Key financial performance indicators
of the Merck Group Audited

Return on sales (ROS or the ratio of operating result to total revenues) and underlying free cash flow on revenues (FCR) are our two leading financial indicators. The divisions use them to steer their business and we also use them for short- and long-term internally agreed targets.

In 2009, ROS declined from 14.9% to 8.4%. Total revenues remained stable; however, the operating result was considerably lower than in 2008. This was due not only to higher operating expenses, especially in the areas of marketing and research, but also to one-time expenses in connection with write-downs, provisions for litigation, and currency risks in Venezuela. These factors adversely affected ROS.

By contrast, FCR developed favorably in the fourth quarter. This key performance indicator increased from 7.9% to 11.0% in 2009.

We refer to the average of the two indicators ROS and FCR as the “Merck Business Target“ (MBT). It is used for performance-based short- and long-term compensation systems and amounted to 9.7% as compared with 11.4% in 2008. Both indicators, ROS and FCR, are presented by division in the Segment Reporting, which can be found in the Notes to the Consolidated Financial Statements.

For EBITDA, as per the definition, depreciation and amortization of non-current assets are added back to profit before taxes. For Merck, EBITDA is also an important financial indicator. Since the acquisition of Serono, amortization of intangible assets has been lowering the operating result by around € 550 million every year.

When high impairment losses are additionally incurred, EBIT or the operating result alone does not reflect the actual earning power of the business. In 2009, EBITDA declined from € 1,947 million to € 1,625 million.