Since 2007, royalty income is no longer shown on a separate line above the operating result. Instead, it is reported under total revenues along with sales. This presentation has been selected since patent and license income is a common form of revenue in the pharmaceutical industry and with the acquisition of Serono, the significance of these amounts is greater to Merck than in the past. The previous year’s presentation has been made comparable and key figures have been adjusted accordingly.
Additional amortization of intangible assets resulting from the Serono purchase price allocation will strongly impact the future results of Merck. In order to increase the transparency of the income statement, as of 2007 the amortization of intangible assets is presented on a separate line above the operating result. This item primarily comprises amortization in connection with the allocation of the Serono purchase price, but also to a lesser extent amortization of other intangible assets. This item does not take into consideration amortization of software, which is still included under operating expenses and is of secondary importance overall. The change lowered the marketing and selling expenses reported in 2006 by €8.0 million. Of this amount, €3.8 million related to the Merck Serono division, €1.8 million to the Consumer Health Care division, €0.2 million to the Liquid Crystals division, €1.8 million to the Performance & Life Science Chemicals division and €0.4 million to the segment Corporate and Other. For the same reason, research and development costs decreased by €4.0 million. Of this amount, €0.7 million relates to the Merck Serono division and €3.3 million to the Liquid Crystals division.
Since 2007, we report inventory write-downs, which were previously included under other operating expenses, as a component of cost of sales. The adjustment was made in order to improve the informative value of the income statement and to permit a causal allocation of the costs to the relevant functions. The previous year’s figures are presented accordingly on a comparable basis. As a result of these changes, the cost of sales reported in 2006 increased by €56.4 million. Of this amount, €17.6 million related to the Merck Serono division, €2.5 million to the Consumer Health Care division, €23.0 million to the Liquid Crystals division, €12.6 million to the Performance & Life Science Chemicals division and €0.7 million to the segment Corporate and Other. By contrast, other operating expenses declined.
Previously, the financial result was allocated to the divisions. As of this year, we disclose the financial result in full in the segment Corporate and Other since it is no longer possible to allocate the financial result to the individual divisions subsequent to the acquisition of Serono and the disposal of the Generics business. In accordance with these structural changes, the previous year’s presentation has been made comparable. As a result of this change, the free cash flow reported in 2006 for the Merck Serono and Consumer Health Care divisions increased by €25.7 million and €11.2 million, respectively, as did that of Generics, a discontinued operation, by €9.2 million. The free cash flow reported in 2006 for the Liquid Crystals and Performance & Life Science Chemicals divisions declined by €4.6 million and €11.6 million, respectively, as did that of the segment Corporate and Other by €29.9 million.
