Corporate and Other Audited

The segment Corporate and Other comprises Group administrative costs, the financial result, taxes as well as certain exceptional items not allocated to the individual divisions.

Group administrative costs relate primarily to Merck KGaA and consist of typical holding company functions. These include, for example, the corporate finance and accounting, tax, procurement, communications and human resources departments to the extent that their services cannot be allocated to the divisions. Corporate costs also include expenses for central, non-allocated IT functions and corporate IT projects in connection with the expansion and harmonization of IT systems within the Merck Group.

The operating result of the segment Corporate and Other totaled € –78 million in 2009 as compared with € –81 million in 2008. No exceptional items were allocated to the segment in 2009 since we recorded these in the operating divisions.

The financial result for 2009 improved to € –134 million from € –156 million in 2008. The change amounting to € 22 million results mainly from the lower interest component of currency hedging transactions. On the one hand, the varying currency-interest rate levels converged to a greater extent in 2009, while on the other hand the volume of currency hedging transactions was lower overall.

Decline in adjusted tax rate

Tax expenses consist of corporation and trade income taxes for the companies domiciled in Germany as well as comparable income taxes for companies domiciled abroad. This item contains not only effective taxes but also deferred taxes, which take into consideration the difference in the carrying values between the tax accounts of the Group companies and the consolidated balance sheet. The latter results primarily from amortization of intangible assets in the course of the purchase price allocation for Serono as well as from deferred taxes for additions to provisions in the Group. Moreover, in 2009 deferred tax assets were recognized for tax loss carryforwards. The tax rate adjusted for exceptional items decreased from 25.8% to 21.6%. On the one hand, this was affected by the utilization of tax loss carryforwards without deferred tax assets and on the other hand by the write-up of deferred tax assets for unrecognized tax loss carryforwards, which will be utilized in future periods.

Free cash flow was € –511 million in 2009. At € –496 million, underlying free cash flow adjusted for acquisitions and divestments was slightly lower than in 2008 at € –470 million. Apart from Group administrative costs, this figure mainly includes interest and tax payments. The impact of divestments on underlying free cash flow related in both 2009 and 2008 to subsequent payments for the Generics business, which was divested in 2007, as well as to subsequent tax payments and legal advisory fees.