A strong equity position is important for Merck to ensure the continued existence of the company. Based on our financial strategy, the Executive Board regularly reviews various key figures that reflect the capitalization of the company. Gearing (ratio of net debt and pension provisions to net equity) and the equity ratio are important indicators here.

Within the scope of the capital increase conducted in February, the subscribed capital of the company was increased by 13,278,927 shares from 51,313,889 non-par-value shares to 64,592,816. The general partner E. Merck OHG participated in the capital increase with the same rights and conditions by increasing the number of theoretical shares it holds by 13,067,816 from 139,699,997 to 152,767,813. As a result, limited liability shareholders now hold a 29.72% interest and the general partner E. Merck OHG a 70.28% interest in the company’s share capital. As a result of the capital increase, the equity capital increased by €2,055.2 million. Transaction costs of €17.6 million related to the capital increase were recognized in equity. Moreover, during the reporting period a further 20,310 shares were issued as part of the stock option program. This led to a further increase in the number of shares to a total of 64,613,126. The amount resulting from the issue of shares by Merck KGaA exceeding the nominal amount is recognized in the capital reserves. The reserves also contain the retained earnings and the net retained profit of the consolidated subsidiaries as well as the income and expenses taken directly to equity. The currency translation difference includes the differences not recognized in income from currency translation by subsidiaries abroad. Currency translation differences decreased equity in 2007 by €205.8 million (2006: decreased by €128.6 million). Accordingly, as of December 31, 2007, currency translation differences in equity amounted to a loss of €348.4 million (2006: €317.4 million). Accumulated exchange rate losses of €174.9 million were recognized with the disposal of the Generics companies.

The disclosure of minority interest is based on the stated equity of the subsidiaries concerned after any adjustment required to ensure compliance with the accounting policies of the Merck Group, as well as pro rata consolidation entries. The interests of other shareholders in net equity mainly relates to the minority interests in Merck Ltd. India, the Merck Indonesia Group and Merck Ltd., Thailand.

In addition to the dividend payments to the shareholders of Merck KGaA and to minority shareholders in subsidiary companies of the Merck Group, the appropriation of profits includes the transfer of profits from Merck & Cie KG to E. Merck OHG in accordance with the company agreements and the reciprocal transfer of profits between E. Merck OHG and Merck KGaA in accordance with the Articles of Association. In accordance with the capital ratios, E. Merck OHG has a 70.28% interest in the profit/loss of Merck KGaA while Merck KGaA has an interest of 29.72% in the profit/loss of E. Merck OHG. Merck KGaA’s profit from ordinary activities less trade income tax, on which the appropriation of its profit is based, amounts to €92.6 million. Merck KGaA transferred €65.1 million of its profit to E. Merck OHG (2006: €400.9 million). In 2007, €30.4 million was transferred from Merck & Cie KG (2006: €28.3 million). In 2007, €438.2 million was transferred from the net retained profit and other retained earnings of Merck KGaA to E. Merck OHG (2006: E. Merck OHG transferred €203.8 million to the net retained profit and retained earnings of Merck KGaA). The profit/loss of E. Merck OHG, on which the appropriation of profit/loss is based, amounts to €–7.2 million (2006: €–1.7 million). Consequently, Merck KGaA will take over a loss of €2.1 million (2006: €4.0 million).

For 2007, a dividend of €1.20 per share plus a bonus of €2.00 per share will be proposed. This corresponds to a total dividend payment of €206.8 million to the limited liability shareholders.

The following table shows the development of changes taken directly to equity as a result of recognizing financial instruments at fair value in accordance with IAS 39.

As part of the stock option program for senior executives resolved by the Merck KGaA Annual General Meeting 2000, the creation of €5,720,000 contingent capital for issuing stock rights was approved. As a result, a maximum of 2,200,000 stock options may be issued from the approved contingent capital. To date, 2,153,500 options have been granted in two tranches. Each option entitles the bearer to acquire one share of Merck KGaA, provided that the exercise requirements are met. The term of the program for both tranches is six years. Both tranches had a minimum vesting period of 25 months. Stock options may only be exercised after the minimum vesting period if the stock price on the day before exercise is at least 30% higher than the option exercise price. The exercise price is the mean value of Merck’s shares in the Frankfurt XETRA trading system, commencing 30 days before the date of issue of the stock rights. In addition, the rights are subject to a lockup period that begins two calendar weeks before the date of publication of the Q1 and Q3 reports and eight calendar weeks before the date of publication of the H1 and Annual Reports. When granted, the first tranche included 766,500 options. As of October 2002, the options in the first tranche could be exercised at an exercise price of €37.41, provided that Merck shares were quoted at a price of at least €48.63. When granted, the second tranche included 1,387,000 options. These stock options may be exercised as of May 2004, at an exercise price of €34.35, provided that Merck’s share price is not below €44.66. Upon exercising the options, the shares carry dividend rights for the current and following fiscal years.

The development of all options on shares of Merck KGaA is presented in the following table:

The weighted average price of Merck KGaA’s shares in XETRA trading at the time of exercise of the stock options was €93.85 in 2007.

Moreover, options that have not been exercised or converted into cash are neither recorded in the balance sheet nor recognized in income in these financial statements.