Net sales were generated primarily from the sale of goods and to a limited degree also included revenues from services rendered and commission income. Since January 1, 2015, commission income has been disclosed as part of sales. In 2014, royalty, license and commission income was disclosed in a separate line in the consolidated income statement. More information in Note  “Changes to accounting and measurement principles and disclosure changes”.
Merck Group net sales totaled € 12,844.7 million in 2015 (2014: € 11,362.8 million), which represented an increase of 13.0% compared to 2014 (increase of 5.5% in 2014). The breakdown of net sales is presented in the Segment Reporting in Note  “Information by business sector / countries and regions”).
Cost of sales primarily included the cost of manufactured products sold as well as merchandise sold. Cost comprises overheads and, if necessary, inventory write-downs, in addition to directly attributable costs, such as the cost of materials, personnel and energy, as well as depreciation / amortization.
Marketing and selling expenses comprised the following:
|Sales force||– 913.1||– 809.3|
|Internal sales services||– 740.0||– 613.6|
|Sales promotion||– 521.9||– 469.4|
|Logistics||– 471.2||– 412.6|
|Amortization of intangible assets1||– 778.9||– 719.0|
|Royalty and license expenses||– 512.8||– 484.2|
|Other marketing and selling expenses||– 111.6||– 81.0|
|Marketing and selling expenses2||– 4,049.5||– 3,589.1|
Amortization of intangible assets was mainly attributable to marketing approvals, customer relationships, brands, trademarks and other, which could be functionally allocated to Marketing and Selling.
Royalty and license expenses arose mainly in connection with the commercialization of Erbitux® outside the United States and Canada amounting to € 93.5 million (2014: € 84.7 million) as well as for the commercialization of Rebif® in the United States amounting to € 333.6 million (2014: € 314.6 million).
Research and development costs totaled € 1,709.2 million in 2015 (2014: € 1,703.7 million).
Reimbursements for research and development amounting to € 88.0 million (2014: € 18.4 million) were offset against research and development costs. This figure also included government subsidies of € 3.4 million (2014: € 5.9 million). The increase was mainly due to reimbursements from the strategic alliance with Pfizer Inc., USA.
The breakdown of research and development costs by region is presented in the Segment Reporting (see Note  “Information by business sector / country and region”).
Other operating income was as follows:
|Income from milestone payments, rights and royalties||261.7||138.0|
|Gains on disposal of non-current assets||52.4||3.7|
|Release of allowances for receivables||40.2||41.8|
|Gains from the release of provisions for litigation||35.3||260.3|
|Exchange rate differences from operating activities (net)||–||53.3|
|Income from miscellaneous services||21.7||26.4|
|Other operating income1||59.4||40.9|
|Total other operating income2||470.7||564.4|
In 2015, € 191.4 million (2014: € 15.9 million) of the income from milestone payments, rights and royalties amounting to € 261.7 million (2014: € 138.0 million) was attributable to the collaboration agreement entered into with Pfizer Inc., USA, in 2014 in the field of immuno-oncology. This related to the pro rata recognition of deferred income from the upfront payment as well as the value of the right to co-promote Xalkori® (see Note  “Joint arrangements of material significance”). Royalty and license income was mainly due to the products Viibryd® (Allergan, Inc., Ireland) and Puregon® (Merck & Co. Inc., USA).
Gains on disposal of non-current assets in the amount of € 52.4 million (2014: € 3.7 million) were primarily attributable to the disposal of marketing authorizations and distribution rights as well as other investments carried at amortized cost.
Income from the release of provisions for litigation amounting to € 35.3 million (2014: € 260.3 million) resulted primarily from the adjustment of the provision in connection with the Paroxetine legal dispute (see Note  “Provisions”). In 2014, income related mainly to the resolution of the legal dispute with Israel Bio-Engineering Project Limited Partnership (“IBEP”).
There was no income from investments in financial year 2015; in the prior year, income from investments amounted to € 1.5 million and was reported as other operating income.
The breakdown of other operating expenses was as follows:
|Impairment losses||– 128.4||– 100.2|
|Acquisition costs||– 101.6||– 24.5|
|Litigation||– 85.1||– 95.5|
|Allowances for receivables||– 84.1||– 41.9|
|Integration costs / IT costs||– 77.6||– 87.2|
|Premiums, fees and contributions||– 56.8||– 55.2|
|Exchange rate differences from operating activities (net)||– 48.8||–|
|Restructuring costs||– 47.5||– 83.9|
|Non-income related taxes||– 44.5||– 35.5|
|Profit share expenses||– 26.3||– 53.3|
|Expenses for miscellaneous services||– 20.3||– 21.8|
|Project costs||– 16.2||– 4.4|
|Other operating expenses1||– 180.1||– 134.0|
|Total other operating expenses2||– 917.3||– 737.4|
Impairment losses totaled € 128.4 million (2014: € 100.2 million) and related in the amount of € 120.9 million (2014: € 84.9 million) to assets which were assigned to research and development, in the amount of € 6.9 million (2014: € 5.7 million) to administration, and in the amount of € 0.3 million (2014: € 0.1 million) to sales-related assets. Impairment losses on production plants amounted to € 0.3 million (2014: € 5.1 million). No impairments were recognized for non-consolidated investments and other financial instruments which were classified to the category “available-for-sale” (2014: € 4.4 million). Further information on impairments can be found in Note  “Intangible assets”.
Acquisition costs amounting to € 101.6 million (2014: € 24.5 million) were incurred in 2015 in connection with the acquisition and the integration of the Sigma-Aldrich Corporation, USA. In 2014, the expenses were largely attributable to the acquisition of AZ Electronic Materials S.A., Luxembourg.
Integration and IT costs of € 77.6 million (2014: € 87.2 million) were incurred primarily for the global harmonization of the IT landscape and in connection with the integration of acquired and existing businesses.
The restructuring charges incurred in fiscal 2015 amounting to € 47.5 million (2014: € 83.9 million) arose completely in connection with the “Fit for 2018” transformation and growth program (2014: € 79.5 million). As in the previous year, these charges largely related to personnel measures, for instance the elimination of positions in order to create a leaner and more efficient organization. Of the recognized impairment losses, an amount of € 6.9 million (2014: € 4.5 million) was attributable to the program, which resulted in total expenses of € 54.4 million (2014: € 84.0 million) for the “Fit for 2018” program.
Other operating expenses also included special environmental protection costs as well as personnel expenses not allocable to the functional areas.
|Interest income and similar income||32.0||30.6|
|Interest expenses and similar expenses||– 291.6||– 159.8|
|Interest expenses from interest rate derivatives||– 11.4||– 2.6|
|Interest component from currency hedging transactions||–||– 5.1|
|Interest result||– 271.0||– 136.9|
|Interest component of the additions to pension provisions and other non-current provisions||– 45.8||– 55.2|
|Currency differences from financing activities||– 39.9||– 13.0|
|Result from financial investments||–||0.1|
|– 356.7||– 205.0|
Higher interest expenses year-on-year were mainly the result of expenses for the hybrid bond issued in December 2014, the U.S. bond issued in March 2015, as well as the euro bond placed in August 2015. All the bonds are part of the financing of the acquisition of the Sigma-Aldrich Corporation, USA. More information about Merck bonds can be found in Note  “Financial liabilities / Capital management”.
Currency differences from financing activities were mainly the result of expenses for hedging intragroup transactions in foreign currency. These expenses result from hedging at forward rates while intragroup transactions are measured at spot rates. The increase over 2014 is mainly attributable to lower interest rates in Europe as well as a higher hedging volume.
The decline in the interest component of the additions to pension provisions and other non-current provisions resulted largely from lower interest expenses in connection with non-current provisions.
|Current taxes in the period||– 704.6||– 592.4|
|Taxes for previous periods||– 95.1||– 21.9|
|Deferred taxes in the period||431.7||222.1|
|– 368.0||– 392.2|
The following table presents the tax reconciliation from theoretical tax expense to tax expense according to the consolidated income statement. The theoretical tax expense is determined by applying the statutory tax rate of 30.7% of a corporation headquartered in Darmstadt.
|Profit before income tax||1,486.5||1,557.0|
|Theoretical tax expense||– 456.4||– 478.0|
|Tax rate differences||151.1||100.8|
|Tax effect of companies with a negative contribution to consolidated profit||– 22.0||– 15.8|
|Tax for other periods||– 95.1||– 21.9|
|Tax effect on tax loss carryforwards||16.1||18.5|
|Tax effect of non-deductible expenses / Tax-free income / Other tax effects||– 482.4||– 19.0|
|Tax expense according to consolidated income statement||– 368.0||– 392.2|
|Tax ratio according to consolidated income statement||24.8%||25.2%|
The tax expense consisted of corporation and trade taxes for the companies domiciled in Germany as well as comparable income taxes for foreign companies.
The higher tax credits arose primarily in the United States due to the consideration of dividend income from high-tax countries. However, this dividend income is also taxable in the United States; the related tax expense is included in the item “Tax effect of non-deductible expenses / Tax-free income / Other tax effects.” The change in the item “Tax for other periods” results, among other things, from the addition to provisions for tax audits.
The reconciliation between deferred taxes in the consolidated balance sheet and deferred taxes in the consolidated income statement is presented in the following table:
|Change in deferred tax assets (balance sheet)||56.7||256.5|
|Change in deferred tax liabilities (balance sheet)||– 2,034.3||– 152.9|
|Deferred taxes credited / debited to equity||41.4||– 177.4|
|Changes in scope of consolidation / currency translation / other changes||2,367.9||295.9|
|Deferred taxes (consolidated income statement)||431.7||222.1|
Tax loss carryforwards were structured as follows:
|Dec. 31, 2015||Dec. 31, 2014|
|Tax loss carryforwards||22.3||1,183.7||1,206.0||8.0||948.4||956.4|
Including deferred tax asset
|Deferred tax asset||0.4||113.9||114.3||0.5||71.5||72.0|
Excluding deferred tax asset
|Theoretical deferred tax asset||2.5||186.0||188.5||0.8||106.5||107.3|
The increase in non-German tax loss carryforwards was mainly due to the recognition of loss carryforwards in Luxembourg as well as the acquisition vehicle Mario Finance Corp., USA. The interest expenses incurred in connection with the financing of the acquisition of the Sigma-Aldrich Corporation, USA, led to a negative tax result and to a higher deferred tax asset.
Deferred tax assets are recognized for tax loss and interest carryforwards only if for tax loss carryforwards of less than € 5.0 million realization of the related tax benefits is probable within one year, and for tax loss carryforwards of more than € 5.0 million realization of the related tax benefits is probable within the next three years.
The vast majority of the tax loss carryforwards either has no expiry date or can be carried forward for up to 20 years.
The tax loss carryforwards accumulated in Germany for corporation and trade tax amounted to € 22.3 million (2014: € 8.0 million).
The additional theoretically possible deferred tax assets amounted to € 188.5 million (2014: € 107.3 million).
In 2015, the income tax expense was reduced by € 16.1 million (2014: € 18.5 million) due to the utilization of tax loss carryforwards from prior years for which no deferred tax asset had been recognized in prior periods.
Deferred tax assets and liabilities correspond to the following balance sheet items:
|Dec. 31, 2015||Dec. 31, 2014|
|Property, plant and equipment||23.4||169.3||16.1||69.8|
|Current and non-current financial assets||10.4||11.8||0.1||3.6|
|Current and non-current receivables / Other assets||25.9||10.8||57.5||7.4|
|Provisions for pensions and other post-employment benefits||351.3||69.6||338.0||47.2|
|Current and non-current other provisions||308.2||35.8||308.1||72.5|
|Current and non-current liabilities||124.9||19.7||120.0||36.0|
|Tax loss carryforwards||114.3||–||72.0||–|
|Tax refund claims / Other||163.5||426.5||18.7||41.6|
|Offset deferred tax assets and liabilities||– 779.4||– 779.4||– 517.4||– 517.4|
|Deferred taxes (consolidated balance sheet)||1,049.6||2,852.7||992.9||818.4|
The increase in deferred tax liabilities on assets is largely due to their recognition at fair value within the scope of the purchase price allocation of the Sigma-Aldrich Corporation, USA.
In addition to deferred tax assets on tax loss carryforwards amounting to € 114.3 million (2014: € 72.0 million), deferred tax assets of € 935.3 million were recognized for temporary differences (2014: € 920.9 million).
As of the balance sheet date, deferred taxes for temporary differences for interests in subsidiaries were recognized to the extent that these related to planned dividend payments and, in this context, the reversal of these differences was foreseeable. Deferred tax liabilities in a total amount of € 391.2 million (2014: € 31.0 million) were recognized for the higher or lower tax expense attributable to dividend payments. The increase resulted from the planned dividend payments of companies acquired in connection with the Sigma-Aldrich acquisition. Temporary differences relating to the retained earnings of subsidiaries amounted to € 5,247.7 million (2014: € 5,194.3 million).
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 use of a theoretical number of shares takes into account the fact that the general partner’s capital is not represented by shares.
The share capital of € 168.0 million was divided into 129,242,252 shares. Accordingly, 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. The weighted average number of shares in 2015 was likewise 434,777,878.
Earnings per share from discontinued operations resulted from the business operations acquired with a view to resale in connection with the acquisition of the Sigma-Aldrich Corporation, USA (see Note  “Acquisitions, assets held for sale and disposal groups”).
As of December 31, 2015 there were no potentially dilutive shares. Diluted earnings per share were equivalent to basic earnings per share.