Annual Report 2015 STRONGER 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, MilliporeSigma 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. GROUP Key figures Change € million 2015 2014 in % Net sales1 12,844.7 11,362.8 13.0 Operating result (EBIT) 1,843.2 1,762.0 4.6 Margin (% of net sales)1 14.3 15.5 EBITDA 3,354.1 3,122.9 7.4 Margin (% of net sales)1 26.1 27.5 EBITDA pre exceptionals 3,629.8 3,387.7 7.1 Margin (% of net sales)1 28.3 29.8 Earnings per share (€) 2.56 2.66 – 3.8 Earnings per share pre exceptionals (€) 4.87 4.60 5.9 Business free cash flow 2,766.2 2,605.1 6.2 1 The composition of net sales has changed, see ‟Changes to accounting and measurement principles and disclosure changes” in the Notes to the Group accounts. GROUP Net sales € million and 2015 12,844.7 Structure 2014 11,362.8 Group 2013 10,735.3 2012 10,755.7 2011 9,922.2 GROUP EBITDA pre exceptionals € million 2015 3,629.8 2014 3,387.7 2013 3,253.3 2012 2,964.9 2011 2,723.8 GROUP Business sectors and businesses Group Performance Business Healthcare Life Science Materials sectors Performance Biopharma Life Science Businesses Materials Consumer Health Allergopharma Biosimilars Our company has fundamentally changed over the past ten years. We have developed from a classic supplier of pharmaceuticals and chemicals to a global science and technology company. With our unique combination of highly specialized biopharmaceutical, life science and materials businesses, we are in a position today to offer solutions to support global megatrends such as health and digital­ ization. Our new brand communicates this new direction to our customers, partners and applicants. We want to be recognizable and remain visible so as to strengthen our well­known brand name. To achieve this, we have adopted a bold and vibrant appearance. ‟Today,ourcompanyisbetterpositioned thaneverbefore.Wecanbeproudof whatwearetoday:aleadingscience andtechnologycompanywhoseideas andproductscanreallymakeadifference intheworld.Withourthreebusiness sectorsHealthcare,LifeScienceand PerformanceMaterials,wearenotonly successful,butalsoimprovethelives ofpatients,customersandpartnersall overtheworld.” Karl-LudwigKley Chairman of the Executive Board 4 Magazine Table of contents Innovations are the essence of our activities. We work enthusiastically to develop future-oriented technologies and invest all our strength in promising areas of research such as cancer therapy, fertility treatment and new medicines, as well as in the development of cutting-edge materials for displays. The magazine in this annual report shows how we work on enriching human life through technological progress on a daily basis. HIGHLIGHTS OF PROGRESS 2015 20 – 23 6 – 7 Immuno-oncological therapies represent a new era in cancer treatment. Together with Pfizerwe aim to unlock the potential of this area of research through a stra- tegic alliance. A CLEAR VIEW AWARENESS 8 – 13 24 – 27 At our new Innovation Center in With our Capacity Advancement Pro- Darm stadt, Germany, scientists are gram, we aim to strengthen our educa- working to develop future-oriented tion and prevention efforts among peo- products and solutions, such as an in- ple living in developing countries. The genious artificial eye lens in which liq- focus is on diabetes, cancer and fertility uid crystals are used. treatment. READY FOR PRINTING GROWTH 14 – 19 28 – 30 OLED displays offer captivating advan- Having completed the acquisition of the tages, whether for smartphones or large laboratory supply company Sigma-Aldrich, televisions. With innovative printing we are now one of the leading players in processes, we want to play a pioneering the global life science industry – and also role in this field. have a superb e-commerce platform. Table of contents Annual Report 5 To Our Shareholders Corporate Governance 31 – 42 145 – 168 033 Letter from Karl-Ludwig Kley 147 Capital structure and governance bodies 038 The Executive Board of Merck KGaA, Darmstadt, Germany 040 Our Shares 148 Statement on Corporate Governance 164 Report of the Supervisory Board 166 Objectives of the Supervisory Board with respect to its composition Combined Management Report* Consolidated 43 – 144 Financial Statements 045 Fundamental Information about the Group 169 – 261 045 The Group 052 Objectives and Strategies 058 Internal Management System 172 Consolidated Income Statement 062 Corporate Responsibility 173 Consolidated Statement of Comprehensive Income 070 Research and Development 174 Consolidated Balance Sheet 080 People 175 Consolidated Cash Flow Statement 176 Consolidated Statement of Changes in Net Equity 086 Report on Economic Position 178 Notes to the Group Accounts 086 Macroeconomic and Sector-Specific Environment 262 Responsibility Statement 088 Review of Forecast against Actual 263 Auditor’s Report Business Developments 092 Course of Business and Economic Position 264 Business Development 2011 – 2015 092 Group 266 Information and Service 103 Healthcare Financial Calendar for 2016 109 Life Science 114 Performance Materials 119 Corporate and Other * T he management report of Merck KGaA, Darmstadt, Germany, has been combined with the Group manage- 120 Report on Risks and Opportunities ment report and published in both our 2015 Annual 131 Report on Expected Developments Report and our Annual Financial Statements. The annual 136 Report in accordance with section 315 (4) financial state ments and the combined management of the German Commercial Code (HGB) report of the Group and Merck KGaA, Darmstadt, Germany, 138 Additional information in accordance with for 2015 have been filed with the electronic German the German Commercial Code (HGB) Federal Gazette and are available on the website of the 144 Subsequent Events German company register. e 6 Magazine Highlights of 2015 Highlights of 2015 March 4 Our company enables employees to share in the company’s success We paid out a total of around € 300 mil- lion to employees around the world in May recognition of our business success in 2014, making this our highest profit - sharing payment ever. The good results of 2014 were mainly due to the success- ful implementation of the ‟Fit for 2018” 28 transformation and growth program. Opening of the OLED Application Center in Korea We opened our new OLED Application Center (OAC) in Pyeongtaek, Korea. With this € 7 million investment, we April are strengthening our OLED research activi ties and Korea’s leading role in 25 the display industry. German Innovation Award We received the German Innovation June Award of the German Federal Ministry for Economic Affairs and Energy for our innovative liquid crystal technology. A few weeks earlier (March 22), we had also been awarded the Innovation Prize 3 of German Industry in the ‟companies Launch of our Curiosity Campaign with innovative HR concepts” category in the United States for our Inno vation Cup and Innospire Launch of the cross-business ‟Smarter, initiatives. Together” campaign. With the initiative, we underscored our rich history of innovation and relentless questioning in the United States, the world’s largest pharmaceutical market. Our campaign aims to encourage scientists and engi- neers, among others, all over the world to share their passion and curiosity. e Highlights of 2015 Magazine 7 November 2 We are distinguished as a top employer by Science magazine October We were chosen as one of the world’s best employers in the biopharmaceutical industry by Science magazine, an inde- 13 pendent international publication. Stefan Oschmann appointed new Chairman of the Executive Board The Board of Partners of E. Merck KG, November June Darmstadt, Germany, appointed Stefan Oschmann as the new Chairman of the Executive Board and CEO of the Group. On conclusion of the Annual General Meeting on April 29, 2016, he will suc- 18 19 ceed Karl-Ludwig Kley, who will then Sigma-Aldrich acquisition closes New OLED production unit retire after nine years at the helm. With the acquisition of Sigma-Aldrich in Darmstadt for around US$ 17 billion, we completed We laid the cornerstone for a new OLED the largest acquisition in our company’s materials production unit in Darmstadt. history, thus establishing one of the Production of high-purity OLED ma- leading players in the over € 100 billion terials for use in state-of-the-art dis- October life science industry and a business with plays and lighting systems is scheduled around 20,000 employees, 300,000 to start in the approximately 2,000 pro d ucts and approximately one million square meter building in summer 2016. customers. Costing around € 30 million, the project is one of the largest single investments 14 made at the site in recent years. Brand relaunched We announced the relaunch of our brand identity. The revamped visual appear- November ance and the introduction of a new logo reflect the transformation into a global October science and technology company. Out- side the United States and Canada, we operate uniformly under our corporate 20 brand. Our company intends to double its presence in Africa by 2020 1 During its visit to Africa, our Execu tive Innovation Center inaugurated Board announced plans to double the We opened our Innovation Center in company’s headcount and sales on the Darmstadt, thereby creating a new continent within the next five years. To platform for innovations. The aims are achieve further growth, we are count- to promote the innovative potential of ing on the entrepreneurial spirit and employees and give external innovators innovative strength of this region.