Notes to the Interim Consolidated Financial Statements as of September 30, 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 September 30, 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 two disclosure changes described in the following, there were no material changes to accounting policies 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.

Amortization of intangible assets (excluding software), which was previously disclosed in a separate line in the income statement, was allocated to the corresponding functional costs in the third quarter of 2014. This has been done to ensure improved comparability of the income statement of the Merck Group with other companies. The amortization relates in particular to intangible assets recognized within the scope of the purchase price allocations for the acquisitions of Serono SA, the Millipore Corporation as well as AZ Electronic Materials S.A. The amortization of intangible assets disclosed within cost of sales was first capitalized during the measurement of inventories and then recorded as part of cost of sales when the corresponding product was sold. Amortization of software was already allocated to the functional costs in the past. This accounting policy change has led to an increase in marketing and selling expenses as well as cost of sales. The previous year’s figures have been adjusted accordingly and are presented in the following table:

The notes to the consolidated financial statements of the Merck Group for 2013, particularly the accounting policies, apply accordingly.

Income tax includes 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 September 30, 2014 223 (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, two mergers took place. Five newly established companies, 28 entities of the AZ Electronic Materials S.A. Group as well as one further and to date immaterial company were included in the consolidated financial statements for the first time.

Acquisition of AZ Electronic Materials S.A.

Obtainment of control following the public offer

Within the scope of a public takeover offer, on May 2, 2014 Merck had received valid acceptances of the offer in respect of 81.3% of the share capital and thus obtained control of the publicly listed company AZ Electronic Materials S.A., Luxembourg (AZ). The purchase price as well as the payments made to obtain control were as follows:

By June 27, 2014, Merck’s shareholding in AZ had increased to 99.8%. On this date, Merck initiated a squeeze-out, which was completed on July 2, 2014 with the acquisition of the remaining shareholding of 0.2%. The acquisition of non-controlling interests after May 2, 2014 was recognized in equity as a transaction without a change of control. Above and beyond the purchase price to obtain control, the following purchase price was paid in order to increase the shareholding:

Business activities as well as sales and earnings contribution of AZ

AZ is a leading global producer of specialty chemical materials that generated sales of US$ 730.3 million (2012: $ 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 specialty process chemicals used to manufacture integrated circuits in the highly differentiated premium segment. The Optronics division accounted for approximately 32.5% of sales in 2013. This division’s portfolio includes light-sensitive processing materials, or 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.

After May 2, 2014, Merck began to integrate AZ 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.

The impact of the consolidation of AZ on sales as well as net income after taxes between May 2, 2014 and September 30, 2014 amounted to € 230.8 million and € –37.3 million, respectively. This result takes into account higher cost of sales owing to the step-up of the acquired inventories to fair values.

Assuming the first-time consolidation of AZ had already taken place as of January 1, 2014, sales of the Merck Group for the period from January 1 to September 30, 2014 would have amounted to € 8,486.6 million (compared with reported sales of € 8,315.0 million) and net income after taxes would have been € 898.6 million (compared with reported net income after taxes of € 833.0 million). The determination of these figures assumed that the adjustments of the book values as a result of the purchase price allocation would have been identical.

Purchase price allocation

The acquired assets and liabilities were recognized at the following fair values on the date of the first-time consolidation: The possibility of measuring non-controlling interests at fair values on the acquisition date (full goodwill method) was not applied. Owing to takeover law restrictions, Merck could only gain access to the information needed to perform the purchase price allocation on the date on which it obtained control of AZ. For this reason, the purchase price allocation could not be entirely completed as of the report date. Therefore, the fair values presented in the following are to be considered preliminary.

The positive difference of € 879.5 million was recognized as goodwill. This results in particular from intangible assets that are not recognizable, for example the ability of AZ to develop new solutions and products for its technologically innovative industry as well as to a lesser extent from synergy effects expected from the integration of AZ into the Performance Materials division.

The development of goodwill during the period from first-time recognition and September 30, 2014 was as follows:

Within the scope of the acquisition, no conditional consideration was agreed upon which Merck would possibly have to pay in the future. The selling shareholders did not provide Merck with any assurances of compensation payments for contingencies related to the acquired assets or liabilities. Costs of € 7.5 million directly related to the acquisition of the company were recorded under other operating expenses in the nine-month period of 2014.

The most significant impact of the purchase price allocation resulted from the remeasurement of intangible assets, property plant and equipment, as well as inventories at fair value. Since the acquired inventories were sold by September 30, 2014, this led to additional cost of sales that were offset by the sales achieved. As a result, the sale of these inventories did not generate any additional income. The intangible assets identified during the purchase price allocation and recognized on the date of first-time consolidation were to the largest extent attributable to technology-related intangible assets as well as to brand rights. The multi-period excess earnings method was used for the valuation of technology-related intangible assets. The relief from royalty method was used for the valuation of the brand rights.

No contingent liabilities were identified in the course of the purchase price allocation. The gross amounts of the acquired receivables on the acquisition date were € 130.2 million. The best possible estimate of the irrecoverable receivables amounted to less than € 0.1 million.

Planned acquisition of Sigma-Aldrich Corporation

Merck and Sigma Aldrich Corporation, a life science and high-tech enterprise headquartered in St. Louis, Missouri (USA), announced on September 22, 2014 that they have entered into a merger agreement under which Merck will acquire Sigma-Aldrich for a total purchase price of approximately $ 17.0 billion or approximately € 13.1 billion.

The merger agreement will be presented to Sigma-Aldrich shareholders for approval at a special meeting of Sigma-Aldrich shareholders. The transaction is also subject to regulatory approvals and customary closing conditions and is expected to close by mid 2015.

The purchase price will be financed through a combination of cash on Merck’s balance sheet, bank loans and bonds. The currency risk stemming from the payment of the purchase price in U.S. dollars has been hedged using standard derivatives (forward exchange transactions and currency options) in line with the requirements for cash flow hedge accounting.

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 included property, plant and equipment, inventories, and goodwill allocated to the business field. The selling price amounted to € 22.6 million, payment of which had largely been received by the end of the second quarter of 2014.

License rights to ceralifimod returned

In October 2011, Merck had acquired exclusive global development and marketing rights to ceralifimod (ONO-4641) in multiple sclerosis (MS) outside Japan, South Korea and Taiwan from Ono Pharmaceutical Co., Ltd., Osaka, Japan (Ono). The drug candidate was in Phase II of clinical development. On June 17, 2014, Merck announced that it had reached a mutual agreement with Ono to terminate the license agreement and to return the license rights to Ono since the compound does not meet Merck’s criteria for further investment. The return of the license rights led in the second quarter to an impairment loss amounting to the full value of the relevant intangible asset of € 14.0 million. In addition, adequate provisions were set up for unavoidable subsequent costs that are likely to be incurred since under the terms of the agreement no further economic benefits are expected to flow to Merck.

Discontinuation of clinical development programs for tecemotide and plovamer acetate

On September 12, 2014, Merck announced that it would discontinue the clinical development program for its investigational MUC1 antigen-specific cancer immunotherapy tecemotide (also known as L-BLP25) in non-small cell lung cancer. Results of a similar Phase I/II study analyzed in August 2014 decreased the probability of the current studies to reach their goals and Merck decided to refocus efforts on other candidates in the pipeline. The discontinuation of the Phase III development program led in the third quarter to an impairment loss of the relevant intangible asset. Furthermore, in the third quarter Merck decided to terminate development activities for plovamer acetate (also known as Pl-2301), an investigational drug for the treatment of multiple sclerosis. The drug candidate is currently in Phase II of clinical development. Following a recent evaluation of all scientific and commercial aspects of this program Merck decided to focus on other pipeline candidates. There were no intangible assets in connection with this Phase II development program. Provisions for unavoidable subsequent costs that are likely to be incurred were set up during the reporting period since no further economic benefits are expected to flow to Merck from these development programms.

Verbal agreement on the resolution of the legal disputes with IBEP

As of September 30, 2014, Merck is involved in legal disputes with Israel Bio-Engineering Project Limited Partnership (“IBEP”). IBEP is asserting claims for property rights and the payment of license fees for the past and the future. The legal disputes are connected to the financing of the development of medical research projects in the early 1980s. Merck has taken appropriate accounting measures for these legal disputes in the past. In August 2014, Merck reached a verbal agreement with IBEP to settle the legal disputes by paying a sum of money. Based on this verbal agreement, the provision previously set up was adjusted in the third quarter. This verbal agreement is expected to be confirmed in writing in the fourth quarter of 2014.

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. These mainly relate to Group functions. Moreover, the column serves the reconciliation to the Group numbers. 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.

The composition of business free cash flow was as follows:

One-time items were as follows:

The restructuring costs amounting to € 59.8 million in the current fiscal year (year-earlier period: € 79.5 million) mainly related to the “Fit for 2018” transformation and growth program. Asset impairments amounting to € 4.1 million (year-earlier period: € 30.4 million) were also attributable to the program, which together with the restructuring expenses resulted in total expenses of € 60.9 million (year-earlier period: € 110.0 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:

Other operating expenses and income include the investment result amounting to € 1.2 million in the nine-month period (year-earlier period: € 1.4 million), which was attributable to Corporate and Other, as in the previous year.

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, taking into account the adjusted disclosure of amortization of intangible assets.

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. Subsequent to the resolution passed by the Annual General Meeting of Merck KGaA on May 9, 2014 approving a share split in a ratio of 1:2, the no-par-value shares with a pro rata amount of the share capital of € 2.60 each were divided into two shares with a pro rata amount of the share capital of € 1.30 each. In accordance with the redivision of the share capital of € 168.0 million into 129,242,252 shares, the general partner’s capital of € 397.2 million was divided into 305,535,626 theoretical shares. Overall, the total capital thus amounted to € 565.2 million or 434,777,878 theoretical shares outstanding. Taking the share split into account, the weighted average number of shares in the third quarter and in the first nine months of 2014 was likewise 434,777,878.

As of September 30, 2014, there were no potentially dilutive shares. Diluted earnings per share corresponded to basic earnings per share.

The calculation of basic and diluted earnings per shares was retroactively adjusted for all the reporting periods presented owing to the share split as of June 30, 2014.

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 future cash flows and intercompany financing in foreign currency.

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 with and without 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 September 30, 2014 there were liabilities by Merck Financial Services GmbH to E. Merck KG in the amount of € 575.3 million as well as to Merck Capital Asset Management, Malta, amounting to € 0.2 million. In addition, as of September 30, 2014, there were receivables by Merck KGaA to E. Merck Beteiligungen KG in the amount of € 8.4 million as well as by Merck & Cie, Switzerland, to E. Merck KG in the amount of € 5.6 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 € 575.5 million, which were subject to standard market interest rates.

From January to September 2014, Merck KGaA performed services for E. Merck KG, E. Merck Beteiligungen KG and Emanuel-Merck-Vermögens-KG with a value of € 1.0 million, € 0.3 million and € 0.3 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 net assets, financial position and results of operations of the Merck Group.