Report of the Supervisory Board

The Supervisory Board again properly executed its duties in 2012 in accordance with the law as well as the company’s Articles of Association and rules of procedure. In particular, the Supervisory Board monitored the work of the Executive Board diligently and regularly.

Cooperation with the Executive Board

The cooperation with the Executive Board was characterized by intensive, trustworthy exchange. During fiscal 2012, the Executive Board provided the Supervisory Board with regular written and verbal reports on the business development of Merck KGaA and the Merck Group. In particular, the Supervisory Board was informed about the market and sales situation of the company against the background of the macroeconomic development, the financial position of the company and its subsidiaries along with their earnings development, as well as corporate planning. Within the scope of quarterly reporting, the sales and operating results were presented for the Merck Group as a whole, and broken down by division. Aside from the Supervisory Board meetings, the Chairman of the Supervisory Board also maintained and continues to maintain a regular exchange of information with the Chairman of the Executive Board.

Key topics of the Supervisory Board meetings

Five Supervisory Board meetings were held in fiscal 2012. At these meetings, the Supervisory Board discussed the reports of the Executive Board in detail and discussed company developments and strategic issues together with the Executive Board.

At the meeting held on February 24, 2012, the Supervisory Board dealt mainly with the annual financial statements and consolidated financial statements for 2011 as well as the corresponding management reports. The Executive Board reported on business developments in 2011 and the key information contained in the 2011 annual financial statements. In addition, the auditor reported on the examination of the financial statements. The Supervisory Board approved the proposals to be made to the Annual General Meeting and adopted the statement on corporate governance including the Statement of Compliance with the German Corporate Governance Code in a joint report of the Executive Board and Supervisory Board. Lastly, the risk report, planning and the “Fit for 2018” program were topics of this meeting.

The meeting held on May 3, 2012 focused on current business developments in the first quarter of 2012. In addition, the Supervisory Board closely examined the internal auditing system. Furthermore, the head of Group Internal Auditing submitted her report on the audits conducted in 2011 and the results thereof. She also provided an outlook on the areas of focus of Group Internal Auditing in 2012. The meeting also focused on reporting as well as a discussion on the work of the Research and Development Committee of the Board of Partners of E. Merck KG. Moreover, the Compliance Report for 2011 was explained and discussed. Lastly, a discussion with the Executive Board on the status of the “Fit for 2018” program took place.

On May 15, 2012, an extraordinary Supervisory Board meeting was held at which the contents and presentations of Capital Market Day, which was also held on May 15, 2012, were discussed. The meeting focused on medium-term financial targets and the planned cost efficiencies.

At its meeting on July 24, 2012, the Supervisory Board discussed not only business developments in the first half of 2012 but also the report of KPMG on the audit review of the abridged financial statements and the interim management report of the Group as of June 30, 2012. The company’s risk management was a further topic of focus. For this purpose, the company risk manager presented his annual report to the Supervisory Board. Apart from the individual risks that had been identified as well as the approach to handling them, he presented the current risk assessment criteria. No risks that threaten the continued existence of the company were identified. The Executive Board then gave a report on the current status of the “Fit for 2018” program, which was followed by a discussion.

At the fifth Supervisory Board meeting on November 1, 2012, the Supervisory Board dealt with the report of the Executive Board on the third quarter of 2012. Here, the Executive Board also reported on the progress of the “Fit for 2018” program. In addition, the head of Group Legal & Compliance presented the compliance report for 2012. In addition, the report of Group Internal Auditing on the first half of 2012 was discussed.

Annual financial statements

The annual financial statements of Merck KGaA, the consolidated financial statements of the Merck Group, and the management reports for Merck KGaA and the Merck Group, including the accounts, were audited by KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin. The auditors issued an unqualified audit opinion on the annual financial statements and management report for Merck KGaA in accordance with German Auditing Standards. For the consolidated financial statements prepared in accordance with International Financial Reporting Standards, the auditors issued the auditor’s report, reproduced in the Annual Report of the Merck Group. In addition, the auditors audited the calculation of Merck KGaA’s participation in the profits of E. Merck KG in accordance with Article 27 (2) of the Articles of Association. The annual financial statements of Merck KGaA, the consolidated financial statements of the Merck Group, the management reports for Merck KGaA and the Merck Group, and the proposal by the Executive Board for the appropriation of the net retained profit were presented and distributed to the Supervisory Board, together with the auditor’s reports.

In accordance with Article 14 (2) of the Articles of Association, the Supervisory Board also examined the annual financial statements of Merck KGaA and the management report for Merck KGaA, the proposal for the appropriation of the net retained profit and the auditor’s report presented in accordance with Article 27 (2) of the Articles of Association. It also examined the consolidated financial statements of the Merck Group as well as the management report for the Merck Group, and took note of the auditor’s report of KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin.

The discussion of the relevant agenda item at the Supervisory Board’s meeting on March 6, 2013 to approve the financial statements was also attended by the auditors who sign the audit opinion on the annual financial statements of Merck KGaA and the consolidated financial statements of the Merck Group, and who reported on their audit. The Supervisory Board took note of and approved the results of the audit. On completion of its examination, the Supervisory Board raised no objections and thus approves the annual financial statements and management report for Merck KGaA, the consolidated financial statements of the Merck Group and the management report for the Merck Group prepared by the Executive Board, as well as the report presented by the auditors in accordance with Article 27 (2) of the Articles of Association. Following its own examination of the situation, the Supervisory Board gave its consent to the proposal for the appropriation of the net retained profit.

Corporate governance and Statement of Compliance

Corporate governance is a topic of high importance to the Supervisory Board. In its own estimation, the Supervisory Board has an adequate number of independent members. There were no conflicts of interest, as defined by the German Corporate Governance Code, involving Supervisory Board members during 2012. After addressing corporate governance topics in detail, the Executive Board and Supervisory Board resolved to adopt the updated Statement of Compliance on February 20, 2013 (Executive Board) and on March 6, 2013 (Supervisory Board) and jointly issued it on March 6, 2013 in accordance with section 161 AktG. The statement is permanently available on the website of Merck KGaA. More information on corporate governance at Merck KGaA, including the compensation of the Executive Board and Supervisory Board, is given in the Statement of Compliance.

Committees

The Supervisory Board of Merck KGaA currently has no committees on account of the special features that apply to the Supervisory Board of a corporation with general partners (KGaA) under German company law and because a corresponding need for this has not emerged to date. Therefore, no report is given on the work of committees.

Personnel matters

No member of the Supervisory Board participated in less than half of the Supervisory Board meetings in fiscal 2012. The following changes in the composition of the Supervisory Board took place in 2012: Effective April 30, 2012, Mr. Osman Ulusoy retired from the Supervisory Board. Mr. Jürgen Glaser was appointed by the court as a new member of the Supervisory Board as of May 1, 2012. Mr. Frieder Kaufmann retired from the Supervisory Board on May 10, 2012. Effective May 11, 2012, Mr. Berthold Wagner, previously replacement member for Mr. Frieder Kaufmann, became a member of the Supervisory Board and retired from the Supervisory Board as of December 31, 2012. Mr. Jens Frank was appointed by the court as a new member of the Supervisory Board effective January 31, 2013. There were no new elections, new appointments to bodies or formations of new bodies beyond those described in the foregoing.

Darmstadt, March 6, 2013

The Supervisory Board of Merck KGaA

Rolf Krebs
Chairman