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
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`ANNUAL REPORT
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`ANNUAL REPORT
`2010
`
`2010
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`3,3/IERCK
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`Page 2
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`Page 2
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`Contents
`
`The key evenTs of 2010
` 3 2010 at a glance
`
`AbouT Merck
` 4 The Merck path
` 5 becoming a global, publicly listed company
` 7 Merck today
` 7 The future
`
`To our shAreholders
` 8 letter from karl-ludwig kley
` 12 executive board
`
`MAnAgeMenT reporT 2010
` 15 overall economic situation
` 17 financial position and results of operations
` 30 corporate responsibility
` 39 Merck in the capital market
` 47 Merck serono
` 63 consumer health care
` 69 Merck Millipore
` 77 performance Materials
` 84 corporate and other
` 86 risk report
` 95 report on expected developments
`106 subsequent events
`
`corporATe governAnce
`108 statement on corporate governance
`128 report of the supervisory board
`131 objectives of the supervisory board with
`respect to its composition
`
`consolidATed finAnciAl
`sTATeMenTs of The
`Merck group for 2010
`134 income statement
`135 balance sheet
`136 segment reporting
`138 cash flow statement
`139 free cash flow
`139 statement of comprehensive income
`140 statement of changes in net equity
`including non-controlling interest
`141 notes
`
`More inforMATion
`209 responsibility statement
`210 Auditor’s report
`212 glossary
`217 business development 2001 – 2010
`219 financial calendar for 2011
`219 service
`
` publication contributors
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`Contents
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`merCk At A GlAnCe
`key figures for 2010
`
`EUR 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
`
`Pharma-
`ceuticals Chemicals
`6,225.5
`3,065.1
`5,109.7
`1,795.5
`1,192.0
`205.1
`579.0
`624.0
`68.6
` –1.0
`647.6
`623.0
`
`Corporate
`and Other
` –
` –
` –
`–89.5
`–68.4
`–157.9
`
`Total
`9,290.6
`6,905.2
`1,397.1
`1,113.5
`–0.8
`1,112.7
`
`Change
`in %
`19.9
`20.8
`3.9
`71.6
`–97.3
`79.2
`
`1,603.7
`
`1,007.5
`
`–154.3
`
`2,456.9
`
`51.2
`
`20.4
`9.3
`1,343.6 –4,129.7
`1,353.3
`812.2
`
`12.0
` –
`–736.4 –3,522.5
`–495.7
`1,669.8
`
`–
`96.1
`
`Total revenues by business sector *
`EUR million
`10,000
`
`operating result by business sector
`EUR million
`1,200
`
` 7,500
`
` 5,000
`
` 2,500
`
` 800
`
` 400
`
` 0
`
`2006 2007 2008 2009 2010
`* excluding Corporate and other
` Pharmaceuticals
` Chemicals
`
`2006 2007 2008 2009 2010
` Pharmaceuticals
` Chemicals
` Corporate and Other
`
`Page 4
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`The pharmaceutical, chemical and life science businesses
`of Merck are organized into four divisions: Merck Serono,
`Consumer Health Care, Merck Millipore and Performance
`Materials. Merck employs more than 40,000 people and
`operates in 67 countries worldwide.
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`2
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`Merck Annual Report 2010
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`the key events of 2010
`
`On the whole, 2010 was an eventful and a very good business year for
`Merck. We pursued the Merck Way, which is based on the principles of
`“Sustain. Change. Grow.” and were successful in doing so.
`
`OLED technology proves fascinat-
`ing – also to Angela Merkel, the
`Chancellor of the Federal Republic
`of Germany.
`
`A leading life science company –
`with the Millipore acquisition,
`Merck makes a successful strategic
`move.
`
`Merck is significantly expanding
`its R&D presence in China – the
`market of the future.
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`Company Management Report
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`Corporate governance
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`Consolidated Financial Statements More information
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`3
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`2010 At A glAnce
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`Merck acquired Millipore, a life science company based in the United States. On Febru-
`ary 28, Merck announced the EUR 5.1 billion transaction. The legal closing of the transaction
`took place on July 14. The new organization, which was merged with parts of the former
`Performance & Life Science Chemicals division, started operating under its new brand identity
`on January 1, 2011. Merck Executive Board Chairman Karl-Ludwig Kley said, “By combining
`Millipore’s bioscience and bioprocess knowledge with our own expertise in serving life science
`customers, we will be able to unlock value in our chemicals business.” Analysts also view the
`acquisition as a good strategic move.
`
`The confidence of the financial markets was reflected by the successful issue of a euro bond
`to finance the Millipore acquisition. The EUR 3.2 billion bond was the largest issue by a German
`company in Europe in 2010 and was conducted in multiple tranches in a rather difficult market
`environment.
`
`China is a market of the future for Merck. In 2010, Merck strongly expanded its presence
`in China. Around 2,000 employees contributed to a sales increase of more than 30%. In Beijing,
`we set up an R&D center in order to coordinate clinical trials locally. More than 200 highly
`qualified positions will be created.
`
`Merck experienced both highs and lows with the regulatory review of its new multiple sclerosis
`treatment cladribine: Approvals in Russia and Australia, resubmission in the United States, a
`final negative opinion on the marketing authorization application from the European Medicines
`Agency. Regulators in the United States will decide on this drug in the first quarter of 2011.
`
`Merck is a pioneer in LED and OLED development. To strengthen our position, we opened
`the new Material Research Center at the Darmstadt site. Merck invested EUR 50 million in the
`center. Angela Merkel, Chancellor of the Federal Republic of Germany, attended the inauguration
`on September 23. The world’s largest OLED display – with a surface area of nearly nine square
`meters – is located in the foyer of the main building.
`
`A future-oriented cooperation agreement with Sanofi-Aventis was announced on Decem-
`ber 17. The agreement involves a global research and development collaboration in oncology.
`The goal is to research new, experimental combinations of agents that could block specific
`signaling pathways in cancer cells. Merck hopes the collaboration will lead to new, targeted
`cancer therapies with high therapeutic potential.
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`Page 7
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`4
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`Merck Annual Report 2010
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`About Merck
`
`At Merck, the pharmaceutical, chemical and life science businesses are under
`one roof. We are convinced that in these sectors, the market will reward
`successful research and technological advances with attractive margins.
`We focus on specialty businesses. We are not interested in engaging in com-
`modity markets or businesses where competition is dictated by price alone.
`
`the Merck pAth
`
`It all started with a pharmacy in 1668. The Angel Pharmacy, which is still owned by members of
`the Merck family, 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 pure 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 successfully isolated
`pure gonadotropin from urine. Gonadotropin plays an important role in reproduction. The
`production of recombinant gonadotropin transformed Serono into a biotechnology company.
`
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`Corporate governance
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`Consolidated Financial Statements More information
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`5
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`becoMing A globAl, publicly listed coMpAny
`
`Merck established initial business relationships with European neighbors in the 1820s.
`Since 1900, Merck has maintained business relationships on all continents.
`In the United States, Georg (later “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. The U.S. company Merck & Co. owns the
`exclusive 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 operates 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 the French company
`Société Lyonnaise Industrielle Pharmaceutique (Lipha).
`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, the acquisition of Amerpharm of
`the United Kingdom gave Merck a critical mass in the generic drugs business. The takeover of a
`large number of laboratory distribution businesses was rounded off with the purchase of VWR
`Scientific Products, a U.S. laboratory distributor, in 1999.
`
`Merck is the market leader
`for liquid crystals.
`By 1983, they were being
`used in car dashboards.
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`6
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`Merck Annual Report 2010
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`In order to secure the financing of these acquisitions, Merck went public in 1995. A 26% interest
`in Merck KGaA was sold to shareholders. The Merck family held the remaining 74% via the
`general partner E. Merck. Following a capital increase in 2007, the ownership ratio shifted to its
`current 30–70 ratio.
`The first half of the past decade saw a significant number of divestments. In 2000, Merck
`divested its interest 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 embarked on a growth course, acquiring the Swiss biopharmaceutical company
`Serono. Involving a purchase price of EUR 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 EUR 4.9 billion, the
`company lowered its debt to less than EUR 1 billion by year-end. Only three years later, Merck
`made its next major acquisition, purchasing Millipore for EUR 5.1 billion. The EUR 3.2 billion
`bond issue was the largest euro-bond offering by a German company in 2010. Merck also
`decided to divest two non-core businesses in 2010: Théramex, a company specializing in
`women’s health, and the Crop BioScience business for improving plant health and crop yields.
`
`Merck is developing targeted cancer
`therapies such as the molecule
` cilengitide (in green) shown here
`at its molecular target.
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`Company Management Report
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`Corporate governance
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`Consolidated Financial Statements More information
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`7
`
`Merck todAy
`
`Merck is pursuing a business model aimed at creating value for shareholders and owners.
`Following the acquisition of Millipore, we have a portfolio with a balanced distribution of risk.
`This portfolio is based on core competences in three businesses with synergetic potential:
`pharmaceuticals, chemicals and life science.
`Merck runs its operating business in four divisions: Merck Serono, Consumer Health Care,
`Merck Millipore and Performance Materials.
`The Merck Serono division markets prescription medicines. It discovers, develops and manufactures
`both chemical and biological molecules. Merck holds strong positions in neurodegenerative
`diseases and oncology. In addition, the division markets fertility treatments, a field in which
`we are the world market leader, and growth hormones as well as a broad portfolio of classic
`products, especially for cardiovascular 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 Performance Materials division focuses on lighting materials for energy-saving LEDs (light-
`emitting diodes) and OLEDs (organic LEDs). Pigments for the plastics, printing and coatings
`industries as well as for cosmetic applications are also an important part of the Performance
`Materials portfolio. Moreover, the division is the market leader for pearl luster effect pigments
`– a highly specialized niche within the pigment market.
`In 2010, Merck acquired the U.S. life science company Millipore. Founded in 1954 by Jack Bush,
`the focus at that time was on filtration technology for water treatment and laboratories. This
`enabled Millipore to achieve a breakthrough worldwide. Later on, further businesses such as
`bioprocessing and bioanalytical services for the pharmaceutical industry were added, trans-
`forming Millipore into a leading global life science company.
`With the acquisition of Millipore, Merck is now a leading life science company. The Merck Mil-
`lipore division offers products for life science research such as assays, biomarkers and target
`solutions, as well as bioprocessing, lab water purification and filtration. Additionally, the divi-
`sion supplies specialty chemicals mainly to regulated markets, for example the pharmaceutical,
`cosmetics and food industries. Analytical and scientific laboratories use our reagents and test
`kits. In total, the Merck Millipore portfolio comprises more than 40,000 products and processes.
`
`the future
`Merck will continue to focus on specialty products in its pharmaceutical, chemical and life
`science businesses while creating synergies. We will also further invest significantly in research
`and development while pursuing growth both organically and through acquisitions. We will
`adhere to our very solid finance policy.
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`8
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`Merck Annual Report 2010
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`
`
`letter froM kArl-ludwig kley
`
`“We aspire to be a company
` where an enjoyment of work
`and innovative strength meet.”
` Karl-Ludwig Kley
`
`Page 12
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`Company Management Report
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`Corporate governance
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`Consolidated Financial Statements More information
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`9
`
`
`
`During 2010, we made further progress with the transformation of your
`company into a leading innovative and high-tech enterprise. As part of this
`process, we achieved several important milestones.
`
`We impressively proved Merck’s economic strength following the 2009
`crisis year. Our total revenues increased by 20% to EUR 9.3 billion, a
`record high. The operating result jumped by 72% to EUR 1.1 billion. At
`nearly EUR 1.7 billion, underlying free cash flow significantly exceeded
`the billion-euro threshold for the first time. Profit after tax was 70% higher
`than in 2009. In view of these figures, we will propose to the Annual General
`Meeting on April 8 an increase in the dividend to EUR 1.25 per share.
`
`With the acquisition of Millipore, we have given our business a deci-
`sive boost. By combining Merck and Millipore, we have become a leading
`global partner to the life science industry. With our portfolio, which ranges
`from laboratory chemicals to complete solutions for the production of bio-
`pharmaceuticals, we are helping our customers to succeed in research,
`development and production. At the same time, we are capturing oppor-
`tunities to realize synergies with our own existing businesses and to enter
`new fields.
`
`We have also set the course for the future with the recent changes in the
`composition of the Executive Board. On January 1, 2011, Stefan Oschmann
`succeeded Elmar Schnee, who left the company, as the Board Member
`responsible for the Pharmaceuticals business. I would also like to take this
`opportunity to thank Elmar Schnee, who decisively shaped the integration
`of Merck Serono and contributed greatly to the solid foundations on which
`we can further develop the business. Kai Beckmann will be joining the
`Executive Board, taking over responsibility for the newly created Executive
`Board position for Human Resources on April 1. And on June 1, 2011, Mat-
`thias Zachert will succeed Michael Becker as Chief Financial Officer. With
`this new team, we are creating the perfect conditions to start a new, success-
`ful chapter in the unique history of Merck.
`
`We are in a position to develop the company further from the economically
`robust and highly innovative basis of 2010.
`
`Merck Serono, our division for innovative prescription drugs, outper-
`formed the average global market growth by posting an 8.3% increase in
`sales. Our two largest products, Rebif ® and Erbitux ®, continued to perform
`well. Their sales increased by 8.6% to nearly EUR 1,700 million and 18%
`
`Draft/Layout
`
`Inhalt ist in der Abstimmung,
`kommt 2011
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`Page 13
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`10
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`Merck Annual Report 2010
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`to EUR 820 million, respectively. Core return on sales (ROS) was 22%. Yet
`we did not reach all our objectives. The Committee for Medicinal Products
`for Human Use (CHMP) of the European Medicines Agency (EMA) issued
`a final negative opinion regarding the marketing authorization application
`for cladribine tablets as a treatment for relapsing-remitting multiple sclero-
`sis. In the United States, we are awaiting the FDA’s decision.
`
`The Consumer Health Care division, which is responsible for our over-
`the-counter drugs business, continued its growth course, with the exception
`of our newly emerging business in China. The restructuring measures
`underway there not only slowed sales growth, but also adversely impacted
`profitability.
`
`We began consolidating our life science business, including the acquired
`Millipore, into the new Merck Millipore division in July. Despite the on going
`integration work, we achieved a marked increased in sales. Adjusted for the
`acquisition, core ROS was 19%.
`
`The Performance Materials division, which comprises our materials busi-
`nesses, can look back at a very successful year. With sales increasing by
`38%, it was our strongest growth driver. The Liquid Crystals business
`exceeded the EUR 1 billion sales threshold for the first time. The division’s
`ROS was 42%.
`
`We were also successful on a regional basis. In Asia, our second-largest
`region after Europe, we grew by 37%, posting sales of EUR 2.3 billion. In
`the United States, sales increased by 32% to EUR 1.4 billion.
`
`We are looking toward the future with optimism. No doubt we expect the
`global financial, economic and debt crises to have a further impact. No
`doubt key economies are still a long way from recovering their former sta-
`bility and dynamism. The financial sector also remains vulnerable. Despite
`all the risks, we expect economic developments to be positive in 2011. For
`Merck, we expect total revenues to increase by between 13% and 18%.
`We aim to increase the operating result by between 35% and 45%.
`
`Above all, however, we want to further develop the company strategically:
`
`Based on our strong position in display materials, we want to expand
`into new fields and new technologies. After having successfully devel-
`oped IPS, VA and PS-VA technologies that produce faster and sharper LCD
`images and consume less power, we are working on successors. At the same
`time, we are aiming to establish ourselves as a materials supplier in new
`
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`Company Management Report
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`Corporate governance
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`Consolidated Financial Statements More information
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`11
`
`fields, including innovative lighting materials based on LEDs and OLEDs,
`energy storage materials for the automotive sector, and products for the
`photovoltaics industry that will be used in the next generation of solar
`cells.
`
`With Merck Millipore, we want to position ourselves as the leading
`supplier to the life science industry, for instance in the biopharmaceutical
`market, which is highly profitable and is currently growing at 12% a year.
`Cooperating with customers on research and development programs is
`a common feature of processes in modern biotech production where we
`transform our expertise in chemicals and pharmaceuticals into innovation.
`Once the production process has been approved for a drug, this leads to
`benefits for our customers, who seek joint, long-term success with a supplier
`they can trust.
`
`At Merck Serono, we are concentrating on specialist therapeutic areas
`with high unmet medical needs. Our research activities are focused on three
`areas: Oncology, Neurodegenerative Diseases and Rheumatology. In parallel
`with the development of specific therapies, it is our aim to develop patient
`stratification methods: We want to focus even more closely on how our
`drugs act in certain groups of patients and how therapeutic efficacy can be
`predicted for individual patients.
`
`We aspire to be a company where an enjoyment of work and innovative
`strength meet. Merck stands out because it offers an inspiring and moti-
`vating work environment in which all employees have the opportunity to
`make extraordinary achievements while developing themselves further.
`
`And this is why our more than 40,000 employees apply themselves ener-
`getically to the benefit of customers and the company. We owe you, our
`shareholders and customers, our thanks for your support and trust. My
`Executive Board colleagues and I will continue to do everything we can to
`merit this trust.
`
`Page 15
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`12
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`Merck Annual Report 2010
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`
`
`executive boArd
`
`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
`
`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
`
`Stefan Oschmann
`Head of the Pharmaceuticals
`business sector
`born in 1957, veterinarian
`joined Merck in 2011 as a
`Member of the Executive Board
`Responsibility for Group-wide
`functions:
`Pharmaceuticals business sector
`Regional responsibilities: Europe;
`United States (Pharmaceuticals);
`Canada; Latin and Central America;
`Africa; Middle East
`Until the end of 2010:
`Elmar Schnee
`
`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
`
`Bernd Reckmann
`
`Page 16
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`Company Management Report
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`Corporate governance
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`Consolidated Financial Statements More information
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`13
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`Stefan Oschmann
`
`Michael Becker
`
`Karl-Ludwig Kley
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`Page 17
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`14
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`MAnAgeMent report
`of the Merck group 2010
`
` 15
` 17
` 30
` 39
` 47
` 63
` 69
` 77
` 84
` 86
` 95
`106
`
` Overall economic situation
` Financial position and results of operations
` Corporate responsibility
` Merck in the capital market
` Merck Serono
` Consumer Health Care
` Merck Millipore
` Performance Materials
` Corporate and Other
` Risk report
` Report on expected developments
` Subsequent events
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`Page 18
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`Company
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`Management Report Corporate governance
`Overall economic situation
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`Consolidated Financial Statements More information
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`15
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`overAll econoMic situAtion
`The global economy recovered from the most severe crisis since the Second
`World War. In the pharmaceutical sector, emerging countries are gaining
`ground. The chemical industry, especially that of Germany, recorded an
`exceptionally good year in 2010.
`
`Global economy is regaining momentum – Uncertainty remains
`The Organization for Economic Cooperation and Development (OECD) reported that economic
`growth of its 34 member states totaled 2.8% in 2010. Gross domestic product (GDP) of the
`United States, the world’s largest economy, grew by 2.7%, while gross national product (GDP)
`of the eurozone countries increased by 1.7%. Japan can look back at growth of 3.7%. On the
`positive side, the OECD noted that company profits, which had grown sharply, were reinvested.
`However, the renewed drop in real estate prices in the United States as well as growing tension
`in the foreign exchange markets had a noticeably negative impact.
`The International Monetary Fund (IMF), which reports on the development of global economic
`growth, calculated an increase of 4.8% in 2010. Accordingly, the industrialized countries
`recorded a 2.7% increase in GDP. However, industrial output in the industrialized countries
`is still notably below the pre-crisis level. By contrast, the emerging and developing countries
`achieved a GDP increase of 7.1%. This includes the BRIC countries, namely China (+10.5%),
`India (+9.7%), Brazil (+7.5%) and Russia (+4%).
`The IMF considers the global growth achieved to be weak because the world economy is still
`recovering from the deepest recession since the Second World War. By contrast, thanks to
` government incentives, China achieved a self-sustaining recovery fueled mainly by private
`sector demand. However, economists are noting real estate speculation in some parts of China,
`which could lead to corrections. According to the IMF, Brazil is leading the recovery in Latin
`America, yet its economy is currently showing signs of possibly overheating.
`The IMF takes a critical view of financial market stability, which had already declined in the
`first half of 2010 and uncertainty is gaining ground. Growing tensions in the international
`currency environment as well as the expansive monetary policy of the United States pose risks.
`Overall, the economic recovery slowed down as of the third quarter of 2010 according to the
`IMF. Private demand as well as the impact of government economic incentives ending were
`and still are uncertainties in this context. In 2010, inflation was under 1.5% in the industrialized
`countries and 5.75% in the economies of emerging countries.
`
`Uncertainties remain despite the
`market recovery following the crisis
`
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`16
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`Merck Annual Report 2010
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`One-third of our global
` pharmaceutical sales are
`generated in
`the United States
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`Pharmaceutical markets of the industrialized countries facing stronger headwind
`The pharmaceutical market research firm IMS Health reported global pharma sales in 2010
`of around USD 840 billion, corresponding to growth of around 4.5%. Sales in the United
`States, the world’s largest pharmaceutical market, totaled USD 310 billion. The more mature
`markets of the industrialized countries no longer showed particularly strong growth, also as
`an outcome of health care reforms, for example in France, Spain and Greece. Markets with
`high growth rates include the BRIC countries, namely Brazil, Russia, India and China, as well
`as Turkey and Indonesia. In 2010, emerging economics already accounted for 42% of the global
`growth of the pharmaceutical markets. According to IMS Health, it is becoming increasingly
`difficult to introduce new medicines to the market and to earn the corresponding returns
`on investment. IMS Health reports that in several countries, including Spain, Italy and China,
`regional or even local authorities are becoming increasingly influential alongside national
`authorities. This lengthens the time to market launch, if a product even makes it that far.
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`Chemical industry registers strong growth
`According to the European Chemical Industry Council (Cefic), the European chemical industry
`grew by 10% in 2010 compared to 2009, which was a weak year due to the economic crisis.
`Germany was the growth engine of the European chemical industry, yet the industry has still
`not returned to the pre-crisis level of 2007. Global sales totaled EUR 1,871 billion in 2009. The
`27 member states of the European Union were responsible for EUR 449 billion, or just 24%
`of the total. Accounting for 25.5% of European sales, Germany holds the leading position
`in this region. Globally, Asia is in first place with sales of EUR 834 billion, led by China with
`EUR 416 billion. Specialty chemicals, which include products from Merck, account for 26%
`of European chemical sales. According to Cefic data, consumer chemicals, which also include
`Merck products, account for 14% of European chemical sales. (The figures for 2010 will only be
`available after the publication of this report).
`Growth weakened toward year-end since economic incentives ended in some countries.
`Demand outside of Europe was the main growth driver according to Cefic.
`The German Chemical Industry Association (VCI) calculated growth of nearly 18% to EUR 170 billion
`for Germany. The approximately 1,600 member companies invested EUR 6.4 billion in plant and
`buildings, and spent nearly EUR 9.4 billion on research and development.
`The American Chemical Council (ACC) put the volume of the largest market, the United States,
`at well over USD 670 billion in 2010. Exports were an important component, generating a trade
`surplus of USD 3.7 billion, compared to a deficit of USD 100 million in 2009. According to the
`ACC, industrial output in the emerging countries rose by 12% in 2010.
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`Company
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`Management Report Corporate governance
`Overall economic situation
`Financial position and results of operations
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`Consolidated Financial Statements More information
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`17
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`fin AnciAl position And results of operAtions
`The Group financial statements strongly reflect the acquisition of Millipore,
`which is helping us to position Merck as a life science company.
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`2010 – A successful and eventful business year
`The financial and earnings position developed very positively in 2010. Following the acquisition
`of Serono of Switzerland within the Pharmaceuticals business sector in 2007, we also made
`a major acquisition in the Chemicals business sector by purchasing Millipore Corporation of
`the United States in 2010. This acquisition had a very strong impact on the 2010 financial
`statements. The revenues and expenses of the Millipore companies have been included in the
`income statement since July 2010. Moreover, the expenses from the purchase price allocation
`as well as one-time transaction and integration costs have been taken into account.
`Product sales of the Merck Group rose in 2010 by 21% to EUR 8,929 million. Declining by 2%,
`royalty, license and commission income was slightly lower than in 2009. Total revenues, mean-
`ing the sum of product sales as well as royalty, license and commission income, rose by 20%
`to EUR 9,291 million. This sharp increase is related to the purchase of Millipore. However, our
`business also grew satisfactorily on an organic basis, i.e. adjusted for acquisition and currency
`effects, by 7.9%.
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`Organic sales growth of 7.9%
`for the Merck Group
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`Total revenues by business sector
`EUR million
`10,000
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`7,500
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`5,000
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`2,500
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`* including generics
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` Chemicals
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` Pharmaceuticals
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`2006*
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`2007
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`2008
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`2009
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`2010
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`Cost of sales increased by 18%. In the course of the purchase price allocation, the inventories
`from the Millipore acquisition were already recognized at fair values based on realizable sales
`revenues, and thus stepped up by EUR 86 million. This amount was fully expensed in cost of
`sales in the second half of 2010, and had a one-time negative impact on gross margin. Overall,
`gross margin rose by 21%. Marketing and selling expenses increased relatively sharply by 20%
`since the c