[32] Provisions 

Provisions developed as follows:

Provisions for restructuring mainly include provisions for severance payments for employees in connection with restructuring projects, contractually agreed severance obligations and provisions for onerous contracts. The relevant provisions are recognized when detailed restructuring plans have been prepared and communicated.

As a pharmaceutical, chemical and life science company with global production operations, Merck is exposed to a multitude of litigation risks. These include in particular risks in the areas of product liability, competition and antitrust law, pharmaceutical law, patent law, tax law, and environmental protection. We are engaged in legal proceedings and government investigations, the outcome of which cannot currently be predicted. Appropriate provisions to cover these risks are disclosed on the relevant balance sheet date. Nevertheless, decisions by courts or government agencies – which, as experience has shown, involve uncertainties – or settlement agreements could lead to additional expenses or cash outflows that could have material effects on the financial and earnings position of the Merck Group. As of the balance sheet date, Merck recorded provisions for litigation amounting to € 473.7 million (2010: € 482.0 million). In 2011, additional provisions for litigation were set up and charged to other operating expenses. Provisions for litigation take into account the material litigation risks described in the following. Our former generics subsidiary Dey Inc., USA, is alleged to have falsely reported price information. Although Dey Inc. was divested within the context of the sale of the Generics business to Mylan Inc., PA (USA) in 2007, Merck continues to be liable for costs incurring from the aforementioned legal disputes since the mentioned risk was not transferred to Mylan. In this connection, claims were settled in a number of U.S. states as well as with the U.S. Department of Justice in previous years. In 2011, one settlement agreement was reached in a further U.S. state.

The legal dispute with the Italian company Italfarmaco S.p.A. in which Italfarmaco S.p.A. claims damages on account of an allegedly wrongful termination of a license and supply agreement relating to the product Rebif® in Italy was settled in 2011 out of court. The remaining provisions were released insofar as they do not relate to outstanding legal fees.

Moreover, as of the balance sheet date, provisions exist in connection with the legal dispute with the company Israel Bio-Engineering Project Limited Partnership (IBEP), in which IBEP claims intellectual property rights and license fees in connection with the funding and development of Rebif ® and other products.

Furthermore, provisions exist for patent litigation with Biogen Idec in connection with Rebif® in the United States. In addition, provisions exist in connection with the marketing of Rebif® in the United States.

As of the balance sheet date, provisions were also set up for litigation with the federal state of São Paulo, Brazil. The federal state of São Paulo is demanding compensation from the Brazilian company Merck S.A., Brazil, in connection with the marketing of the product Raptiva®. Merck withdrew Raptiva® from the market in early 2009.

For various smaller pending legal disputes against companies of the Merck Group, provisions that are considered appropriate from today’s perspective have been set up.

Provisions for employee benefits include obligations from the Merck Long-Term Incentive Plan (LTIP) amounting to € 33.7 million (2010: € 29.8 million). The LTIP offers eligible executives and employees of the Merck Group a long-term, profit-related compensation component. The Executive Board is excluded. The amount paid depends on the achievement of the two financial performance indicators “Underlying free cash flow on revenues (FCR)“ and ”Return on sales (ROS)“ at the end of a three-year period. The plan has caps on potential future payments in the event of a high level of target achievement. By contrast, if the level of target achievement is too low, no payments are made. Moreover, this item includes provisions for obligations for the partial early retirement program, other severance pay and anniversary bonuses.

With respect to provisions for defined-benefit pensions and other post-employment benefits, see Note [33].

Provisions for environmental protection exist in Germany and the United States. Other provisions consist additionally of provisions for uncertain commitments in the context of contributions, levies and fees.