Notes to the Interim Financial Statements of the Merck Group as of June 30, 2011 

These consolidated financial statements have been prepared with Merck KGaA, Darmstadt, which manages the operations of the Merck Group, as parent company.

Accounting policies

The unaudited interim financial statements of the Merck Group as of June 30, 2011 comply with IAS 34. They have been prepared in accordance with the International Financial Reporting Standards (IFRS) in force on the reporting date and adopted by the European Union. In accordance with IAS 34, a condensed scope of reporting as compared with the consolidated financial statements as of December 31, 2010 was selected. The accounting policies have remained unchanged in comparison with the previous year. The notes to the consolidated financial statements of the Merck Group for 2010, particularly the accounting policies, thus apply accordingly.

Income tax includes the taxes on taxable profit paid in the individual countries plus the change in deferred taxes. The income tax in the interim financial statements is calculated based on the income of the consolidated companies and the currently valid tax rate as a best possible estimate.

The preparation of the interim financial statements requires that assumptions and estimates be made to a certain extent. The assumptions and estimates are based on the state of knowledge and the data currently available.

The following amendments to standards, the following interpretations and the following amendment to an interpretation take effect as of fiscal 2011:

The new rules do not have any material effects on the interim financial statements.

Scope of consolidation

As of June 30, 2011, a total of 232 (December 31, 2010: 236) companies were fully consolidated. No companies were consolidated on a pro rata basis. Two associates were included using the equity method. The following changes have occurred since the beginning of 2011: Beijing Skywing Technology Co. was consolidated for the first time as of January 1, 2011. Three newly established companies were consolidated for the first time. Within the scope of the sale of the Crop BioScience business, two companies were deconsolidated. Six companies are no longer consolidated due to liquidations and mergers.

Divestment of the Crop BioScience business

The announced sale of our Crop BioScience business to Novozymes A/S, Denmark, took place in the first quarter of 2011. In the Group balance sheet as of December 31, 2010, the corresponding assets and liabilities were disclosed under “Assets held for sale” and “Liabilities directly related the assets held for sale”. The Performance Materials division generated sales of around € 46 million with this business in 2010. We received the proceeds of € 208.2 million from the sale in the first quarter of 2011. Merck generated a gain on the sale of € 157.4 million, which is disclosed in the income statement under exceptional items.

Based on the values on the closing date, the divestment of the Crop BioScience business had the following impact on the Group financial statements:

First-time consolidation of Beijing Skywing Technology

At the end of December 2010, Merck acquired 100% of the shares in Beijing Skywing Technology Co., Ltd., Beijing, China. The acquired company, which is now part of the Merck Millipore division, is a leading supplier to the biopharmaceutical sector in China. The selling price totaled € 14.5 million, € 10.1 million of which was paid to the seller in 2011. The first-time consolidation of Beijing Skywing Technology Co. took place on January 1, 2011.

Announced acquisition of the microbiology business of Biotest AG

On March 22, 2011, Merck announced its intention to acquire the microbiology business of Biotest AG. The transaction closing and the first-time consolidation of this business are expected to take place in the second half of 2011.

Reassessment of the business potential of cladribine tablets

In the first quarter of 2011, impairment losses of € 50.4 million were recorded under amortization of intangible assets in connection with the reassessment of the business potential of cladribine tablets. Due to the decision to no longer pursue the global approval process for cladribine tablets, additional expenses of € 20 million were recorded under other operating expenses and income.

Amortization of intangible assets

As described above, this line of the income statement includes impairment losses of € 50.4  million in connection with the reassessment of the business potential of cladribine tablets. The second quarter of 2011 includes impairments of € 63.4 million for safinamide, a potential add-on therapy for Parkinson’s disease, as well as € 35.4 million for the discontinued cancer treatment candidate IMO-2055. Furthermore, impairment losses of € 8.6 million on various patents in the Performance Materials division were recorded in the second quarter.

As of the beginning of the second quarter of 2011, the estimates regarding the remaining useful life of Rebif® were changed, shortening the amortization period by two years. Owing to this new estimate, amortization increased in the second quarter of 2011 by € 17.1 million. This change will increase amortizations by a total of € 51.3 million in 2011. In 2012, amortization will be € 68.4 million higher.

Impairment of Large-Scale Biotech production plant in Switzerland

Owing to the expected overcapacity at the LSB production plant currently being built at the Merck Serono Biotech Center in Switzerland, an impairment loss of € 160.7 million was recorded. This expense is recognized in the income statement under other operating expenses and income.

Valuation of Greek sovereign bonds

As of June 30, 2011, the balance sheet item “Marketable securities and financial assets” includes Greek sovereign bonds with a book value of € 36.1 million. The nominal value of these securities is € 55.4 million. We received these securities within the scope of an exchange of receivables that were due from Greek hospitals.

In the first half of 2011, an impairment loss of € 5.0 million was recorded, which led to a cumulative impairment on the Greek bonds of € 19.3 million as of June 30, 2011. The corresponding expense of € 5.0 million was recognized in other operating expenses for the first half of 2011. The Greek sovereign bonds are allocated to the measurement category “Available-for-sale financial assets” .

Exceptional items

In the first half of 2011, the exceptional items recorded in the income statement include the gain on the divestment of the Crop BioScience business amounting to € 157.4 million as well as a subsequent gain of € 6.8 million from the divestment of Théramex in 2010. In addition, exceptional items include expenses of € 17.3 million stemming from discontinued businesses.

Segment reporting

The segment report presents the assets, income and other key figures by operating segment. Segmentation was performed in accordance with the internal reporting of the Merck Group. The operating segments are described in detail in the sections about the divisions in the interim management report. Expenses and income as well as assets and cash flows are fully allocated to the reported divisions and, to the extent they relate to corporate functions, to the segment Corporate and Other. The financial result and income taxes as well as the resulting cash flows are reported in full under Corporate and Other. We determine the transfer prices of intragroup transactions in accordance with market values. There were no significant intercompany relations between the business segments.

As a result of the acquisition of Millipore in July 2010, the Chemicals business sector was reorganized. The figures as of June 30, 2010 have been adjusted accordingly to reflect the new divisional structure. As of 2011, the Cosmetic Actives business field is reported under the Performance Materials division. As of December 31, 2010, and in fiscal 2010, this business field was still part of the Merck Millipore division.

Operating assets have been reconciliated in the segment report as follows:

Notes to the Cash Flow Statement

The balance of interest paid and interest received resulted in a cash outflow of € 127.3 million in the first half of 2011 (first half of 2010: € 18.8 million). This strong increase is due to the interest payment date in March 2011 for major bonds issued in 2010 in order to finance the Millipore acquisition.

As a result of payments amounting to € 108.7 million in the first half of 2011, provisions for litigation were used and free cash flow was lowered by the corresponding amount in the reporting period.

Owing to the divestment of the Crop BioScience business, free cash flow increased by € 201.0 million. In addition, the receipt of the purchase price of € 265.1 million for Théramex, our former women’s health business which we sold in 2010, had a positive impact of € 265.1 million on free cash flow in 2011.

Earnings per share

Basic earnings per share equal net profit after non-controlling interest divided by the weighted average number of outstanding theoretical shares. The calculation of the theoretical number of shares is based on the fact that the general partner’s equity capital is not represented by shares. The share capital of € 168.0 million is divided into 64,621,126 shares. The general partner’s capital amounts to € 397.2 million or 152,767,813 theoretical shares. This results in a total of € 565.2 million or 217,388,939 outstanding theoretical shares.

As of June 30, 2011, there were no potentially dilutive shares. Diluted earnings per share corresponded to basic earnings per share.

Related-party disclosures

As of June 30, 2011, there were liabilities by Merck KGaA, Merck Financial Services GmbH and Merck & Cie, Altdorf, to E. Merck KG in the amount of € 475 million. In addition, as of June 30, 2011, there were receivables by Merck KGaA to E. Merck KG in the amount of € 3.1 million and to E. Merck Beteiligungen KG in the amount of € 2.6 million. The balances result mainly from the profit transfers by Merck & Cie to E. Merck KG as well as the reciprocal profit transfers between Merck KGaA and E. Merck KG. They included financial payables of € 315 million, which are subject to standard market interest rates. From January to June 2011, Merck KGaA performed services for E. Merck KG and Emanuel Merck Vermögens KG with a value of € 0.6 million and € 0.1 million, respectively. During the same period, E. Merck KG performed services for Merck KGaA with a value of € 0.5 million. From January to June 2011, companies of the Merck Group supplied goods with a value of € 1.1 million to associates. As of June 30, 2011, companies of the Merck Group had receivables from associates amounting to € 0.7 million.

Subsequent events

Merck had no material subsequent events.