Notes to the Interim Consolidated Financial Statements as of March 31, 2014

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, 2014 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 as well as in accordance with section 37x para 3 of the German Securities Trading Act (WpHG). In accordance with IAS 34, a condensed scope of reporting as compared with the consolidated financial statements as of December 31, 2013 was selected.

With the exception of the disclosure changes described in the following, the accounting policies have remained unchanged in comparison with the previous year.

Effective January 1, 2014, two product groups, Neurobion® (a vitamin B-based analgesic) and Floratil® (a probiotic antidiarrheal), were transferred from the Merck Serono division to the Consumer Health division. A detailed presentation of the resulting disclosure changes in segment reporting can be found in the information on segment reporting.

The notes to the consolidated financial statements of the Merck Group for 2013, 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 standards take effect as of fiscal 2014:

• IFRS 10 “Consolidated Financial Statements”
• IFRS 11 “Joint Arrangements”
• IFRS 12 “Disclosure of Interests in Other Entities”
• Amendments to IAS 27 “Separate Financial Statements”
• Amendment to IAS 28 “Investments in Associates and Joint Ventures”
• Amendment to IAS 32 “Financial Instruments: Presentation”
• Amendment to IAS 36 “Impairment of Assets”
• Amendment to IAS 39 “Financial Instruments: Recognition and Measurement”
• Amendments to IFRS 10 “Consolidated Financial Statements”
• Amendment to IFRS 11 “Joint Arrangements”
• Amendments to IFRS 12 “Disclosure of Interests in Other Entities”

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

Merck applied the amendment to IAS 36 “Impairment of Assets” in advance in the consolidated financial statements as of December 31, 2013.

Scope of consolidation

As of March 31, 2014 192 (December 31, 2013: 191) companies were fully consolidated. No companies were consolidated using either the proportionate consolidation method or the equity method as of the balance sheet date. Since the beginning of 2014, one merger took place. Two newly established companies were included in the consolidated financial statements for the first time.

Obtainment of control over AZ Electronic Materials S.A. after the balance sheet date

On December 20, 2013, Merck published an offer to acquire the entire share capital of AZ Electronic Materials S.A., Luxembourg, (AZ), by way of a cash payment. The successful completion of the transaction was recently still conditional upon antitrust clearance as well as the achievement of a minimum acceptance level of 95% of the share capital. On April 30, 2014, Merck was granted the final, outstanding antitrust clearance; at the same time the minimum acceptance level was lowered to 75% of the share capital. As of May 2, 2014 a total of 81.3% of the share capital of AZ had been tendered. On this date, Merck declared the offer as unconditional in all respects, thereby triggering the transfer of the shares, so that this can be deemed as the date of the obtainment of control over AZ. The purchase price of the acquired shareholding was GBP 1.25 billion and will be paid entirely in cash. As of May 8, 2014, Merck’s shareholding in AZ increased to 97.9%.

AZ is a leading global producer of specialty chemical materials that generated sales of US$ 730.3 million (2012: US$ 793.9 million) and profit after tax of US$ 57.3 million (2012: US$ 83.3 million) in 2013. Around 67.5% of sales were attributable to the IC Materials division, which supplies process chemicals used to manufacture integrated circuits. The Optronics division accounted for approximately 32.5% of sales in 2013. This division’s portfolio includes photoresists for the manufacture of flat panel displays, as well as silicon-chemistry-based products for optoelectronics. As of the end of 2013, AZ had a total of 1,131 employees.

AZ will be integrated into the Performance Materials division. The aim of the acquisition is to further strengthen Merck’s materials and specialty chemicals business by joining forces with one the leading suppliers of high-tech materials for the electronics industry. Since legal regulations prevented Merck from accessing information needed to perform the purchase price allocation before the date on which it obtains control of AZ, the disclosure of further information – for instance on the fair values of the acquired assets and liabilities – was not possible as at the preparation date of the consolidated interim financial statements.

Divestment of the Discovery and Development Solutions business field

Effective March 31, 2014, the Discovery and Development Solutions business field of the Merck Millipore division was sold to Eurofins Scientific S.A., Luxembourg. The assets sold were reported as a disposal group in the consolidated financial statements as of December 31, 2013 and include property, plant and equipment, inventories, and goodwill allocated to the business field. The selling price amounted to € 22.6 million.

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 flows from the financial result and income taxes are also disclosed under “Corporate and Other”.

Apart from sales, the success of a segment is mainly determined by EBITDA pre one-time items (segment result) and business free cash flow. EBITDA pre one-time items and business free cash flow are performance indicators not defined by International Financial Reporting Standards. However, they represent important variables used to steer the Merck Group. To permit a better understanding of operational performance, EBITDA pre one-time items excludes depreciation and amortization in addition to specific income and expenses of a one-time nature presented in the following. Among other things, business free cash flow is also used for internal target agreements and individual incentive plans.

Transfer prices for intragroup sales are determined on an arm’s-length basis. There were no significant intercompany relations between the business segments.

The following table presents the reconciliation of EBITDA pre one-time items of all operating businesses to the profit before income tax of the Merck Group.

Business free cash flow comprised the following:

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

The restructuring costs amounting to € 15.1 million (Q1 2013: € 41.8 million) were directly related to the “Fit for 2018” transformation and growth program. Asset impairments amounting to € 1.2 million (Q1 2013: € 26.6 million) were also attributable to the program, which together with the restructuring expenses resulted in total expenses of € 16.3 million (Q1 2013: € 68.4 million) in connection with “Fit for 2018”.

The reconciliation of operating assets presented in the Segment Reporting to the total assets of the Merck Group was as follows:

The adjustments of the previous year’s figures for the Merck Serono and Consumer Health divisions owing to the transfer as of January 1, 2014 of the two product groups Neurobion® (a vitamin B-based analgesic) and Floratil® (a probiotic antidiarrheal) from the Merck Serono division to the Consumer Health division are presented in the following table.

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 2014.

As of March 31, 2014, there were no potentially dilutive shares. Diluted earnings per share corresponded to basic earnings per share.

Information on the measurement of fair value

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 as of the balance sheet date:

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 sheet 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 and liabilities is based on the official market prices and market values quoted on the balance sheet date (Level 1 assets and liabilities) as well as mathematical calculation models with inputs observable in the market on the balance sheet date (Level 2 assets and liabilities). Level 1 assets comprise stocks and bonds and are classified as “available-for-sale”, Level 1 liabilities comprise issued bonds and are classified as “other liabilities”. Level 2 assets and liabilities are primarily liabilities to banks classified as “other liabilities”, interest-bearing securities classified as “available-for-sale” as well as derivatives in and not in hedging relationships. 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 the balance sheet and the fair values deviating substantially from the carrying amount were determined as follows:

Related-party disclosures

As of March 31, 2014, there were liabilities by Merck KGaA, Merck Financial Services GmbH and Merck & Cie, Switzerland, to E. Merck KG in the amount of € 761.8 million as well as liabilities of Merck Financial Services GmbH to Merck Capital Asset Management, Malta, and Merck Capital Asset Management Holding, Malta, amounting to € 0.2 million and € 0.1 million, respectively. In addition, as of March 31, 2014, Merck KGaA had receivables from E. Merck Beteiligungen KG in the amount of € 4.7 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 liabilities of € 350.9 million, which were subject to standard market interest rates.

From January to March 2014, Merck KGaA performed services for E. Merck KG and Emanuel-Merck-Vermögens-KG with a value of € 0.4 million and € 0.1 million, respectively.

Subsequent events

Merck obtained control over AZ Electronic Materials S.A., Luxembourg, on May 2, 2014. Further details of this acquisition can be found under “Obtainment of control over AZ Electronic Materials S.A. subsequent to the balance sheet date”.

On May 9, 2014, the Annual General Meeting resolved to redivide the share capital of Merck KGaA so that one existing company no-par value share with a pro rata amount of the share capital of € 2.60 is to be divided into two no-par value shares with a pro rata amount of the share capital of € 1.30 each (2:1 share split). The implementation of this resolution requires, among other things, entry of the corresponding amendment to the Articles of Association in the Commercial Register. This entry had not yet been made as of the date of preparation of these financial statements. The calculation of earnings per share and the share price therefore do not yet take into account the doubling of the number of shares.

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