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Additional Information in accordance with the German Commercial Code (HGB)1

1 1 Owing to the altered expectations as regards the impact of the Covid-19 pandemic, this 2020 forecast for Merck KGaA, Darmstadt, Germany, was updated accordingly on May 12, 2020.

The management report of Merck KGaA, Darmstadt, Germany, has been combined with the Group management report. The annual financial statements and the combined management report of the Group and Merck KGaA, Darmstadt, Germany, for 2019 are being filed with the electronic German Federal Gazette (elektronischer Bundesanzeiger) and are available on the website of the German company register.

Merck KGaA, Darmstadt, Germany, headquartered in Darmstadt, is the parent company of the Group. In addition to its function as a holding company, Merck KGaA, Darmstadt, Germany, generates sales in the Healthcare, Life Science, and Performance Materials business sectors. The Healthcare business sector has been run in a separate company, Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, since April 1, 2019 (see “Effects of material company agreements on the net assets, financial position, and results of operations”). Merck KGaA, Darmstadt, Germany, bears a significant portion of the Group-wide research and development costs, and employs the majority of the 11,000-plus workforce in Darmstadt. Of that number, just under 3,000 employees of the Healthcare business sector have been employed at a separate company, Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, since April 1, 2019.

The financial statements of Merck KGaA, Darmstadt, Germany, have been prepared in accordance with the provisions of the German Commercial Code (HGB), as amended by the German Accounting Directive Implementation Act (BilRUG), and the German Stock Corporation Act (AktG). The full version of the annual financial statements of Merck KGaA, Darmstadt, Germany, together with the unqualified auditor’s opinion has been submitted to the operator of the electronic Federal Gazette (elektronischer Bundesanzeiger), where they are published and forwarded to the company register.

Statement on Corporate Governance

The Statement of Corporate Governance according to section 289a of the German Commercial Code (HGB) is contained in the “Corporate Governance” section.

Effects of material company agreements on the net assets, financial position, and results of operations

End of the temporary business lease of the Healthcare business sector

As part of the strategic development of Merck KGaA, Darmstadt, Germany, the existing operating activities of the Healthcare, Life Science, and Performance Materials business sectors within Merck KGaA, Darmstadt, Germany, together with the relevant assets and liabilities (hereinafter: “operating sectors”) were spun off at their carrying values into three separate companies (hereinafter: “OpCo” or plural “OpCos”) with the legal form of a GmbH or German limited liability corporation (operating spin-off). This operating spin-off is based on the spin-off and takeover agreement concluded between Merck KGaA, Darmstadt, Germany, and the OpCos in notarized form on March 2, 2018. Following approval by the 2018 Annual General Meeting, the operating spin-off took place with economic effect as of 0:00 hours on January 1, 2018.

Immediately after the spin-off took effect, all shares held by Merck KGaA, Darmstadt, Germany, in the respective OpCos were transferred to holding companies via a further spin-off (holding company spin-off), as a result of which the OpCos are each indirectly held by Merck KGaA, Darmstadt, Germany, via an intermediate holding company. The acquiring legal entities within the scope of the holding company spin-off were Merck Healthcare Holding GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, for the business shares of Healthcare OpCo, Merck Life Science Holding GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, for the business shares of Life Science OpCo, and Merck Performance Materials Holding GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, for the business shares of Performance Materials OpCo (referred to individually as “HoldCo”, independently of the sector, and jointly as “HoldCos”). To this end, Merck KGaA, Darmstadt, Germany, and the HoldCos signed a notarized spin-off and takeover agreement on March 2, 2018. The holding company spin-off took place with economic effect as of 0:00 hours on January 1, 2018.

Since the technical system requirements for the introduction of the sector-specific enterprise resource planning (ERP) systems as regards the OpCos were not in place at the time of the spin-off, the business activities spun off to the OpCos have been temporarily leased back by the relevant OpCos to Merck KGaA, Darmstadt, Germany, until sector-specific ERP systems have been introduced. For this purpose, also on March 2, 2018, Merck KGaA, Darmstadt, Germany, entered into a business leasing contract with each respective OpCo with economic effect as of 0:00 hours on January 1, 2018, to lease back all the operating business previously spun off to the OpCo. Under the terms of the respective business leasing contract, Merck KGaA, Darmstadt, Germany, leases the entire operation from the respective OpCo, as well as all fixed assets in this context; it acquires the current assets as well as certain liabilities and provisions at their carrying amounts under German commercial law. The business lease allowed the spin-off measures to be implemented for all OpCos with economic effect at a uniform time, 0:00 hours on January 1, 2018, while retaining the flexibility of transitioning the management of the relevant operating business in accordance with the sector-specific ERP introduction at an individual time to the OpCo in question in a targeted manner. On the basis of the business leasing contract, Merck KGaA, Darmstadt, Germany, will temporarily continue to operate the spun-off business as a leaseholder in its own name and for its own account. Once the relevant ERP systems have been introduced for the respective OpCo, the business lease with this OpCo will be terminated and the business previously leased out will pass to the OpCo.

The aforementioned spin-off and business leasing contracts form part of an overall entrepreneurial concept. They were submitted to the General Meeting of Merck KGaA, Darmstadt, Germany, for approval on April 27, 2018 (2018 Annual General Meeting) as a coherent restructuring measure, and were approved by it. The gradual implementation of the measures is due to be completed in 2020. In 2018, the Healthcare OpCo changed its legal form to that of a German corporation with general partners (“Kommanditgesellschaft auf Aktien”) and has since been trading under the name of Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany.

The business leasing contract under which the Healthcare business sector was leased back to Merck KGaA, Darmstadt, Germany, was terminated with the agreement dated January 11, 2019, with economic effect as of 24:00 hours on March 31, 2019. The sector-specific ERP system for the Healthcare business sector was introduced as planned on April 1, 2019. As a result of the end of the business leasing contract, the leased objects allocated to the Healthcare business sector at the end of the lease – comprising current assets as well as certain liabilities and provisions, including the leased objects acquired or created by means of maintenance, replacement, and expansion investments – were transferred to Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, at their carrying amounts under German commercial law and in a condition commensurate with their continued and proper operational use up to the date the business leasing contract ended. The carrying amounts of the debt exceeded the carrying amounts of assets, and so Merck KGaA, Darmstadt, Germany, made a settlement payment to Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany. In addition, the licenses for the intangible assets and know-how leased to Merck KGaA, Darmstadt, Germany, came to an end.

The table below shows the assets and debt of Merck KGaA, Darmstadt, Germany, immediately before and after the end of the business lease and the transfer of the assets and debt to Merck Healthcare KGaA, a subsidiary of Merck KGaA, Darmstadt, Germany. As a result of the termination of the business lease, there were mainly lower sales, material, personnel and other operating expenses in fiscal year 2019.

5.85 KBEXCEL
 
€ million Merck KGaA, Darmstadt, Germany  March 31, 2019
Merck KGaA, Darmstadt, Germany  April 1, 2019
ASSETS    
A. Fixed assets    
Intangible assets 237.0 237.0
Tangible assets 885.5 885.5
Financial assets 17,532.0 17,532.0
  18,654.5 18,654.5
     
B. Current assets    
Inventories 702.4 506.9
Trade accounts receivable 105.7 84.3
Other receivables and other assets 1,111.6 1,106.0
Cash and cash equivalents 2.0 2.0
  1,921.7 1,699.2
     
C. Prepaid expenses 58.9 58.9
Total ASSETS 20,635.1 20,412.6
     
EQUITY AND LIABILITIES    
A. Net equity    
Subscribed capital 168.0 168.0
General partner’s equity 397.2 397.2
Capital reserves 3,813.7 3,813.7
Retained earnings 701.6 701.6
Profit carried forward E. Merck KG, Darmstadt, Germany 60.8 60.8
Net retained profit: shareholders 138.6 138.6
  5,279.9 5,279.9
     
B. Provisions    
Provisions for pensions and other post-employment benefits 302.4 302.4
Other provisions 854.1 684.9
  1,156.5 987.3
     
C. Liabilities    
Financial liabilities 1,500.0 1,500.0
Trade accounts payable 365.2 273.4
Other liabilities 12,317.1 12,357.8
  14,182.3 14,131.2
     
D. Deferred income 16.4 14.2
Total EQUITY AND LIABILITIES 20,635.1 20,412.6

Business development

Net sales of Merck KGaA, Darmstadt, Germany, decreased in 2019. The decline of € 1,140 million resulted primarily from the Healthcare and Performance Materials business sectors. The Healthcare business sector has been held in a separate company, Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, since April 1, 2019. On the other hand, net sales of the Life Science business sector rose, in particular.

4.29 KBEXCEL
      Change
€ million 2019 2018 € million %
Healthcare 1,102 2,310 -1,208 -52.3
Life Science 987 780 207 26.5
Performance Materials 1,263 1,386 -123 -8.9
Other sales 293 309 -16 -5.2
Total 3,645 4,785 -1,140 -23.8

Sales of the Healthcare sector include product sales generated until the termination of the business lease as well as sales from intercompany cross-charges. Other sales mainly included intragroup cross-charging for IT services, trademarks, rent, and other administrative services.

The share of sales with other Group companies (Group sales) amounted to 92.0% in 2019 (2018: 93.6%).

4.06 KBEXCEL
      Change
€ million 2019 2018 € million %
Group sales 3,355 4,477 -1,122 -25.1
Sales to third parties 290 308 -18 -5.8
Total 3,645 4,785 -1,140 -23.8

At 81.7% (2018: 86.7%), the share of exports in 2019 was below the previous year’s level.

4.05 KBEXCEL
      Change
€ million 2019 2018 € million %
Outside Germany 2,978 4,148 -1,170 -28.2
Germany 667 637 30 4.7
Total 3,645 4,785 -1,140 -23.8

The decline in net sales of the Healthcare business sector is attributable to the fact that its business has been continued in a separate company, Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, since April 1, 2019.

In the Performance Materials business sector, sales at the Display Solutions business unit declined year-on-year by -7.6%. Sales of the Surface Solutions business unit also declined, by -1.1%. All in all, a sharp increase in sales at Cosmetics and OLED was not enough to offset this decline. From a regional perspective, sales in Asia-Pacific and Europe fell.

Net sales of the Life Science business sector increased by a double-digit rate over the previous year’s figure, mainly due to the Process Solutions business unit (+21%). The Research Solutions (+6.0%) and Applied Solutions (+6.9%) business units also posted higher sales year-on-year and contributed to growth. Sales growth was generated in the Europe, Asia-Pacific, and North America regions. By contrast, a slight fall was recorded in the Middle East and Africa regions.

5.18 KBEXCEL
Results of operations
         
      Change
€ million 2019 2018 € million %
Net sales 3,645 4,785 -1,140 -23.9
Other income 215 172 43 25.0
Cost of materials -1,459 -1,776 317 -17.8
Personnel expenses -1,128 -1,305 177 -13.6
Depreciation, amortization, and write-downs -122 -112 -10 8.9
Other operating expenses -1,382 -2,152 770 -35.8
Investment income/write-downs of financial assets 1,099 1,234 -135 -10.9
Financial result -228 -262 34 -13.0
Profit before profit transfers and taxes 641 584 56 9.6
Profit transfers -456 -454 -2 0.4
Taxes -16 32 -48 -150.0
Profit after profit transfers and taxes 169 162 7 4.3

The increase in other income primarily resulted from cross-charges within the scope of the business lease. This was offset by lower income from the reversal of provisions and lower exchange rate gains.

The cost of materials fell overall, due to fact that the Healthcare business has been continued in a separate company, Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, since April 1, 2019. Owing to higher sales volume with declining prices in some cases, the cost of materials in relation to sales rose to 40.0% (2018: 37.1%).

The decline in personnel expenses was mainly attributable to the business transfer of about 3,000 employees from the Healthcare business sector to a separate company, the Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, since April 1, 2019.

Depreciation, amortization, and write-downs rose as a result of the investments made in 2018 and 2019.

The continuation of the Healthcare business sector in a separate company since April 1, 2019, led to a fall in other operating expenses, mainly in marketing, research and other external services and remuneration.

Investment income fell essentially on account of lower dividend payments in the Group. The profit transfers from subsidiaries decreased mainly due to a dividend received in the previous year from an intermediate holding company with a profit transfer agreement. In addition, one-off effects in one subsidiary further reduced the profit transfer. This was offset by higher profit transfers from other subsidiaries, particularly Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany; see section “Effects of material company agreements on the net assets, financial position, and results of operations”.

The financial result increased mainly due to higher fair values of plan assets. This was offset by higher interest expense resulting from the financing for Versum, see Note (5) "Acquisitions and divestments" in the Notes to the Consolidated Financial Statements.

Net assets and financial position

6.23 KBEXCEL
Assets
         
      Change
€ million Dec. 31, 2019 Dec. 31, 2018 € million %
Fixed assets 23,550 18,670 4,880 26.1
Intangible assets 232 239 -7 -2.8
Tangible assets 860 899 -39 -4.3
Financial assets 22,458 17,532 4,926 28.1
Current assets 1,726 2,336 -610 -26.1
Inventories 567 725 -158 -21.8
Trade accounts receivable 186 315 -129 -41.0
Other receivables and other assets 973 1,293 -320 -24.8
Cash and cash equivalents 1 3 -2 -66.7
Prepaid expenses 47 34 13 36.6
  25,323 21,040 4,283 20.4
         
         
Liabilities
         
      Change
€ million Dec. 31, 2019 Dec. 31, 2018 € million %
Net equity 5,338 5,329 9 0.2
Provisions 983 1,119 -136 -12.1
Provisions for pensions and other post-employment benefits 379 288 92 31.9
Other provisions 605 832 -227 -27.3
Liabilities 18,988 14,575 4,413 30.3
Financial liabilities 3,000 1,500 1,500 100.0
Trade accounts payable 384 446 -62 -14.0
Other liabilities 15,605 12,629 2,976 23.6
Deferred income 14 17 –3 –17.2
  25,323 21,040 4,283 20.4

The change in net assets and in the financial position of Merck KGaA, Darmstadt, Germany, was mainly a result from capital and financing measures in connection with the acquisition of Versum. With a 20.4% increase in total assets, the equity ratio amounted to 21.1% (2018: 25.3%). The fall in the equity ratio is mainly attributable to the financing measures as part of the Versum acquisition.

The end of the business lease of the Healthcare business sector resulted in a decline in the assets and liabilities associated with this business sector (see “Effects of material company agreements on the net assets, financial position and results of operations”).

Intragroup capital measures as part of the Versum acquisition resulted in an increase in financial assets.

Current assets (€ –610 million) decreased principally due to lower profit transfers compared with the previous year, mainly as a result of a dividend received in the previous year from an intermediate holding company with a profit transfer agreement. Moreover, inventories and trade accounts receivable fell in 2019 due to the continuation of the Healthcare business sector within Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, as of April 1, 2019.

The drop in other provisions (€ –227 million) resulted primarily from the operating spin-off (see “Effects of material company agreements on the net assets, financial position and results of operations”).

The increase in financial liabilities was due to the issue of bonds as part of the Versum acquisition.

The rise in other liabilities resulted mainly from intragroup financing measures in the wake of the Versum acquisition.

Research and development

In 2019, research and development spending on projects of Merck KGaA, Darmstadt, Germany, and of other Group companies totaled € 434 million (2018: € 923 million). A large portion was also incurred by companies outside the Group. The decline of € 489 million (53.0%) was mainly attributable to the fact that the Healthcare business sector has been continued in a separate company, Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, since April 1, 2019. Further information can be found in the section "Research and Development" in the Management Report of the Group.

4.43 KBEXCEL
Research and development expenses
         
      Change
€ million 2019 2018 € million %
Healthcare 132 604 -472 -78.1
Life Science 57 46 11 22.8
Performance Materials 244 260 -16 -6.3
Other R&D spending that cannot be allocated to individual business sectors 2 13 -11 -85.8
Total 434 923 -489 -53.0

The ratio of research and development spending to sales was 11.9% (2018: 19.3%). Overall, the average number of employees working in research and development was 1,678. Merck KGaA, Darmstadt, Germany, is one of the main research sites of the Group, accounting for a share of 19.1% (2018: 41.6%) of total Group research and development spending. The decline is mainly attributable to the fact that the R&D activities of the research-intensive Healthcare business sector have been continued at the operating company, Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, since April 1, 2019.

Dividend

For 2019, we are proposing to the General Meeting the payment of a dividend of € 1.30 per share.

Personnel

As of December 31, 2019, Merck KGaA, Darmstadt, Germany, had 8,474 employees, representing a decrease over the previous year (2018: 11,133). The decline was mainly attributable to the fact that employees from the Healthcare business sector have been employed at a separate company, Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany.

The average number of employees by functional area is as follows:

4.21 KBEXCEL
Personnel
     
Average number of employees during the year 2019 2018
Production 3,164 3,756
Administration 3,143 3,213
Research 1,678 2,674
Logistics 620 671
Marketing and sales 510 590
Other 23 79
Total 9,138 10,983

Risks and opportunities

Merck KGaA, Darmstadt, Germany, is largely subject to the same opportunities and risks as the Group. More information can be found in the Report on Risks and Opportunities.

Forecast for Merck KGaA, Darmstadt, Germany

Deviations of actual business development in 2019 from the previously reported guidance

The combined management report for 2018 forecast a decline in net sales at the Healthcare business sector in 2019 due to the fact that the business lease would end and, related to that, its operating business would be continued in Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, from April 1, 2019. A slight increase in net sales was forecast for the Life Science business sector, whereas a slight drop in net sales was expected for the Performance Materials business sector. A slight increase over the previous year was forecast for net income for the year.

In the Performance Materials business sector, sales at the Display Solutions business unit declined year over year by -7.6% und thus met the expectations from the management report 2018. Sales of the Surface Solutions business unit also declined, by -1.1%. All in all, a sharp increase in sales at the Cosmetics and OLED business units was not enough to offset this decline.

Net sales of the Life Science business sector increased by a double-digit rate over the previous year’s figure and were thus above our forecast from the management report 2018, mainly due to the Process Solutions business unit (+21%). The Research Solutions (+6.0%) and Applied Solutions (+6.9%) business units also posted higher sales year-on-year and contributed to growth.

The continuation of the Healthcare business sector in Merck Healthcare KGaA, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, led to a fall in the associated net sales and cost of materials and personnel, and other operating expenses at Merck KGaA, Darmstadt, Germany, as expected. 

Forecast 2020

For fiscal 2020, a significant decline in net sales is expected overall. This is due to the planned termination of the business leasing contracts with Merck Life Science Germany GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, and Merck Performance Materials Germany GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, as well as the resulting transfer of the Life Science and Performance Materials business sector’s operating business.

As in 2018, the financing costs of the Sigma-Aldrich acquisition as well as the Versum acquisition in 2019 continue to adversely affect net income. Nevertheless, net income for the year is expected to be at a comparable level to 2019 due to the positive investment income and dividends from the subsidiaries.

Merck Financial Services GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, will provide the company with sufficient financial resources and thus ensure liquidity.

Currently no risks can be identified that may jeopardize the continued existence of the company.

Updated forecast for 2020 dated May 12, 2020

This combined management report was originally prepared on February 14, 2020 by the Executive Board of Merck KGaA, Darmstadt, Germany. Owing to the originally planned termination of the lease agreements with Merck Life Science Germany GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, and Merck Performance Materials Germany GmbH, Darmstadt, Germany, a subsidiary of Merck KGaA, Darmstadt, Germany, in fiscal 2020 as well as the resulting transfer of the operating businesses, a significant decline in net sales of Merck KGaA, Darmstadt, Germany, was forecast. As the project scheduling has meanwhile been updated, the successive implementation of the measures in fiscal 2020 is not likely to be completed. Taking into account this present state of knowledge, while simultaneously considering the development of the Covid-19 pandemic, the forecast previously given is updated as follows: Net sales for 2020 are now expected to be at a level comparable to 2019.

All further forecast assumptions are identical to those made in our original forecast.