Notes to the Interim Consolidated Financial Statements as of March 31, 2013

These consolidated financial statements have been prepared with Merck KGaA, Frankfurter Strasse 250, 64293 Darmstadt, Germany, which manages the operations of the Merck Group, as parent company.

Accounting policies

The unaudited interim financial statements of the Merck Group dated March 31, 2013 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, 2012 was selected. With the exception of the changes described in the following, the accounting policies have remained unchanged in comparison with the previous year.

In June 2011, the IASB approved the amended version of IAS 19 “Employee Benefits,” which was adopted by the EU in June 2012. Starting with the interim financial statements as of June 30, 2012, Merck has 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. The figures published in the first quarter of 2012 were adjusted accordingly.

In a first step, the allocation of expenses for Group functions of Merck KGaA to the operating divisions was modified in fiscal 2012. In a further step, the corresponding disclosures for the consolidated subsidiaries were adjusted in fiscal 2013. Consequently, expenses for Group functions are no longer allocated to the operating divisions, but rather disclosed fully in the column ”Corporate and Other“ in the Segment Reporting. In order to ensure comparability, the previous year‘s Segment Reporting figures have been adjusted in accordance with the allocation rules for 2013.

The notes to the consolidated financial statements of the Merck Group for 2012, particularly the accounting policies, apply accordingly.

Income tax includes the taxes on taxable profit paid in the individual countries plus those changes in deferred taxes that are recognized in income. 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 current state of knowledge and the data available on the balance sheet date.

The following rules take effect as of fiscal 2013:

• IFRS 13 “Fair Value Measurement”
• Amendment to IAS 1 “Presentation of Financial Statements”
• Amendment to IAS 12 “Income Taxes“
• Amendment to IFRS 1 “First-time Adoption of International Financial Reporting Standards”
• Amendment to IFRS 7 “Financial Instruments: Disclosures”
• “Improvements to International Financial Reporting Standards” (IASB version issued in May 2012)
• IFRIC 20 “Stripping Costs in the Production Phase of a Surface Mine”

Based on the new IFRS 13, information on financial instruments in these consolidated financial statements has been expanded in comparison with previous interim financial statements. In accordance with the amendment to IAS 1, the components of the statement of comprehensive income have been grouped into items based on whether they are potentially reclassifiable to profit or loss subsequently, i.e. those that might be reclassified and those that will not be reclassified. The disclosures required by IFRS 7 about the effect of netting arrangements on the financial position have been included in the interim financial statements.

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

Scope of consolidation

As of March 31, 2013, 197 (December 31, 2012: 203) companies were fully consolidated. No companies were consolidated either on a pro rata basis or at equity as of the balance sheet date. The changes that have taken place since the beginning of 2013 are attributable to six liquidations.

Discontinuation of the cilengitide development program

Since the Phase III trial of cilengitide did not meet the primary endpoint, Merck decided to discontinue its activities to develop this active ingredient. The accounting impact has been taken into consideration in these interim financial statements.

Segment Reporting

Segmentation was performed in accordance with the internal organization and reporting structure of the Merck Group. The fields of activity of the individual divisions are described in detail in the sections about the divisions in the interim management report.

The column “Corporate and Other” includes assets and liabilities as well as income and expenses that cannot be directly allocated to the reportable segments; it serves the reconciliation to the Group numbers. These mainly relate to Group functions. The cash flow resulting from the financial result and income taxes are also disclosed under Corporate and Other.

Apart from sales, the main indicator used to measure the success of a segment is EBITDA pre one-time items (segment result).

We determine the transfer prices of intragroup transactions in accordance with market values. There were no significant transactions between the business segments.

The reconciliation of EBITDA pre of all operating businesses to earnings before income tax of the Merck Group was as follows:

One-time items comprised the following and were recorded in the income statement under other operating expenses and income:

The restructuring charges amounting to € 41.8 million (2012: € 10.5 million) were directly related to the efficiency program “Fit for 2018”. Impairment losses of € 26.6 million were also attributable to the efficiency program, resulting in total expenses of € 68.4 million for “Fit for 2018”, including restructuring charges.

The reconciliation of operating assets in the Segment Reporting was as follows:

Notes to the cash flow statement

Interest paid and interest received resulted in a total cash outflow of € 99.7 million in the first quarter of 2013 (previous-year quarter: € 121.5 million).

Free cash flow resulted as follows:

Business free cash flow comprised the following:

Earnings per share

Basic earnings per share are calculated by dividing the profit after tax attributable to the shareholders of Merck KGaA by the weighted average number of theoretical shares outstanding. 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 was divided into 64,621,126 shares. Accordingly, the general partner’s capital of € 397.2 million was divided into 152,767,813 theoretical shares. Overall, the total capital thus amounted to € 565.2 million or 217,388,939 theoretical shares outstanding. The weighted average number of shares was likewise 217,388,939 in the first quarter of 2013.

As of March 31, 2013, there were no potentially dilutive shares. Diluted earnings per share corresponded to basic earnings per share.

Information on the measurement of fair value as well as netting arrangements

On the reporting date, assets classified as available-for-sale financial assets and derivative financial instruments were measured at fair value.

Derivative financial investments are used exclusively to hedge and reduce the risks of interest rate and foreign exchange positions.

The following derivative financial instruments were held at the balance sheet date:

The stated fair values for derivatives do not include accrued interest (clean price). The maturity structure of the hedging transactions (nominal volume) is as follows as of the balance sheet date:

The forward exchange contracts that are entered into to reduce the exchange rate risk and currency options primarily serve to hedge intercompany financing in foreign currency as well as to hedge future cash flows.

The following table presents the reconciliation of the balance sheets items to the classes of financial instruments in accordance with IFRS 7 and provides information on fair value measurement:

The fair value of financial assets is based on the official market prices and market values quoted on the balance sheet date (Level 1 assets) as well as mathematical calculation models with inputs observable in the market on the balance sheet date. Level 1 assets comprise stocks and bonds and are classified as “available-for-sale”. Level 2 assets are primarily interest-bearing securities classified as “available-for-sale” as well as hedging and non-hedging derivatives. The fair value of interest-bearing securities is determined by discounting future cash flows using market interest rates. The fair value measurement of forward exchange contracts and currency options uses spot and forward rates as well as foreign exchange volatilities applying recognized mathematical principles. The fair value of interest rate swaps is determined with standard market valuation models using interest rate curves available in the market.

The fair values of the financial instruments disclosed in our balance sheet were determined as follows:

From an economic perspective, netting is only possible at Merck with derivatives. This possibility results from the framework agreements on derivatives trading which Merck enters into with commercial banks. However, Merck does not offset financial assets and financial liabilities in its balance sheet.

The following table presents the potential netting volume of the derivative financial assets and liabilities disclosed:

Related-party disclosures

As of March 31, 2013, there were liabilities by Merck Financial Services GmbH, Merck KGaA and Merck & Cie, Switzerland, to E. Merck KG in the amount of € 578.3 million as well as liabilities of Merck Financial Services GmbH to Merck Capital Asset Management, Malta, amounting to € 0.3 million. In addition, as of March 31, 2013, Merck KGaA was owed receivables of € 3.5 million by E. Merck Beteiligungen KG. 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 liabilities of € 243.4 million, which were subject to standard market interest rates.

From January to March 2013, Merck KGaA performed services for E. Merck KG and Emanuel-Merck-Vermögens-KG with a value of € 0.2 million and € 0.1 million, respectively.

During the reporting period, Merck KGaA sold a piece of developed land to Emanuel-Merck-Vermögens-KG. The purchase price of € 4.3 million corresponded to the market value, which an independent expert third party determined in an appraisal.

Subsequent events

Subsequent to the balance sheet date of March 31, 2013, the British Office of Fair Trading issued a statement of objections to Merck in connection with the former Generics business, which was divested in 2007. It is alleged that Merck, or its former subsidiary Generics (UK) Ltd., engaged in anticompetitive behavior in connection with the launch of the antidepressant paroxetine.

Since a comprehensive legal appraisal has not been concluded, the issue has not been reflected in this interim report.