Letter from Karl-Ludwig Kley

"Dear Shareholders," (handwriting)

Merck performed well in 2011. Total revenues, which increased by nearly 11%, exceeded the € 10 billion mark for the first time in the company’s history. The milestone we set for ourselves in 2007 has thus been achieved.

» Merck has changed significantly in recent years.«

Karl-Ludwig Kley

Karl-Ludwig Kley – Chairman of the Executive Board (photo)

In accordance with our strategic objectives, we grew particularly in Asia and North America. We will further intensify our activities in both regions since they offer our businesses the greatest potential for growth.

The operating result amounted to € 985 million, declining by 11.5%. The main reasons for this were the one-time effects in the second quarter. These primarily included the impairment loss on our biotech production plant in Corsier-sur-Vevey (Switzerland) as well as reassessments of various pharmaceutical projects. In addition, we set up provisions for the costs of discontinuing the development of cladribine tablets. Consequently, profit after tax declined by 2% to € 629 million.

We are, of course, not satisfied with the development of this result. Our focus in 2012 will therefore be on improving the operating result.

For our shareholders, 2011 was a good year. With a price increase of 29%, Merck shares were the best-performing stock in the DAX®. We would like to underscore both this excellent development and the sharp decline in debt with a suitable dividend payment. We therefore intend to propose to the Annual General Meeting on April 20 an increase of € 0.25 in the dividend to € 1.50 per share. The basis for this proposal is the excellent business performance of Merck, the robust underlying operating result as well as the positive future prospects for the company.

Merck has changed significantly in recent years.

  • By acquiring Serono, we became a leading global manufacturer of biopharmaceuticals.
  • With the divestment of the Generics business, we shifted our focus to innovation-driven and higher-margin activities.
  • And with the acquisition of Millipore, we established ourselves as a leading partner to the global life science industry.

With its new structure, Merck is in a good starting position to sustainably exploit the growth opportunities in the pharmaceutical, chemical and life science sectors.

We will now focus on achieving a lasting improvement in the operating result. After all, future growth must also be financed. For this purpose, we have initiated the “Fit for 2018” program, which we will be implementing in two phases.

In the first phase, which will last until 2013, we will work to enhance our efficiency and lower our costs. This also includes implementing a leaner management structure.

We have already made good progress at the organizational level. On January 1, 2012, a new global leadership organization became effective. It replaces the former country-based structure with clear leadership by our global businesses.

We will optimize processes and structures especially in those areas where our success has not yet met our expectations. This applies specifically to our Pharmaceuticals research and development organization, which we largely restructured in 2011.

In order to accelerate the ongoing transformation process and to strengthen our expertise, we made not only organizational, but also personnel changes.

With three new members, the Executive Board has been complete since mid-2011. In January, Stefan Oschmann took over responsibility for our Pharmaceuticals business sector. Kai Beckmann followed in April as Head of Group Human Resources. And Matthias Zachert has been Chief Financial Officer since June. Matthias Zachert succeeded Michael Becker, who retired after 13 successful years working for Merck. I’d like to thank Michael Becker for his tremendous commitment and achievements. He made great contributions to Merck.

We made new appointments not only to the Executive Board, but also to numerous level-two management positions. We recruited executives from well-known companies in our sectors, which has enabled us to meaningfully strengthen expertise, leadership experience and diversity at Merck.

Since early 2012, we have been working intensely to identify objectives and measures that will improve our positioning at our sites in 67 countries around the world. The changes introduced will be significant and encompass all areas of the company.

Once the first phase of the “Fit for 2018” program has been completed, from 2014 we’ll again focus more strongly on growth – which of course doesn‘t mean we‘ll have lost sight of this objective in the meantime. We will continue to seize attractive growth opportunities, either by making smaller acquisitions or in-licensing pharmaceutical development compounds. Since the speed at which the efficiency program will be completed around the world will vary greatly, individual businesses or countries could also realize their growth objectives sooner than 2014.

Changes such as the current ones are nothing new for Merck. On the contrary. One of our recipes for success, which has enabled us to remain in existence for 344 years, is the ability to change. This has been the only way for Merck to survive wars, currency reforms and changes in government systems while continuing to operate its businesses successfully.

Whenever changes take place, our employees can rely on the fact that Merck remains a community based on a shared set of values, attaches great importance to social partnership, and appropriately involves employee representatives in the individual steps of the process. This of course also applies to the implementation of our efficiency-enhancement and cost-reduction program. The aim of “Fit for 2018” is to shape Merck so that we can leverage our strong market position to achieve sustainable, profitable growth with innovative products. We will fulfill this ambition.

We sincerely thank you for the trust and support you have given us on the journey so far. And we’d be pleased if you would continue to accompany Merck in that same spirit of trust on the “road to tomorrow.”

Darmstadt, February 2012

Signature "Sincerely, Dr. Karl-Ludwig Kley" – Chairman of the Executive Board (handwriting)

Karl-Ludwig Kley
Chairman of the Executive Board