Notes to the Interim Consolidated Financial Statements as of June 30, 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 interim financial statements of the Merck Group dated June 30, 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 change described in the following, the accounting policies have remained unchanged in comparison with the previous year.

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 include the taxes on taxable profit levied in the individual countries plus changes in deferred taxes 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 June 30, 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 seven liquidations or mergers as well as to the divestment of two companies. Three newly established companies were fully consolidated for the first time in June 2013.

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 half-year consolidated financial statements.

Sale of the Merck Serono buildings in Geneva

In May 2013, the Merck Serono division signed an agreement concerning the sale of the Merck Serono buildings in Geneva Sécheron. The title was transferred at the end of June 2013. The sale of the buildings was realized in connection with the divestment of two subsidiaries.

Trade accounts receivable

In the first six months of 2013, trade accounts receivable were sold in Italy and Spain with a nominal value of € 134.0 million for a price of € 127.7 million. Of this amount, trade accounts receivable with a nominal value of € 68.5 million were sold in the second quarter for € 65.7 million. In this connection, previously recorded allowances were reversed and disclosed under other operating income. The sold receivables do not involve any further rights of recovery vis-à-vis Merck.

Legal risks in connection with the former Generics business

In connection with the former Generics business, which was sold to Mylan in 2007, Merck continues to bear risks from certain proceedings against companies of the Generics group. In April 2013, the British Office of Fair Trading issued a statement of objections to Merck. It is alleged that Merck, or its former subsidiary Merck Generics (UK) Ltd., engaged in anticompetitive behavior in connection with the allegedly delayed market launch of a generic version of the product paroxetine. A provision has been set up in these financial statements to take this situation into account.

Moreover, in June 2013, the European Commission fined Merck, among others, for having engaged in anticompetitive behavior in connection with the allegedly delayed market launch of a generic version of the product citalopram. Merck had already set up the necessary provisions for this case in the previous year to cover the payment of the fine. Merck is considering filing an appeal with the European Court in Luxembourg.

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 flows 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, i.e. EBITDA before 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:

Restructuring charges of € 46.7 million in the first six months of 2013 (year-earlier period: € 365.8 million) were directly related to the “Fit for 2018” efficiency program. Of the impairment losses totaling € 31.2 million (year-earlier period: € 31.1 million), € 30.5 million (year-earlier period: € 20.9 million) were also attributable to the efficiency program. Including the restructuring charges, the total expenses for “Fit for 2018” thus amounted to € 77.1 million (year-earlier period: € 386.7 million). The losses from the divestment of businesses amounting to € –18.4 million (year-earlier period: € –10.2 million) relate mainly to subsequent expenses in connection with the divestment of the Generics business in 2007.

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

Notes to the cash flow statement

Free cash flow is an indicator used internally by Merck to measure the contribution of the divisions to liquidity. Free cash flow includes all net cash flows from operating activities as well as investing activities performed in connection with operating business. Not included in free cash flow are pure financial investments and similar monetary deposits of more than three months, which are also to be reported as net cash flows from investing activities under IFRS.

Free cash flow resulted as follows:

The sale of the buildings in Geneva resulted in a cash inflow of € 250.3 million, which was recorded under “Disposal of non-current assets”.

In addition to free cash flow, business free cash flow is an important indicator used to agree internal targets for steering liquidity. It comprises the major payment-relevant items that the individual businesses can influence.

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 six months of 2013.

As of June 30, 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 instruments 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 and currency options entered into to reduce the exchange rate risk primarily served 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 its 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 June 30, 2013, there were liabilities by Merck Financial Services GmbH, Merck KGaA, and Merck & Cie, Switzerland, to E. Merck KG in the amount of € 698.5 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 June 30, 2013, Merck KGaA was owed receivables of € 5.6 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 € 446.2 million, which were subject to standard market interest rates.

From January to June 2013, Merck KGaA performed services for E. Merck KG and Emanuel-Merck-Vermögens KG with a value of € 0.5 million and € 0.2 million, respectively. During the same period, E. Merck KG performed services for Merck KGaA with a value of € 0.5 million.

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, no events of special importance occurred that could have a material impact on the financial position and results of operations of the Merck Group.