Notes to the Interim Consolidated Financial Statements as of June 30, 2012

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 interim financial statements of the Merck Group as of June 30, 2012 comply with IAS 34. They have been prepared in accordance with the International 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, 2011 was selected. With the exception of the changes described in the following, the accounting policies have remained unchanged in comparison with the previous year.

As of fiscal 2012, “Exceptional items” are no longer disclosed in the income statement. The disclosures made under this item in the previous year have been allocated to “Other operating expenses and income” in accordance with their nature. Due to the allocation of exceptional items, the operating result and earnings before interest and tax (EBIT) are now identical.

Moreover, the method used to charge expenses for Group functions to functional expenses has been modified as of fiscal 2012. Whereas in the past, these expenses were also recorded under functional expenses in the income statement, they are now included under administration expenses. The Group functions affected in particular are those that perform legal, financial and organizational tasks to administer the Group. The income statement for 2011 has been adapted for comparability reasons.

In connection with the amended allocation of expenses for Group functions to functional expenses, their allocation to the operating divisions has also been modified within the scope of segment reporting. These expenses are now fully disclosed outside of the operating segments. For comparability reasons, the previous year’s figures in the segment report have been adjusted.

In June 2011, the IASB issued amendments to IAS 19 “Employee Benefits,” which were adopted by the EU in June 2012. The revised standard is applicable to annual periods beginning on or after January 2013. Merck made use of the possibility to adopt the standard earlier, and has been applying the rules contained in IAS 19 (2011) since January 1, 2012. At Merck, the changes that the amended standard involve relate in particular to expected returns on plan assets, the treatment of past service cost as well as top-up amounts within the context of partial retirement agreements. The new rules are to be applied retroactively. Consequently, the balances brought forward to January 1, 2011, the figures reported in the previous year as well as the balances brought forward to January 1, 2012 have been adjusted and stated on a comparable basis. Owing to the retroactive adjustments made, the opening balances as of January 1, 2011 have changed in the balance sheet as follows: Net defined benefit assets (other current assets) increased by € 1.8 million, provisions for employee benefits (long-term provisions) declined by € 7.3 million, and provisions for pensions and other post-employment benefits increased by € 3.4 million. Taking deferred taxes into consideration, this led overall to an increase of € 4.8 million in stockholders’ equity as of January 1, 2011. The adjustment of the income statement reported in the first half of 2011 led to an increase of € 2.4 million in expenses and adversely affected the financial result by € 3.8 million. Taking deferred taxes into consideration, this reduced profit after tax by € 5.4 million and earnings per share by € 0.02. Stockholders’ equity as of December 31, 2011 increased by a total of € 0.9 million as a result of the adjustments.

The explanations on accounting policies given in the notes to the consolidated financial statements of the Merck Group for 2011 otherwise apply unchanged.

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 rule is effective as of fiscal 2012:

• Amendment to IFRS 7 “Financial Instruments: Disclosures”

The new rule does not have any material effects on the interim financial statements.

Scope of consolidation

As of June 30, 2012, 220 (December 31, 2011: 228) companies were fully consolidated. No companies were consolidated either on a pro rata basis or at equity as of the balance sheet date. The following changes have taken place since the beginning of 2012: Merck Financial Trading GmbH, Darmstadt, which was established in 2011, was consolidated for the first time. Nine companies are no longer consolidated due to six liquidations and three mergers.

Other operating expenses and income

The item “Other operating expenses and income” in the income statement for the first half of 2012 shows an expense balance of € 633.2 million (year-earlier period: € 215.3 million expense balance). The sharp increase over the previous year was due mainly to one-time items. Whereas in the first six months of 2011 one-time items totaling € –54.6 million were reported, the first half of 2012 included one-time items of € –423.7 million. More information on the presentation of one-time items can be found in the section Segment Reporting (see below).

Amortization of intangible assets

The decline in amortization of intangible assets in the first half of 2012 to € 433.7 million (year-earlier period: € 567.2 million) is due to the fact that in 2011, impairment losses of € 157.9 million classified as one-time items were disclosed under this item. In the first half of 2012, “Amortization of intangible assets” does not include any impairment losses. More information on the presentation of one-time items can be found in the section Segment Reporting (see below).

Greek sovereign bonds

All Greek sovereign bonds were sold in the second quarter of 2012. Following the Greece debt cut in the first quarter of 2012, the nominal value of these securities was € 20.1 million (December 31, 2011: € 43.2 million before the debt cut). The net book value of the bonds was € 10.9 million on December 31, 2011. We received these securities in fiscal 2011 within the scope of an exchange of receivables that were due from Greek hospitals. On the selling date, the realized selling price of € 8.1 million largely corresponded to the net book value of the bonds. The impairment losses recorded in the first half of 2012 prior to the sale amounted to € 2.8 million and were disclosed under other operating expenses.

Trade accounts receivable

In the first half of 2012, trade receivables in Italy and Spain with a nominal value of € 175.3 million were sold for € 168.7 million. In this connection, allowances of € 9.1 million were reversed and disclosed under other operating income. The sold receivables do not involve any further rights of recovery vis-à-vis Merck.

In the first half of 2012, allowances for trade accounts receivable amounting to € 52.1 million (year-earlier period: € 50.7 million) were recorded and disclosed under other operating expenses.

New variable, long-term compensation plan

As of fiscal 2012, the previous long-term variable compensation plan (Merck Long-Term Incentive Plan) was replaced by a new long-term variable compensation plan linked to the Merck KGaA share price.

Under the new Merck Long-Term Incentive Plan, eligible executives and employees could be entitled to a certain number of Merck Share Units (MSUs) at the end of a three-year performance period. Following the expiration of the three-year performance period, the eligible individuals will be granted between 0% and 150% of the MSU entitlement depending on the development of two key performance indicators (KPIs):

a) the relative performance of the Merck share price compared to the performance of the DAX® with a weighting of 70%, and

b) the development of the EBITDA margin, adjusted for one-time items, during the performance period as a proportion of a defined target value with a weighting of 30%.

The eligible individuals receive a cash payment based on the number of MSUs granted. The value of an MSU corresponds to the average closing price of Merck shares in Xetra trading during the last 60 trading days prior to January 1 after the performance period.

The fair value of the liability for the new long-term, variable compensation plan has been disclosed under provisions for employee benefits on a pro rata basis for the vesting period already completed. The resulting expense for the first half of 2012 amounting to € 5.7 million has been recognized in the income statement.

Segment reporting

Notes to the cash flow statement

In the first half of 2012, interest paid amounted to € 132.8 million (year-earlier period: € 127.3 million).

The bond repaid in the reporting period was issued by Merck Financial Services GmbH, Germany. It had a nominal volume of € 500 million and matured in March 2012.

Free cash flow resulted as follows:

Earnings per share

Basic earnings per share equal profit after tax attributable to Merck KGaA shareholders 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, 2012, there were no potentially dilutive shares. Diluted earnings per share corresponded to basic earnings per share.

Related-party disclosures

As of June 30, 2012, there were liabilities by Merck Financial Services GmbH and Merck & Cie, Switzerland, to E. Merck KG in the amount of € 364.3 million. Additionally, as of June 30, 2012, Merck KGaA had receivables from E. Merck KG totaling € 29.6 million and from E. Merck Beteiligungen KG totaling € 1.6 million. Merck Financial Services GmbH had receivables from Merck Capital Asset Management Holding, Malta, amounting to € 0.2 million. The balances resulted 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 € 332.2 million, which were subject to standard market interest rates.

From January to June 2012, Merck KGaA performed services for E. Merck KG and Emanuel Merck Vermögens KG with a value of € 0.3 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.

Subsequent events

Subsequent to the balance sheet date, no further events of special importance occurred that could have a material impact on the financial position and results of operations of the Merck Group.