.7% in 2007. According to information from the German chemical industry
`association (VCI), production by German chemical companies increased in 2007 by 4.5%
`and sales increased by 7.5%.
`
`Acquisition of Serono influences total revenue growth
`Total revenues of the Merck Group rose in fiscal 2007 by 58% to € 7,057 million. The
`sharp increase is due to the inclusion of Serono: Merck acquired the Swiss biopharma-
`ceutical company at the beginning of the year.
`The Generics division, which was divested in October 2007, is presented separately
`as a Discontinued Operation. Its revenues for 2006 and 2007 have already been reported
`separately.
`With the acquisition of the Serono Group, the importance of royalty income increased:
`As of 2007, royalty income is disclosed together with sales under total revenues. (For
`more information, see page 88 of the Consolidated Financial Statements). The effect of
`currencies on growth was –3.6%, whereas that of acquisitions was 51%. Adjusted for
`the impact of currency and acquisitions, organic growth amounted to 11%.
`Total revenues of the Pharmaceuticals business sector more than doubled in 2007 to
`€ 4,877 million, particularly owing to the Serono acquisition. This business sector now
`accounts for around 70% of total Merck revenues. The Merck Serono division generated
`total revenues of € 4,458 million. A pro forma comparison of total revenues including
`Serono in 2006 results in an increase of 7.4% for 2007 (for details on the pro forma com-
`parison, 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 € 420 million, which was 5.0% more than in 2006. In particular,
`the strategic brands developed favorably once again.
`
`Pharmaceuticals* | Total revenues by division
`
`Chemicals | Total revenues by division
`
`€ million
`
`420
`9%
`
`* excluding the Generics division
`
`€ million
`
`1,235
`57%
`
`4,458
`
`91%
`
` Consumer
`
`Health Care
` Merck Serono
`
`916
`43%
`
` Performance
`
`& Life Science
`Chemicals
` Liquid Crystals
`
`Page 23
`
`
`
`MANAGEMENT REPORT
`Sales development
`
`19
`
`The Chemicals business sector increased total revenues by 1.8% to € 2,150 million in
`2007, accounting for around 30% of total Merck revenues. The Liquid Crystals division
`generated sales of € 916 million, corresponding to an increase of 2.3%. On the one hand,
`currency effects had a negative impact. On the other hand, the previous year still included
`the sales of the ITO (indium tin oxide) glass business, which has meanwhile been sold.
`Adjusted for these effects, organic growth of the division amounted to 14%. Total revenues
`of the Performance & Life Science Chemicals division of € 1,235 million were 1.5%
`above the previous year, as the business suffered from currency effects in the United States
`and Asia. Organic growth amounted to 4.7%.
`
`Total revenues by quarter*
`
`€ million
`
`Total
`
` Pharmaceuticals
`
` Chemicals
`
` Corporate and Other
`
`* excluding the Generics division
`
`1st quarter
`
`2nd quarter
`
`3rd quarter
`
`4th quarter
`
`1,715
`
`1,178
`
`529
`
`7.6
`
`1,795
`
`1,249
`
`538
`
`7.3
`
`1,741
`
`1,195
`
`539
`
`7.0
`
`1,806
`
`1,255
`
`544
`
`7.3
`
`2007
`
`7,057
`
`4,877
`
`2,150
`
`29
`
`2006
`
`4,460
`
`2,314
`
`2,112
`
`34
`
`Components of growth by quarter
`
`in %
`
`Organic growth
`
`1st quarter* 2nd quarter* 3rd quarter* 4th quarter*
`
`2007*
`
`2006
`
`6.5
`
`15
`
`11
`
`10
`
`11
`
`13
`
`9.4
`
`8.5
`
` Pharmaceuticals
`
` Chemicals
`
`Currency effects
`
`Acquisitions/Disposals
`
`Total
`
`* excluding the Generics division
`
`12
`
`1.1
`
`–4.2
`
`47
`
`50
`
`17
`
`14
`
`–2.9
`
`54
`
`67
`
`8.6
`
`15
`
`–2.9
`
`52
`
`61
`
`14
`
`6.9
`
`–4.2
`
`51
`
`57
`
`8.7
`
`–3.6
`
`51
`
`58
`
`12
`
`–0.3
`
`–0.6
`
`8.5
`
`Merck Group | Sales by region
`
`Merck Group | Sales by region*
`
`€ million
`
`8,000
`
`6,000
`
`4,000
`
`2,000
`
`€ million
`
` 1,785
`27%
`
`968
`14%
`
`2003
`
`2004
`
`2005
`
`2006*
`
`2007*
`
`* excluding the Generics division
`
`* excluding the Generics division
`
`3,322
`49%
`
`700
`10%
`
` Asia, Africa, Australasia
`
` North America
` Latin America
` Europe
`
`Page 24
`
`
`
`20
`
`Growth in Asia strongly
`influenced by the Liquid
`Crystals business
`
`Strong expansion of business in the United States
`Merck generated nearly one-half of sales (excluding royalty income) in European coun-
`tries. Accounting for sales of € 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
`€ 738 million, followed closely by the home market of Germany, where sales increased
`by 46% to € 711 million. Other large sales markets where the former Serono Group had
`strong presences included Italy, where sales increased by 148% to € 319 million, Spain,
`which generated a 91% increase to € 313 million, and the United Kingdom, with a
`32% increase in sales to € 245 million. With the exception of the United Kingdom, all
`the named countries increased their sales also on a pro forma basis, meaning including
`Serono in the previous year. Sales in eastern Europe climbed by 60% to € 73 million.
`Thanks to the Serono acquisition, sales in North A