INFINITELY CURIOUS Annual Report 2016 DISCLAIMER Publication of Merck KGaA, Darmstadt, Germany. In the United States and Canada the subsidiaries of Merck KGaA, Darmstadt, Germany, operate as EMD Serono in Healthcare, MilliporeSig- ma in Life Science and EMD Performance Materials. To reflect such fact and to avoid any misconception of the reader of the publication certain logos, terms and names of businesses of the publication have been substituted or additional descriptions have been added. This version of the publication, therefore, slightly deviates from the otherwise identical version of the publication provided outside the United States and Canada. INFINITELY For nearly 350 years, curious people at our company have been bringing ideas to life. As a global science and tech- nology company, a passion for research and discovery is our most valuable resource. With our three business sectors, namely Healthcare, Life Science and Performance Materials, we improve the quality of life of patients, increase the success of our customers, and offer solutions for diverse challenges. Curiosity is and remains our strongest driving force for future-oriented innovations. “ Curiosity fuels business development and enables companies like ours to remain competitive. In my opinion, we should even dare to be more curious. We need curiosity in order to understand technical progress and to shape our future actively and responsibly.” Stefan Oschmann, Chairman of the Executive Board and CEO Group Key figures GROUP Key figures Change € million 2016 2015 € million in % Net sales 15,024 12,845 2,179 17.0 % Operating result (EBIT)1 2,481 1,843 637 34.6 % Margin (in % of net sales)1 16.5 % 14.3 % EBITDA1 4,415 3,354 1,061 31.6 % Margin (in % of net sales)1 29.4 % 26.1 % EBITDA pre exceptionals1 4,490 3,630 861 23.7 % Margin (in % of net sales)1 29.9 % 28.3 % Profit after tax 1,633 1,124 509 45.3 % Earnings per share (€) 3.75 2.56 1.19 46.5 % Earnings per share pre exceptionals (€)1 6.21 4.87 1.34 27.5 % Business free cash flow1 3,318 2,766 552 20.0 % 1 Not defined by International Financial Reporting Standards (IFRS). GROUP Net sales € million 2016 15,024 2015 12,845 2014 11,363 2013 10,735 2012 10,756 GROUP EBITDA pre exceptionals € million 2016 4,490 2015 3,630 2014 3,388 2013 3,253 2012 2,965 Group Business sectors and businesses Business sectors Performance Healthcare Life Science Materials Businesses Performance Biopharma Life Science Materials Consumer Health Biosimilars Allergopharma w Highlights of 2016 January 28 Accelerator further expanded We established a new Accelerator program in Nairobi with a focus on digital health. At the same time, the application period for the second edition of the program at the Innovation Center in Darmstadt was kicked off. This represents a milestone for the our Accelerator on its journey to becoming a global platform. At both locations, start- ups from the fields of healthcare, life science and performance materials will April 29 receive extensive support. New Executive Board Chairman Stefan Oschmann took over as Chairman of the Executive Board. We owe our thanks to his predecessor Karl-Ludwig Kley, who held office since 2007, for fundamentally and successfully transforming our company into a stronger, more profitable and more innovative company. Likewise, we thank Bernd Reckmann, who also retired from the Executive Board and was succeeded by Udit July 19 Batra and Walter Galinat. US$ 115 million for a new Life Science hub in the United States We announced plans to build a new campus in Burlington, Massachusetts that will serve as a major hub for the North American Life Science business. As a premier global customer destination, the new campus will also house an M Lab™ Collaboration Center – a state-of-the-art, shared, explor- atory environment where our scientists and engineers can work together with customers to help solve their toughest life science challenges. Highlights of 2016 September 13 Start of the ‟WE100®” movement We are at the threshold of an era in which people will reach the age of 100 and more – while enjoying good health. This is September 7 not just the new purpose of our Consumer Health business, but also relates to society New OLED materials production as a whole. It is why we have launched the plant in Darmstadt ‟WE100®” movement, within the context By 2018, we aim to become one of the of which partnerships will be established leading suppliers of materials for organic with public and private organizations and light-emitting diodes (OLEDs). For this concrete actions will be coordinated around purpose, a new production plant was the theme of living 100 healthy years. inaugurated at the Darmstadt site after a construction period of 14 months. This has enabled a five-fold increase in our production capacity for OLED materials used in modern displays and lighting systems. The plant is one of the largest single investments our company has made at the Darmstadt site in recent years. Highlights of 2016 September 21 Construction of a state-of-the-art packaging center in Darmstadt We plan to invest more than € 50 million in a new packaging center of excellence at our pharmaceutical manufacturing site in Darmstadt. The focus will be on our Glucophage®, Concor® and Euthyrox® brands in order to meet increasing patient needs in the areas of diabetes, cardio- vascular diseases and thyroid disorders. Operations are scheduled to begin in mid-2018. October 11 We publish our first international curiosity study A curious person is more likely to bring an idea to life at work – 85% of employees in Germany, the United States and China October 19 agree with this statement. This is one of the many findings ofo ur first global 500 millionth praziquantel curiosity study, for which we investigated tablet donated the importance of curiosity at the workplace An estimated 260 million people world- and surveyed more than 3,000 full-time wide suffer from the insidious tropical employees. disease schistosomiasis. The infection rate is especially high among children and the consequences are particularly serious. Schistosomiasis stunts growth, causes learning disabilities, and leads to anemia. As part of our social respon- sibility, we have been supporting the World Health Organization (WHO) since 2007 in combating the disease. Our praziquantel tablets are the most effective treatment to date and is well tolerated. Highlights of 2016 October 28 ‟Science” magazine recognizes us a top employer According to a survey by the interna tional scientific publication ‟Science”, we rank 11th among the top 20 employers in the global biopharmaceutical industry. This is not only the third year in a row that we have been included in the top employer list, it also marks an improvement from 17th place in 2015. We achieved particular- November 14 ly good scores for the criteria: ‛employees treated with respect’, ‛work culture values Fourth place in the 2016 Access aligned’ and ‛has loyal employees’. to Medicine Index We also moved up the ranks in the Access to Medicine Index, from sixth to fourth place. The Access to Medicine Foundation recognized our access-related targets that are aligned with the United Nations Sustainable Development Goals. In terms of capacity-building and in intellectual property management transparency, we were the leading company in the index. Table of contents Magazine A CURIOUS SPECIES 2 – 7 LOOKING AHEAD 8– 13 DIGITAL HEALTH 14 – 17 PARTNER IN IDEAS 18 – 21 ON THE ROAD 22 – 27 MAKING IT BIG IN SCIENCE 28 – 32 Table of contents Report To Our Shareholders Corporate Governance 33 – 44 155– 184 035 Letter from Stefan Oschmann 157 Capital structure and governance bodies 040 The Executive Board of Merck KGaA, Darmstadt, Germany 042 Our Shares 158 Statement on Corporate Governance 180 Report of the Supervisory Board 182 Objectives of the Supervisory Board with respect to its composition Combined Consolidated Management Report* Financial Statements 45 – 154 185 – 271 047 Fundamental Information about the Group 188 Consolidated Income Statement 047 The Group 189 Consolidated Statement of Comprehensive 054 Objectives and Strategies Income 060 Internal Management System 190 Consolidated Balance Sheet 064 Corporate Responsibility 191 Consolidated Cash Flow Statement of contents Table Magazine and Report 072 Research and Development 192 Consolidated Statement of Changes in Net Equity 084 People 194 Notes to the Consolidated Financial Statements 090 Report on Economic Position 272 Responsibility Statement 090 Macroeconomic and 273 Auditor’s Report Sector-Specific Environment 093 Review of Forecast against Actual 274 Business Development 2012 – 2016 Business Developments 276 Information and Service 098 Course of Business and Economic Position Financial Calendar for 2017 098 Group 109 Healthcare 116 Life Science 121 Performance Materials 126 Corporate and Other 127 Report on Risks and Opportunities 139 Report on Expected Developments * The management report of Merck KGaA, Darmstadt, Germany, 144 Report in accordance with section 315 (4) has been combined with the Group management report and of the German Commercial Code (HGB) published in both our 2016 Annual Report and our Annual Financial 146 Additional information in accordance with Statements. The authoritative German versions of the annual financial state ments and the combined management report of the German Commercial Code (HGB) the Group and Merck KGaA, Darmstadt, Germany, for 2016 have 154 Subsequent Events been filed with the elec tronic German Federal Gazette and are available on the website of the German company register. Magazine 2 A curious species CURI OUS SPE CIESS Magazine 3 A curious species Would you have thought that What really is curiosity? In the following interview, Stefan Oschmann, our Chairman of the Executive Board and CEO, explains what the most productive human trait means to him.