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Additional Information in accordance with the German Commercial Code (HGB)

The management report of Merck KGaA, Darmstadt, Germany, has been combined with the Group management report. The annual financial statements and the combined management reports of the Group and Merck KGaA, Darmstadt, Germany, for 2015 have been filed with the electronic German Federal Gazette (elektronischer Bundesanzeiger) and are available on the website of the German company register.

Statement on Corporate Governance

The Statement on Corporate Governance according to Section 289a HGB can be found here.

Business Development

The sales of Merck KGaA, Darmstadt, Germany, rose further in 2015. All business sectors contributed to the increase of € 478 million:


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€ million / Change in % 2015 2014 Change
Healthcare 1,617 1,525 6.0
Life Science 674 622 8.4
Performance Materials 1,597 1,263 26.4
Total 3,888 3,410 14.0

Sales increases, particularly in our Healthcare and Performance Materials business sectors, were achieved in all four quarters of 2015 compared with the previous year.

The share of Group sales also rose in 2015 (92.7%; 2014: 90.9%). This development underscores the importance of Merck KGaA, Darmstadt, Germany, to the Group as a production company:


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€ million / Change in % 2015 2014 Change
Group sales 3,605 3,100 16.3
Sales to third parties 283 310 – 8.7
Total 3,888 3,410 14.0

At 88.1%, the share of exports increased again in 2015 compared with the previous year (2014: 85.7%).


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€ million / Change in % 2015 2014 Change
Outside Germany 3,427 2,922 17.3
Germany 461 488 – 5.5
Total 3,888 3,410 14.0

In our Healthcare business sector, particularly sales of products in the Cardiovascular (+ 20.0%) and Thyroid (+ 12.9%) franchises increased in almost all regions, with notable sales increases in the Asia-Pacific and Europe regions. In comparison, the declines in reported sales of General Medicine (– 22.3%), Neurodegenerative Diseases (– 7.7%) and Oncology (– 1.5%) products were not as high. These declines relate primarily to the European market.

In all major markets, particularly in the Asia-Pacific region (+ 29.9%), our Performance Materials business sector recorded sales growth (+ 26.4%). The Display Materials (+ 27.9%) and Advanced Technologies (+ 84.1%) business units contributed significantly to this growth. The Pigments & Functional Materials business unit (+ 7.9%) also maintained its level of sales in Europe and increased sales in North America and Latin America.

In our Life Science business sector the strongest growth was achieved by the Process Solutions business area (+ 10.7%). The business sector performed particularly well in North America (+ 47.0%) and Latin America (+ 15.9%). However, slight declines in sales were recorded in Europe (– 1.0%).

Results of operations


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Change
€ million 2015 2014 € million %
Sales 3,888 3,410 478 14.0
Other income 966 952 14 1.5
Cost of materials – 956 – 879 – 77 8.8
Personnel expenses – 1,123 – 1,019 – 104 10.2
Depreciation, amortization, write-downs and impairment losses – 280 – 348 68 – 19.5
Other operating expenses – 2,050 – 1,877 – 173 9.2
Investment result / Write-downs of financial assets 339 445 – 106 – 23.8
Financial result – 175 – 32 – 143 – 446.9
Profit from ordinary activities 609 652 – 43 – 6.6
Profit transfers – 373 – 426 53 – 12.4
Taxes – 116 – 77 – 39 – 50.6
Profit after tax and profit transfers 120 149 – 29 – 19.5

The increase in other income was mainly attributable to both higher license income and releases of provisions. This was offset by inventory reduction costs.

The cost of materials decreased slightly in relation to sales (24.6%; 2014: 25.8%).

The rise in personnel expenses was attributable to the higher number of employees and higher pension expenses.

The decrease in depreciation, amortization, write-downs and impairment losses was mainly due to lower impairment losses (€ – 73 million). In fiscal 2015, impairment losses of € 105 million on intangible assets related particularly to the discontinuation of development projects (2014: € 176 million).

Other operating expenses increased as a result of the intensified marketing and selling activities as well as due to legal and advisory expenses in connection with the Sigma-Aldrich acquisition.

The investment result declined mainly due to lower dividend payments from Merck Capital Holding Ltd., Malta, a subsidiary of Merck KGaA, Darmstadt, Germany, and Merck Holding GmbH, Darmstadt, a subsidiary of Merck KGaA, Darmstadt, Germany.

The borrowing of funds for the acquisition of Sigma-Aldrich resulted in higher interest expenses, which increased the negative financial result.

Net assets and financial position


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Assets

Change
€ million Dec. 31, 2015 Dec. 31, 2014 € million %
Fixed assets 17,770 7,089 10,682 150.7
Intangible assets 227 325 – 98 – 30.2
Tangible assets 921 879 43 4.9
Financial assets 16,622 5,885 10,737 182.5
Current assets 1,280 1,485 – 205 – 13.8
Inventories 617 588 29 4.9
Trade accounts receivable 213 220 – 7 – 3.2
Receivables and other assets 450 677 – 228 – 33.7
Cash and cash equivalents 0 0 0 0.0
Prepaid expenses 27 40 – 13 – 32.5
Excess of plan assets over relevant obligations 195 – 195 – 100.0
19,077 8,808 10,269 116.6

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Equity and liabilities

Change
€ million Dec. 31, 2015 Dec. 31, 2014 € million %
Net equity 5,268 5,312 – 44 – 0.8
Provisions 930 750 180 24.0
Provisions for pensions and other post-employment benefits 5 5
Other provisions 925 750 175 23.4
Liabilities 12,878 2,746 10,132 369.0
Financial obligations 1,500 1,500 0 0.0
Trade accounts payable 289 192 97 50.4
Other liabilities 11,089 1,054 10,035 952.3
Deferred income 1 1
19,077 8,808 10,269 116.6

The development of the net assets and financial position of Merck KGaA, Darmstadt, Germany, in fiscal 2015 was characterized by the acquisition of the Sigma-Aldrich Corporation, USA. The increase in total assets by € 10,269 million to € 19,077 million was largely attributable to the completion of this important transaction, increasing financial assets by € 10,737 million. The intragroup sale of Merck Ltd., Japan, a subsidiary of Merck KGaA, Darmstadt, Germany, within the scope of the reorganization subsequent to acquisition of AZ in 2014 caused financial assets to decline in 2015.

Intangible assets declined primarily due to the discontinuation of the development project for evofosfamide and the associated impairment losses of capitalized rights amounting to € 82 million.

In addition, the progress of the construction project ONE Global Headquarters at the Darmstadt site contributed significantly to an increase in fixed assets.

The decline in current assets (€ – 205 million) was mainly due to lower receivables from affiliates, primarily because of the increased funding requirement for the acquisition of Sigma-Aldrich.

The increase in other provisions (€ 175 million) was partly due to the repayment of a cash deposit in a trust agreement to cover provisions for a partial retirement program amounting to € 48 million. These provisions under the partial retirement program will now be secured by a bank guarantee. In addition, the provisions for outstanding invoices increased by € 32 million.

In 2015, no excess of plan assets over relevant obligations was disclosed for pension provisions, as pension obligations exceeded plan assets by € 5 million. This is largely attributable to the decrease in the applicable discount rate pursuant to the specifications of the German Central Bank (Deutsche Bundesbank).

The increase in liabilities to affiliates resulted primarily from the granting of intragroup loans (€ 8.5 billion) and from the clearing account (€ 1.5 billion) with Merck Financial Services GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany.

Research and Development

Research and development spending amounted to € 782 million in 2015 (2014: € 774 million), a large portion of which was incurred also by companies outside the Group. Our Performance Materials business sector accounted for € 4 million of the total increase of € 8 million (1.0%). At 77.8% (2014: 78.6%) our Healthcare business sector accounted for the largest share of research and development spending. In Darmstadt, Healthcare mainly focuses on oncology as well as autoimmune and inflammatory diseases. Our Performance Materials business sector focuses its research primarily on developing new and improved basic materials and mixtures for LC displays as well as for innovative OLED applications. To strengthen the Pigments business, new effect pigments for the automotive, cosmetics and printing ink sectors were developed. In our Life Science business sector, research activities focused on technologies in the laboratory and life science segment, and new developments progressed. These include improved test kits, chromatography methods, substrates for separating active substances, and innovations in the fields of microbiology and hygiene monitoring.


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€ million / Change in % 2015 2014 Change
Healthcare 609 608 0.2
Life Science 38 35 8.6
Performance Materials 130 126 3.2
Other R&D spending that cannot be allocated to the individual business sectors 5 5 0.0
Total 782 774 1.0

The research spending ratio (research and development costs as a percentage of sales) was 20.1% (2014: 22.7%). In total, an average of 2,186 employees were engaged in R&D activities. Merck KGaA, Darmstadt, Germany, was one of the main research sites of the Group, accounting for 45.7% (2014: 45.5%) of total Group research and development spending.

Dividend

For 2015, we will propose to the General Meeting a dividend of € 1.05 per share. Based on our earnings expectations, the family of owners and shareholders of our company can continue to expect to receive an earnings-oriented dividend.

Personnel

As of December 31, 2015, Merck KGaA, Darmstadt, Germany, had 9,537 employees, a slight increase over the previous year (2014: 9,407).

Average number of employees by functional area:


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Average number of employees during the year 2015 2014
Production 3,114 3,024
Administration 2,254 2,174
Research 2,186 2,160
Logistics 583 542
Engineering 555 538
Sales and marketing 409 389
Other 348 551
Total 9,449 9,378

Risks and opportunities

Merck KGaA, Darmstadt, Germany, is largely subject to the same opportunities and risks as the Group. More detailed information on risks and opportunities is provided in the consolidated financial statements of Merck KGaA, Darmstadt, Germany.

Forecast for Merck KGaA, Darmstadt, Germany

Deviations of actual business developments in 2015 from previously reported guidance:

In the 2014 Annual Financial Statements of Merck KGaA, Darmstadt, Germany, we expected sales to increase slightly in 2015.

In our sales forecast, we anticipated a slight sales decrease for our Healthcare business sector as a result of lower sales of Erbitux®. The expected decline in sales of the Oncology franchise, however, was more than compensated for by the sales increases in the Cardiovascular and Thyroid franchises, leading to overall sales growth of 6.0%.

In our Performance Materials business sector, sales were expected to decrease due to the persisting high competitive pressure in the context of liquid crystals. This development did not materialize. The business units Display Materials (+ 27.9%), Advanced Technologies (+ 84.1%) and Pigments & Functional Materials (+ 7.9%) achieved sales growth, resulting in an overall sales increase in our Performance Materials business sector of 26.4%.

As expected, our Life Science business sector increased its sales (+ 8.4%) in 2015.

As stated in the Annual Financial Statements for 2014, we expected a decrease in profit from ordinary activities and thus also of financial resources.

Profit from ordinary activities in 2015 mainly declined compared with 2014 due to a lower investment result and the associated increase in financing costs in connection with the Sigma-Aldrich acquisition. The financial resources for this acquisition were provided through borrowings from Merck Financial Services GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany.

Forecast for 2016

A slight decline in sales is assumed for 2016 for our Healthcare and Performance Materials business sectors. This decline is expected to be nearly fully offset by sales growth in our Life Science business sector.

The financing costs of the Sigma-Aldrich acquisition will have a negative impact on earnings. Accordingly, we expect net income to decline. Net income will also be influenced significantly by investment results and dividend payments of subsidiaries. The provision of a sufficient amount of financial resources is ensured by Merck Financial Services GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany.

Currently no risks can be identified that could jeopardize the continued existence of Merck KGaA, Darmstadt, Germany.

The internal control system for the accounting process according to section 289 (5) HGB

The annual financial statements of Merck KGaA, Darmstadt, Germany, are prepared by Merck Accounting Solutions & Services Europe GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, and an independent legal entity within the Group. The financial statement process of Merck KGaA, Darmstadt, Germany, is based on the accounting provisions of the German Commercial Code with due consideration of key processes and uniform deadlines. The objective of the internal control system for accounting is to implement controls that will provide the security needed to ensure that financial statements are prepared in compliance with the relevant accounting laws and standards. It covers measures designed to ensure the complete, correct and timely conveyance and presentation of information that is relevant for the preparation of the financial statements. The financial reporting processes are monitored via a stringent internal control system that ensures the accuracy of financial reporting as well as compliance with the relevant legal regulations.

The main rules and tools used are as follows:

  • Accounting guidelines based on Group-wide guidelines. These Group-wide accounting guidelines are the responsibility of Group Accounting and are available to all employees of the relevant units via the company’s intranet. Detailed account allocation instructions are provided here for all major transactions. These guidelines include, for example, clear requirements for the inventory valuation process and transfer pricing within intragroup supply relationships.
  • Clearly defined segregation of tasks and assignment of responsibilities to the units involved in the financial reporting process. Through corresponding organizational measures, the company ensures that in the accounting system duties are segregated between the booking of transactions and the review and approval of transactions. These measures include the power of disposition approved by the Executive Board in relation to authorizing contracts and credit notes, as well as consistently implementing a dual-control principle.
  • Involvement of external experts as needed, for example for the valuation of pension obligations.
  • Use of suitable, largely uniform IT finance systems and the application of detailed authorization concepts to limit user rights on a need-to-have basis, taking into account principles concerning the segregation of duties.
  • System-based IT controls as well as manual, process-integrated controls, particularly within the scope of the financial reporting process.
  • Consideration of risks recorded and assessed by the risk management system in the annual financial statements insofar as this is required by existing accounting rules.

The management of the respective department is responsible for the implementation of these rules and utilization of the tools.

The annual financial statements of the company are the responsibility of the Chief Financial Officer, who is a member of the Executive Board of Merck KGaA, Darmstadt, Germany. This responsibility is laid down in the rules of procedure of the Executive Board.

All the structures and processes described are subject to constant review by Group Internal Auditing. The Executive Board determines the structures and processes that are to be audited in an annual audit plan.

The results of these audits are dealt with regularly in meetings of the Executive Board, the Supervisory Board and the Finance Committee of E. Merck KG, Darmstadt, Germany.