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Merck : Half-yearly Financial Report 2020

08/12/2020 | 05:53pm EDT

2020

HALF-YEARLY FINANCIAL REPORT

2

Half-Yearly Financial Report 2020

Table of Contents

Table of Contents

03 In brief

04 Developments within the Group and R&D

  1. Course of Business and Economic Position
  1. Group
  1. Healthcare
  1. Life Science
  1. Performance Materials
  1. Corporate and Other
  1. Report on Risks and Opportunities
  2. Report on Expected Developments
  1. Consolidated Half-Year Financial Statements
  2. Consolidated Income Statement
  3. Consolidated Statement of Comprehensive Income
  4. Consolidated Balance Sheet
  5. Consolidated Cash Flow Statement
  6. Consolidated Statement of Changes in Net Equity
  1. Notes to the Consolidated Half-Year Financial Statements as of June 30, 2020
  1. Responsibility Statement
  2. Review Report
  3. Financial Calendar

This half-yearly financial report contains certain financial indicators such as operating result (EBIT), EBITDA, EBITDA pre, business free cash flow (BFCF), free cash flow, net

financial­ debt and earnings per share pre, which are not defined by International Financial Reporting Standards (IFRS). These financial indicators should not be taken into account in order to assess the performance of the Group in isolation or used as an alternative to the financial indicators ­presented in the consolidated financial statements and determined in accordance with IFRS.

The figures presented in this half-yearly financial report have been rounded. This may lead to individual values not adding up to the totals presented.

The Annual Report for 2019 has been optimized for mobile devices and is available on the Web at ar.emdgroup.com/2019/.

3

Half-Yearly Financial Report 2020

In brief

In brief

GROUP

Key figures

€ million

Q2 2020

Q2 2019

Change

Jan.-June 2020

Jan.-June 2019

Change

Net sales

4,119

3,971

3.7%

8,489

7,717

10.0%

Operating result (EBIT)1

491

618

-20.6%

1,207

997

21.0%

Margin (% of net sales)1

11.9%

15.6%

14.2%

12.9%

EBITDA2

1,048

1,074

-2.5%

2,195

1,927

13.9%

Margin (% of net sales)1

25.4%

27.0%

25.9%

25.0%

EBITDA pre2

1,074

1,139

-5.7%

2,256

2,068

9.1%

Margin (% of net sales)1

26.1%

28.7%

26.6%

26.8%

Profit after tax

289

471

-38.6%

747

660

13.1%

Earnings per share (€)

0.67

1.08

-38.0%

1.72

1.52

13.2%

Earnings per share pre (€)1

1.30

1.54

-15.6%

2.80

2.67

4.9%

Business free cash flow1

813

701

16.0%

1,474

1,246

18.3%

1 Not defined by International Financial Reporting Standards (IFRSs).

GROUP 

Net sales by quarter

€ million

Q1

4,370

2020

3,746

2019

Q2

4,119

3,971

Q3

4,054

Q4

4,381

Jan.-Dec.16,152

GROUP 

EBITDA pre1 by quarter

€ million

Q1

1,181

2020

929

2019

Q2

1,074

1,139

Q3

1,111

Q4

1,206

Jan.-Dec.4,385

1 Not defined by International Financial Reporting Standards (IFRSs).

4

Half-YearlyFinancial Report 2019 Developments within the Group and R&D

Developments

within the Group and R&D

Group

We are a vibrant science and technology company. ­Science is at the heart of everything we do. It drives the ­dis­coveries we make and the technologies we create. Our work makes a positive difference to millions of people's lives every day.

In Healthcare, we discover unique ways to treat the most challenging diseases such as multiple sclerosis and cancer. Our Life Science experts empower scientists by developing tools and solutions that help deliver breakthroughs more quickly. And in Performance Materials, we develop science that sits inside technologies and changes the way we access and display information.

Everything we do is fueled by a belief in science and technology as a force for good. A belief that has driven our work since 1668, and will continue to inspire us to find more joyful and sustainable ways to live. We are curious minds dedicated to human progress.

We operate globally under our corporate brand. The only exceptions are Canada and the United States. In these coun- tries, we operate as EMD Serono in the Biopharma business, as MilliporeSigma in the Life Science business and as EMD

­Performance Materials in the high-tech materials business. We had 57,523 employees worldwide on June 30, 2020

compared with 53,051 on June 30, 2019.

Changes in the Executive Board of Merck KGaA, Darmstadt, Germany

On July 13, we announced that the Board of Partners of E. Merck KG, Darmstadt, Germany, appointed Belén Garijo as Vice Chairman of the Executive Board of Merck KGaA, Darm- stadt, Germany, with immediate effect. She maintains her current responsibility as CEO Healthcare along with responsibility for the Group functions Human Resources and Environment, Health, Safety, Security, Quality. Udit Batra, CEO Life Science and responsible for Information Tech­nology, has decided to pursue other opportunities outside our company. Effective July 13, Mr. Batra ceased to be General Partner of Merck KGaA, Darm- stadt, Germany, E. Merck KG, Darmstadt, Germany, and Executive Board Member of Merck KGaA, Darmstadt, Germany.

This section of the present half-yearly report summarizes the highlights of the first half of 2020 of the Group, including those in research in development. A detailed description of our company and its ­business sectors can be found in the Annual Report for 2019 (ar.emdgroup.com/2019/).

Our efforts in the fight against Covid-19

For several months now, the world has been facing an

­unprecedented pandemic. We do everything possible to protect the health and safety of our employees and their families. At the same time, we ensure the continuation of our business activities for the benefit of many patients, scientists and ­customers who rely on us. Even before the global spread of Covid-19, we had supported renowned local aid organizations in China with donations of money and supplies.

GROUP 

GROUP 

Net sales by business sector - Q2 2020

EBITDA pre1 by business sector2 - Q2 2020

€ million / in % of net sales

€ million / in %

20%

20%

Performance Materials

Performance Materials

814

36%

238

32%

Healthcare

Healthcare

44%

1,499

48%

374

Life Science

Life Science

1,806

569

1 Not defined by International Financial Reporting Standards (IFRSs).

2 Not presented: Decline in Group EBITDA pre by € -107 million due to Corporate and Other.

5

Half-YearlyFinancial Report 2020 Developments within the Group and R&D

We are convinced that as a science and technology company, we can contribute to meeting the global challenges posed by Covid-19 and are taking action in many different ways:

  • On March 26, a consortium of healthcare and life sciences companies together with the Bill & Melinda Gates Founda- tion announced an important collaboration to accelerate the development, manufacture, and delivery of vaccines,
    diagnostics,­and treatments for Covid-19. All partners con- tribute a range of assets, resources, and expertise needed to identify effective and scalable solutions to the pandemic, which is affecting billions worldwide. We are part of this group.
  • On April 2, we announced that due to the shortage of
    disinfectant­caused by the Covid-19 pandemic, we have built up our own capacities to produced disinfectant at our
    Darmstadt­ and Wiesbaden sites and are donating 150,000 liters of this to the state of Hesse.
  • On April 7, we announced that, as part of our global efforts to investigate potential therapies for Covid-19 and our sup- port of independent research by the World Health Organi- zation (WHO), we are donating 290,000 units of our active ingredient interferon beta-1a (Rebif®) as a clinical trial drug for the WHO SOLIDARITY study*. The SOLIDARITY study is investigating various potential treatments for Covid-19.
  • On April 14, we announced that with our help, the Jenner
    Institute in Oxford, UK, has laid the foundation for the industrial production of its Covid-19 vaccine candidate
    ChAdOx1­ nCoV-19. A joint team reduced the process devel- opment time from one year to two months - a critical step to manufacturing a vaccine on an industrial scale.
  • On May 12, we announced that we would be donating a total of two million FFP2 masks, including to Germany, France and the United States. We are is covering the costs of
    purchasing­ and transporting the personal protective equip- ment. The donation is mainly intended to support health- care workers; the relevant authorities and organizations will handle the distribution of the masks.

* Rebif® (interferon beta-1a, solution for subcutaneous injection in pre-filled syringe) is indicated for the treatment of relapsing multiple sclerosis. To date, Rebif® is not approved by any regulatory authority for the treatment of Covid-19 or for use as an antiviral agent.

  • On May 27, we announced an extension of our ongoing collaboration with Baylor College of Medicine in Houston,
    Texas, USA. Together we are working on a process devel- opment approach to accelerate the production of Baylor's
    Covid-19 vaccine candidates, including the vaccine candi- date RBD219-N1, which is expected to enter clinical trials later this year. We will help to accelerate their suitability for large-scale manufacturing. The collaboration will focus on improvements to production efficiency, yield, robustness, scalability and costs.
  • On June 25, we announced the U.S. Food and Drug Admin- istration (FDA) has cleared the investigational new drug application (IND) for our investigational compound M5049 for the treatment of patients with Covid-19 pneumonia. We will now initiate a Phase II randomized, controlled clinical study to evaluate the safety and efficacy of M5049 in this patient population. More information on this can be found under ‟Healthcare".

Healthcare

BIOPHARMA

Neurology and Immunology

  • At the European Academy of Neurology 2020 Virtual
    Congress­ that took place from May 23-26, we presented late-breaking data from the Phase II open-label extension study on the long-term efficacy and safety profile of
    evobrutinib,­an investigational, oral, highly selective
    Bruton's­ Tyrosine Kinase (BTK) inhibitor in adult patients with relapsing multiple sclerosis. It is the first and only BTK inhibitor to demonstrate high and sustained efficacy through 108 weeks in clinical studies. No new safety signals were identified in the 60-weekopen-label extension, which is consistent with data seen in more than 1,200 patients who have received evobrutinib to date, across MS and other conditions.

GROUP 

Business free cash flow1 by business sector2 - Q2 2020

€ million / in %

22%

Performance Materials

204

28%

Healthcare

261

50%

Life Science

472

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. Not presented: Decline in Group business free cash flow by € -125 million due to Corporate and Other.

GROUP 

Employees by region as of June 30, 2020

Number / in%

6%

2%

Latin America

Middle East and Africa (MEA)

3,529

1,342

23%

46%

Asia-Pacific (APAC)

13,172

Europe

26,354

23%

North America

13,126

6

Half-YearlyFinancial Report 2020 Developments within the Group and R&D

  • On May 27, we announced that the U.S. Food and Drug
    Administration (FDA) has approved the inclusion of new safety data on pregnancy and breastfeeding in the prescrib- ing information for Rebif® (interferon beta 1a). The label will no longer have the pregnancy category C designation and contains additional data to assist healthcare providers in assessing benefit versus risk and support counseling of pregnant women and nursing mothers living with MS. The label update is based on data from a large register-based study, as well as other published studies over several decades. More than 50 countries world-wide have now updated the Rebif® label, including the countries in the
    European Union (EU).
  • Mavenclad® (cladribine tablets), the only disease-modifying MS treatment that can deliver and sustain up to 4 years of disease control with a maximum of 20 days of oral dosing in the first 2 years, was approved in Morocco, Thailand, Oman, Russia, Macau, Kosovo and El Salvador during the first half of 2020, bringing the number of Mavenclad® approvals world-wide up to a total of 79 countries, including countries in the EU, Canada, Australia and the U.S.
  • On June 25, we announced that the FDA has cleared our investigational new drug application (IND) for M5049 for the treatment of patients with Covid-19 pneumonia, and that we will initiate a Phase II randomized, controlled clin- ical study evaluating the safety and efficacy of M5049 in this patient population. The aim of the study is to investi- gate if M5049 intervention at a critical point in the course of Covid-19 disease may prevent or ameliorate the hyper-in- flammatory response in patients with Covid-19 pneumonia and prevent progression to ‛cytokine storm'. Successful intervention with the investigational drug may reduce life-threatening complications of Covid-19, including severe respiratory symptoms that often necessitate further med- ical interventions such as mechanical ventilation.

Oncology

  • On January 6, we and our Alliance partner Pfizer announced
    topline results from the Phase III JAVELIN Bladder­ 100 trial, which showed that patients with previously untreated locally advanced or metastatic urothelial carcinoma (UC) whose disease did not progress on induction chemotherapy and who were randomized to receive first-line maintenance therapy with Bavencio® (avelumab) and best supportive care (BSC) lived significantly longer than those who received BSC only.
    • On April 9, Merck KGaA, Darmstadt, Germany, and Pfizer announced that the FDA granted Breakthrough Desig- nation for Bavencio® in first-line maintenance treatment of locally advanced or metastatic UC, and that the com-

panies had submitted a supple­ mental­ Biologics­ License Application for review under the FDA's Real-Time Oncology Review pilot program.

    • On June 22, we announced that the European Medicines
      Agency has validated for review the Type II variation­
      application for Bavencio® for this proposed indication­ .
      A supplemental application has also been submitted in
      Japan.
    • These applications were based on the Phase III JAVELIN­ Bladder 100 data, which were featured in the official press program for the ASCO20 Virtual Scientific ­Program
      (Abstract #LBA1). The data showed that Bavencio­ ® as first-line maintenance significantly improved overall­
      survival­ in the primary population of all randomized patients by 7.1 months, with a 31% reduction in the risk of death compared with induction chemotherapy followed by BSC alone.
  • On March 2, Erbitux® (cetuximab) was approved by the
    National Medical Products Administration of China for the first-line treatment of Chinese patients with recurrent and/or metastatic squamous cell carcinoma of the head and neck (SCCHN) in combination with platinum-based therapy with fluorouracil.
  • On March 25, tepotinib was approved by the Japanese Min- istry of Health, Labour and Welfare (MHLW) for the treat- ment of patients with unresectable, advanced or recurrent non-small cell lung cancer (NSCLC) with METex14 skipping alterations. The treatment, known as Tepmetko® in Japan, was the first MET inhibitor to have received a regulatory approval for NSCLC with MET gene alterations.
  • On May 29, The New England Journal of Medicine published the primary analysis of the Phase II VISION study of
    tepotinib­ in advanced NSCLC with METex14 skipping alter- ations.
  • In June, the MHLW granted SAKIGAKE 'fast-track' designa- tion for the investigational bifunctional fusion protein bin- trafusp alfa (M7824) as a potential treatment for patients with biliary tract cancer.
  • On June 30, the FDA approved Bavencio® for the
    maintenance­treatment of patients with locally advanced
    or metastatic­ UC that has not progressed with first-line
    platinum­ -containing chemotherapy, based on the results of JAVELIN Bladder 100. The FDA also converted the
    accelerated­approval of Bavencio® for the treatment of patients with locally advanced or metastatic UC who have
    disease progression during or following platinum­ -containing
    chemotherapy,­or who have disease progression within
    12 months of neoadjuvant or adjuvant treatment with
    platinum­ -containing chemotherapy, based on tumor response rate and duration of response, to full approval.

7

Half-YearlyFinancial Report 2020 Developments within the Group and R&D

ASCO 2020

  • We had a significant presence at the ASCO20 Virtual
    Scientific­ Program. Data from more than 30 abstracts across multiple tumor types highlight our biology-driven approach with breakthrough innovations and significant advances in cancer care across our oncology assets.
    Potential­ first-in-class /best-in-class early- and late-stage pipeline compounds, and investigational uses of our approved medicines were featured at the meeting.
    • Data from the Phase III JAVELIN Bladder 100 study
      (abstract# LBA1) of Bavencio® in the first-line mainte- nance treatment of patients with locally advanced or
      metastatic­ UC were highlighted in the ASCO presscast on May 26 and at the plenary session on May 31.
    • In addition, a late-breaking oral presentation of results of the investigator-sponsored, multicenter Phase II
      TROPHIMMUN­study of Bavencio® for the treatment of chemotherapy-resistant gestational trophoblastic tumors
      (cohort A), was also featured in the ASCO press program.
    • Several oral presentations for both the TPExtreme ISS and the independent BEACON-CRC study data featur- ing Erbitux® demonstrated its continued legacy as the
      cornerstone­in the treatment of SCCHN and reinforce its value across the continuum of care in metastatic
      colorectal­ cancer.
    • For tepotinib, results from primary analysis of the Phase II VISION study and the first patient-reported outcomes of health-related quality of life for patients with METex14 skipping NSCLC were shared at the meeting.
    • For bintrafusp alfa, an investigational bifunctional fusion protein targeting TGF-β and PD-L1,two-yearfollow-up from a Phase I global study in second-line NSCLC was presented. These data continue to highlight the value of this first-in-class bifunctional supposed mode of action in
      NSCLC and additionally, the potential to offer new ways
      to fight difficult­ -to-treat cancers beyond PD-1/PD-L1 in the future.

Fertility

  • The Pergoveris® pen, a convenient and ready-to-use
    fertility­ combination treatment option for women with severe follicle-stimulating hormone and luteinizing hormone deficiency, was successfully introduced in several countries in Europe, Asia-Pacific and Latin America by the end of 2019. Additional launches in Slovakia, Indonesia and

Panama­ followed in the beginning of 2020, and more launches are scheduled for the second half of the year. To date, an estimated three million babies have been born with the help of our Fertility portfolio.

  • During the challenging situation in the face of the Covid-19 pandemic, we supported patients with advancing their treatment at home with the release of our Gonal-f® 150 IU pen. Recently launched in Germany, the 150 IU pen will soon be available in other countries. Studies conducted with nurses highlighted both the ease of use and the patient-­ friendliness of our comprehensive pen portfolio.
  • Our Fertility franchise launched the Digital Congress Center in March supporting a seamless switch to digital­ interac- tions with customers. The platform provides relevant sci- entific information for healthcare professionals. As of today, the center has over 11,000 registered users (physicians) and is free of charge for all healthcare professionals.

General Medicine and Endocrinology

  • Our new formulation of Euthyrox® (levothyroxine) for the
    treatment­ of hypothyroidism received further regulatory approvals in the second quarter, resulting in a total of
    39 countries in which it has been approved.
  • Glucophage®, containing the active ingredient metformin, is now approved in more than 58 countries for prediabetes when lifestyle intervention is not enough to control the condition.
  • We continued to pursue selected patient solutions that go beyond the pill in areas such as medication adherence (via our partner Medisafe) where we are observing strong and consistent adherence rates higher than 80%. We are also exploring partnerships for offering digital solutions to sup- port prediabetic patients' lifestyle changes. In China, we provide education on disease awareness via our partnership with Ali Health.
  • In the second quarter, the number of new patients using the Easypod® electromechanical injection device for treat- ment with Saizen® (somatropin) continued to grow, bringing the total number of patients enrolled on Easypod® Connect to 23,006. Saizen® is our main endocrinology product and is indicated for the treatment of growth hormone deficiency in children and adults.
  • We continued the roll-out of Aluetta®, our new pen for the injection of Saizen®, taking the total number of countries where it is currently available to 21.

8

Half-YearlyFinancial Report 2020 Developments within the Group and R&D

ALLERGOPHARMA

  • On February 19, we signed an agreement to sell our allergy business Allergopharma to Dermapharm Holding SE. The transaction closed on March 31. By divesting Allergo- pharma, we are further sharpening the focus of the Health- care business sector on the development of innovative medicines for difficult-to-treat diseases.

Life Science

  • In the first half of 2020, we continued to focus on meeting customer needs by launching some 7,700 products across the Research Solutions, Process Solutions and Applied Solu- tions business units, including those launched through our
    ‟faucet program" for antibodies, reference materials, chem- icals and nanomaterials.
  • In March, we launched a dedicated Covid-19 webpage on our e-Commerce platform, providing a one-stop-shop of approximately 200 products and corresponding information for academic labs and biopharmaceutical companies work- ing to combat the virus.
  • In April, we announced our grant to Beyond Benign, a green chemistry education nonprofit with which we have collab- orated since 2019. This support will allow Beyond Benign to continue developing laboratory resources for universities looking to include green chemistry in their courses and programs.

Research Solutions

  • In January, we announced our opening of a non-profit, high- tech skill development center in collaboration with the Council of Scientific and Industrial Research's Institute of Microbial Technology (CSIR-IMTECH) to help Indian students­
    build life science skills.

Process Solutions

  • In February, we announced a global licensing agreement with ReForm Biologics, a pharmaceutical technology com- pany in Woburn, Massachusetts, USA, for excipient devel- opment and commercialization.
  • In April, we were awarded our second U.S. patent for
    CRISPR­ -chrom technology, making us the only provider with a patent covering the fusion of chromatin modulating

peptides to CRISPR proteins. This gene-editing technology improves access to the genome for more efficient editing.

  • Additionally, we joined The Jenner Institute, Oxford, United Kingdom, in their announcement that they laid the founda- tion for large-scale production of the Covid-19 vaccine can- didate, ChAdOx1 nCoV-19, which leveraged our previous collaborative work to develop the manufacturing process for a rabies vaccine candidate. Our support empowered the development of the manufacturing process, which would normally take at least six months to a year, to take place in just two months' time.
  • Also in April, we announced an expansion to include a
    second­ facility at our site in Carlsbad, California, USA, for our BioReliance® viral and gene therapy service offering.
    This € 100 million, 140,000-square-foot manufacturing
    facility­ will support viral and gene therapy production at the 1,000-liter scale using the Mobius® single-use equipment and is expected to open next year.
  • Further, we unveiled Bio4C™ Software Suite, a first-of-its- kind digital ecosystem that combines process control,
    analytics­ and plant-level automation. As the next com­ ponent of our BioContinuum™ Platform, this technology allows users to look across the entire manufacturing
    process­ versus­ individual operational units.
  • In May, we were awarded two U.S. patents for foundational CRISPR-Cas9 technology. These grants, which support
    scientists­ and researchers in their work to advance gene therapy development programs, mark our 25th and 26th CRISPR patents worldwide and third and fourth in the U.S.
  • Also in May, we announced an extension of our ongoing collaboration with Baylor College of Medicine in Houston,
    Texas, USA, which previously focused on vaccine develop- ment for tropical disease outbreaks, to now advance a
    vaccine­ manufacturing platform for Covid-19. Our joint work supports the accelerated transition to Phase 1 clinical trials, optimizing the production process to advance two Covid-19 vaccine candidates, including the CoV RBD219-N1 vaccine candidate originally developed to target SARS.
  • In June, we joined 10x Genomics, a single­ cell and spatial genomics technologies company, in announcing our devel- opment of two linked technologies: single cell transcriptom- ics and pooled CRISPR screening. This is the first solution for simultaneous gene perturbation measurement and
    unbiased­ single-cell gene expression.

9

Half-YearlyFinancial Report 2020 Developments within the Group and R&D

Applied Solutions

  • In February, we introduced the BrightLab™ platform, our cloud-based software solution bringing inventory manage- ment and instrument connectivity functionalities to research scientists.
  • Also in February, we announced that our business was selected by Elypta, a molecular diagnostics firm in Sweden, as the contract manufacturer for their research use only clinical diagnostic liquid biopsy kits.
  • In March, we launched the LANEXO™ system for lab inven- tory, safety and compliance management. This first-to-­ market digital lab informatics solution offers radio-­ frequency identification (RFID) labels and cloud-based integration.
  • In May, we launched the Milli-Q® IX 7003/7005/7010/7015
    Type 2 water purification system, a redesigned version of our benchtop pure water system that provides laboratories with a reliable and consistent source of high-quality pure water. This is a smaller and more intuitive and ergonomic device than previous generations of the water purification system.

Performance Materials

  • Performance Materials is advancing digital living. Our main focus is on the electronics market with our materials and solutions changing the way we access, store, process, and display information. In addition, our highly specialized,
    science­ -driven Surface Solutions business makes life more colorful.
  • The business sector consists of three business units:
    Semiconductor­Solutions, Display Solutions and Surface
    Solutions.
  • We are well on track with the execution of our five-year
    Bright Future transformation program announced in 2018, focusing on adapting to new market realities and customer requirements. With the completion of the Intermolecular and Versum Materials acquisitions, we achieved two major milestones to transform Performance Materials into a strong solutions provider and leading player in the electronic
    materials­ market. The newly integrated organization went live on June 1, 2020.

Semiconductor Solutions

  • Semiconductor Solutions is the largest business unit within
    Performance Materials. It consists of Delivery Systems & Services as well as Semiconductor Materials. Our Semicon- ductor Materials unit supplies products for every major production step in the wafer manufacturing process - including doping, lithography, patterning, deposition,
    planarization,­etching and cleaning. Specialty cleans,
    photoresists­and conductive pastes for semiconductor packaging round off the portfolio.
  • Delivery Systems & Services (DS&S) develops and deploys equipment that enables safe and reliable delivery of
    hazardous­ materials in the manufacturing process of our customers. This unit also supports the installation of our equipment and the safe handling of our materials through MEGASYS® Gas and Chemical Services.
  • DS&S is seeing increasing demand across the product
    portfolio­ including delivery equipment for specialty gases, deposition liquid precursors and chemical mechanical
    planarization­(CMP) slurries to support customer capacity increases and technology-driven projects across the logic, memory and foundry segments.
  • At our factory in Shanghai, we successfully completed man- ufacturing and shipping of the first liquid delivery systems from the CHEMGUARD® 100 product line. Previously, the factory was dedicated to manufacturing the GasSTAR® line, our latest generation of gas cabinets and bulk specialty gas systems, aimed at strengthening our presence in China.
  • We are continuously developing new products with increas- ing process control requirements, including temperature, pressure and flow to support our customers' technology roadmaps.
  • We continue to develop POLYFLOW®, our line of CMP slurry delivery systems and wafer carrier and quartzware clean- ers.
  • In Semiconductor Materials, our Thin Film Solutions busi- ness achieved significant breakthroughs in developing new organosilanes for conformal high-performance atomic layer deposition (ALD) and chemical vapor deposition (CVD) applications. Substantial progress has been made in devel- oping high-puritymetal-containing precursor offerings enabled by new engineered container delivery systems. We continue to focus on developing new spin-on dielectric

10

Half-YearlyFinancial Report 2020 Developments within the Group and R&D

­formulations for processes with improved dielectric ­characteristics for faster and better processors, servers and data storage density.

  • We are seeing high interest in our DSA (Directed Self
    Assembly) platform from leading chipmakers who are cur- rently looking for new patterning technologies. We are actively working with the leading players to collaborate on technology development. We are also engaging with the industry to address extreme ultraviolet (EUV) lithography technical and commercial challenges in both logic and mem- ory. Additionally, our advanced integrated circuit (IC) cleans with selective etchants for 3D-NAND applications continue to see rising orders from leading memory companies. The sensor and 5G market in China continues to drive demand, creating growth opportunities for our photoresist, wafer cleans, and Klebosol portfolios.
  • Our Planarization business continues to make significant progress in new product development in memory and logic across both slurry and cleans products. To better support our customers, in late June we inaugurated a new R&D center in Korea to develop next-generation chemical mechanical planarization (CMP) materials. The facility is in close proximity to many of our Korean customers and aims to provide local collaboration support and faster time to market.
  • In the first half of 2020, our Specialty Gases business
    generated­ key findings in the etch gas technology program advancing the development of new chemistries that will enable more than 100-layersingle-stack etching for advanced memory devices such as V-NAND. Executing on a key tenant of our strategy, we successfully intro- duced a new product offering in the rare gas industry with a
    strategic­ customer.
  • Our materials R&D services provider Intermolecular is
    seeing­ significant customer interest on its extensive thin film materials properties library and expertise. These
    libraries­ have been generated through internal develop- ment and unit process development during customer
    programs­ . They provide a starting point for applications in
    ALD processes used throughout the semiconductor industry in the most advanced logic and memory devices.

Display Solutions

  • Our Display Solutions business unit consists of the Liquid Crystals, Organic Light-Emitting Diodes (OLED), Photo­ resists, and Liquid Crystal Windows businesses. Currently, we are supporting our display customers in the development of novel display technologies and product concepts for appli- cations, also addressing new requirements that have emerged from the Covid-19 pandemic.
  • In Liquid Crystals our newest materials help us to maintain our position as the technology leader. With our XtraBright™ products, we were able to win new projects for large-area displays as well as high-resolution mobile devices.
  • With our OLED materials, the business unit is contributing to the fast-growing market of flexible displays that includes foldable smartphones and rollable TVs. Our OLED materials have qualified for all upcoming free-formdisplay-based products that will enter the market this year. To further strengthen our capability to drive innovations in the fast-growing OLED market, the business is looking into new opportunities afforded by the OLED patents acquired in April from Konica Minolta. The acquired portfolio comprises over
    700 patent families for OLED display applications and will further boost our OLED development pipeline.
  • Our photoresist materials are also being used in flexible displays. Our low-temperature processable positive tone photoresists are widely used to pattern on-cell touch sen- sors. These sensors enable a thinner display structure which is crucial for foldable devices.
  • In June, we announced that our Liquid Crystal Windows business had entered into a commercial partnership with Guardian Glass to commission sales of eyrise® dynamic
    liquid­ crystal windows. The strategic deal aims to expand the customer base of our Liquid Crystal Windows business by leveraging additional distribution channels. Our Liquid Crystals Windows business also inaugurated an experience lab at its newly transformed headquarters in Veldhoven, the Netherlands, to showcase the capabilities of our liquid
    crystal­ glass. The redesigned facility creates an interactive environment that offers solar control and privacy for employees, and a space where visitors can experience the benefits first-hand.

11

Half-YearlyFinancial Report 2020 Developments within the Group and R&D

Surface Solutions

  • The core markets for Surface Solutions are automotive coatings, cosmetics, and, to a smaller extent, industrials. We are serving these markets with functional and decorative­ solutions. Our focus is on expanding our portfolio through innovation in all areas and proactive solution development in close cooperation with our customers.
  • Surface Solutions launched several new laser additives under the brand name Iriotec® and a new pigment Iriodin®
    NXT 103 for powder and coil coating applications. In March

we announced the launch of RonaCare® Balmance, a new, award-winning active ingredient for anti-itching, redness reduction, and soothing relief.

  • While Covid-19 has had severe negative impacts across our customer industries, we have quickly adapted to their changing needs. This includes leveraging digital concepts on a much broader scale for introducing new, situation-­ related solutions to our customers. One compelling example was the ‟Live Cosmetics Conference" format, which reached a total of more than 4,000 customers with two events.

12

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Group

Course of Business and Economic Position

Group

Overview - Q2 2020

  • Group sales rise by 3.7% to € 4,119 million
  • Organically, Group net sales decline by -2.5%, negative foreign exchange effects amount to -0.9%, portfolio effects increase sales by 7.1%
  • Group EBITDA pre down -5.7% to € 1,074 million; EBITDA pre margin declines to 26.1% (Q2 2019: 28.7%)
  • Net financial debt € 12.6 billion on June 30, 2020
    (December­ 31, 2019: € 12.4 billion)

GROUP

Key figures

€ million

Q2 2020

Q2 2019

Net sales

3,971

4,119

Operating result (EBIT)1

491

618

Margin (% of net sales)1

11.9%

15.6%

EBITDA1

1,048

1,074

Margin (% of net sales)1

25.4%

27.0%

EBITDA pre1

1,074

1,139

Margin (% of net sales)1

26.1%

28.7%

Profit after tax

289

471

Earnings per share (€)

0.67

1.08

Earnings per share pre (€)1

1.30

1.54

Business free cash flow1

813

701

1 Not defined by International Financial Reporting Standards (IFRSs).

DEVELOPMENT OF NET SALES

AND RESULTS OF OPERATIONS

In the second quarter of 2020, the Group generated net sales of € 4,119 million (Q2 2019: € 3,971 million). This represented a year-on-year increase of € 148 million or 3.7%. The rise in sales was primarily due to acquisition-related increases in the Performance Materials business sector as well as to organic growth in Life Science. Group-wide, sales declined organically by € -98 million or -2.5%. Information on the impact of the Covid-19 pandemic on Group sales can be found in the sections on the individual business sectors. At -0.9%, the impact of foreign exchange on Group sales was insignificant. Portfolio changes increased Group net sales by € 280 million or 7.1%. This primarily stemmed from the acquisition of Versum

Change

Jan.-June 2020

Jan.-June 2019

Change

3.7%

8,489

7,717

10.0%

-20.6%

1,207

997

21.0%

14.2%

12.9%

-2.5%

2,195

1,927

13.9%

25.9%

25.0%

-5.7%

2,256

2,068

9.1%

26.6%

26.8%

-38.6%

747

660

13.1%

-38.0%

1.72

1.52

13.2%

-15.6%

2.80

2.67

4.9%

16.0%

1,474

1,246

18.3%

­Materials, Inc., USA, (Versum), which closed on October 7, 2019, and complements the Semiconductor Solutions business of the Performance Materials business sector. The divestment of the Allergopharma allergy business on March 31, 2020 lowered the sales of the Healthcare business sector.

In the second quarter of 2020, the Life Science business sector generated a sales increase of 5.9% to € 1,806 million (Q2 2019: € 1,705 million), which was mainly due to organic sales growth (6.3%). Accounting for a 44% (Q2 2019: 43%) share of Group sales, Life Science was once again the Group's largest business sector in terms of sales. In the second quarter of 2020, net sales of the Healthcare business sector decreased by -10.6% to € 1,499 million (Q2 2019: € 1,677 million). Healthcare's share of Group net sales thus decreased by six

13

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Group

percentage points to 36% (Q2 2019: 42%). The increase in sales of the Performance Materials business sector by a total of 38.1% to € 814 million (Q2 2019: € 589 million) was due to the successful acquisitions of Versum and Intermolecular.

Organically, the business sector sustained a double-digit sales decline. The percentage contribution of the Performance Materials business sector to Group net sales rose by five percentage points to 20% (Q2 2019: 15%).

GROUP

Net sales by business sector

Organic

Exchange rate

Acquisitions /

€ million

Q2 2020

Share

growth1

effects

divestments

Total change

Q2 2019

Share

Healthcare

1,499

36%

-7.4%

-2.3%

-0.9%

-10.6%

1,677

42%

Life­ Science­

1,806

44%

6.3%

-0.4%

-

5.9%

1,705

43%

Performance Materials

814

20%

-13.7%

1.8%

50.1%

38.1%

589

15%

Group

4,119

100%

-2.5%

-0.9%

7.1%

3.7%

3,971

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

In the second quarter of 2020, the regional sales development of the Group was as follows:

GROUP

Net sales by region

€ million

Organic

Exchange rate

Acquisitions /

Q2 2020

Share

growth1

effects

divestments

Total change

Q2 2019

Share

Europe

1,118

27%

-4.2%

-0.6%

0.1%

-4.8%

1.174

30%

North America

1,093

27%

-3.2%

1.8%

6.7%

5.4%

1.037

26%

Asia-Pacific (APAC)

1,541

37%

-2.2%

0.2%

14.7%

12.7%

1.367

34%

Latin America

203

5%

-1.8%

-18.9%

0.2%

-20.5%

256

6%

Middle East and

Africa (MEA)

164

4%

13.8%

-0.2%

6.1%

19.6%

137

4%

Group

4,119

100%

-2.5%

-0.9%

7.1%

3.7%

3.971

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

In the first six months of 2020, net sales of the Group rose by

  • 772 million or 10.0% to € 8,489 million (January-June 2019:
  • 7,717 million). All business sectors contributed to this positive sales development. In particular, sales growth was attributable

to the organic increases in Life Science and Healthcare as well as to the acquisition-related sales in Performance Materials. The following table presents the net sales development of the business sectors in the first half of 2020:

GROUP

Net sales by business sector

Jan.-June

Organic

Exchange rate

Acquisitions /

Jan.-June

€ million

2020

Share

growth1

effects

divestments

Total change

2019

Share

Healthcare

3,200

38%

3.2%

-1.4%

-0.5%

1.3%

3,158

41%

Life­ Science­

3,575

42%

5.9%

0.2%

-

6.2%

3,366

44%

Performance Materials

1,714

20%

-9.5%

2.1%

51.1%

43.7%

1,193

15%

Group

8,489

100%

2.4%

-0.2%

7.7%

10.0%

7,717

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

14

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Group

In the first half of 2020, the regional sales development of the

Group was as follows:

GROUP

Net sales by region

€ million

Jan.-June

Organic

Exchange rate

Acquisitions /

Jan.-June

2020

Share

growth1

effects

divestments

Total change

2019

Share

Europe

2,428

29%

2.7%

-0.2%

0.7%

3.3%

2,351

31%

North America

2,243

27%

4.0%

2.5%

7.3%

13.8%

1,972

26%

Asia-Pacific (APAC)

3,077

36%

-0.5%

0.7%

15.7%

15.9%

2,654

34%

Latin America

455

5%

9.3%

-15.8%

0.2%

-6.3%

486

6%

Middle East and

Africa (MEA)

285

3%

5.5%

0.4%

6.0%

12.0%

255

3%

Group

8,489

100%

2.4%

-0.2%

7.7%

10.0%

7,717

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

The consolidated income statement of the Group is as follows:

GROUP

Consolidated Income Statement1

€ million

Jan.-June

Jan.-June

Q2 2020

Q2 2019

Change

2020

2019

Change

Net sales

4,119

3,971

3.7%

8,489

7,717

10.0%

Cost of sales

-1,610

-1,454

10.7%

-3,264

-2,838

15.0%

Gross profit

2,509

2,517

-0.3%

5,225

4,879

7.1%

Marketing and selling expenses

-1,035

-1,157

-10.5%

-2,094

-2,248

-6.9%

Administration expenses

-298

-269

10.8%

-587

-552

6.3%

Research and development costs

-520

-553

-6.0%

-1,099

-1,080

1.8%

Impairment losses and reversals of impairment losses

on financial assets (net)

-5

2

> 100.0%

1

-2

> 100.0%

Other operating expenses and income

-160

79

> 100.0%

-240

-1

> 100.0%

Operating result (EBIT)1

491

618

-20.6%

1,207

997

21.0%

Financial result

-102

-61

67.4%

-201

-174

15.6%

Profit before income tax

389

557

-30.2%

1,006

824

22.2%

Income tax

-100

-136

-26.7%

-259

-203

27.5%

Profit after tax from continuing operations

289

421

-31.4%

747

620

20.4%

Profit after tax from discontinued operation

-

50

-100.0%

-

40

-100.0%

Profit after tax

289

471

-38.6%

747

660

13.1%

Non-controlling interests

1

-

-

-1

-1

14.9%

Net income

290

471

-38.5%

746

659

13.1%

1 Not defined by International Financial Reporting Standards (IFRSs).

Gross profit declined slightly to € 2,509 million in the second quarter of 2020 (Q2 2019: € 2,517 million). The resulting gross margin of the Group, i.e. gross profit as a percentage of sales, decreased to 60.9% (Q2 2019: 63.4%).

The decline in marketing and selling expenses as well as research and development costs compared with the year-­earlier quarter was due mainly to the Healthcare business sector. In the second quarter of 2020, the Group research spending

15

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Group

ratio (research and development costs as a percentage of net sales) was 12.6% (Q2 2019: 13.9%). Accounting for a 72% (Q2 2019: 73%) share of research and development costs of all business sectors, Healthcare is the most research-intensive business sector of the company.

Other operating expenses and income (net) showed an expense balance of € -160 million in the second quarter of 2020; in the year-earlier quarter this item showed an income balance of € 79 million. The sharp change was primarily attributable to impairment losses on intangible assets in the Performance Materials business sector during the second quarter of 2020 (see the ‟Notes to the Half-Year Consolidated Financial Statements as of June 30, 2020") as well as to income from milestone payments in the year-earlier quarter in Healthcare (see explanations under ‟Healthcare").

In comparison with the year-earlier quarter, the negative financial result rose by 67.4% to € -102 million (Q2 2019:

  • -61million). This development was mainly the result of higher interest expenses as well as expenses due to the devel- opment of the time value of the Share Units of Merck KGaA, Darmstadt, Germany, within the scope of the Long Term Incen- tive Plan of the Group.
    Income tax expenses of € 100 million (Q2 2019: € 136 million) led to an effective tax rate of 25.7% (Q2 2019: 24.4%).
    Net income, i.e. profit after tax attributable to the share- holders of Merck KGaA, Darmstadt, Germany, declined to € 290 million (Q2 2019: € 471 million), yielding earnings per share of € 0.67 in the second quarter of 2020 (Q2 2019: € 1.08).
    The following table presents the composition of EBITDA pre for the reporting period in comparison with the year-earlier quarter. The IFRS figures have been modified to reflect the elimination of adjustments included in the respective functional costs.

GROUP

Reconciliation EBITDA pre1

Q2 2020

Q2 2019

Change

€ million

Elimination of

Pre1

Elimination of

Pre1

Pre1

IFRS

adjustments

IFRS

adjustments

Net sales

4,119

-

4,119

3,971

-

3,971

3.7%

Cost of sales

-1,610

3

-1,608

-1,454

3

-1,451

10.8%

Gross profit

2,509

3

2,511

2,517

3

2,520

-0.4%

Marketing and selling expenses

-1,035

10

-1,025

-1,157

5

-1,152

-11.1%

Administration expenses

-298

33

-266

-269

11

-258

2.7%

Research and development costs

-520

-

-520

-553

17

-536

-3.0%

Impairment losses and reversals of impairment losses

on financial assets (net)

-5

-

-5

2

-

2

> 100.0

Other operating expenses and income

-160

93

-67

79

29

108

> 100.0

Operating result (EBIT)1

491

618

Depreciation / amortization / impairment losses / reversals

of impairment losses

556

-112

445

455

-

455

-2.4%

EBITDA1

1,048

1,074

Restructuring expenses

21

-21

-

39

-39

-

Integration expenses / IT expenses

37

-37

-

22

-22

-

Gains (-) / losses (+) on the divestment of businesses

2

-2

-

-2

2

-

Acquisition-related adjustments

-30

30

-

-

-

-

Other adjustments

-4

4

-

6

-6

-

EBITDA pre1

1,074

-

1,074

1,139

-

1,139

-5.7%

of which: organic growth1

-11.5%

of which: exchange rate effects

-3.1%

of which: acquisitions / divestments

8.8%

1 Not defined by International Financial Reporting Standards (IFRSs).

EBITDA pre, the most important financial indicator used to steer operating business, fell by -5.7% to € 1,074 million in the second quarter of 2020 (Q2 2019: € 1,139 million). The organic decline amounted to -11.5% and negative foreign­ exchange effects adversely affected the key performance indicator by -3.1%. The acquisitions of Versum and Intermolecular

led to an 8.8% increase in EBITDA pre. Relative to net sales, the EBITDA pre margin was 26.1% in the second quarter of 2020 (Q2 2019: 28.7%). Earnings per share pre (earnings per share after net of tax effect of adjustments and amortization of purchased intangible assets) fell by -15.6% to € 1.30 (Q2 2019: € 1.54).

16

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Group

The following table presents the composition of EBITDA pre for the first half of 2020 in comparison with the year-earlier period.

The IFRS figures have been modified to reflect the elimination of adjustments included in the respective functional costs.

GROUP

Reconciliation EBITDA pre1

Jan.-June 2020

Jan.-June 2019

Change

€ million

Elimination of

Elimination of

IFRS

adjustments

Pre1

IFRS

adjustments

Pre1

Pre1

Net sales

8,489

-

8,489

7,717

-

7,717

10.0%

Cost of sales

-3,264

23

-3,241

-2,838

19

-2,819

15.0%

Gross profit

5,225

23

5,248

4,879

19

4,899

7.1%

Marketing and selling expenses

-2,094

12

-2,081

-2,248

8

-2,240

-7.1%

Administration expenses

-587

49

-538

-552

47

-505

6.5%

Research and development costs

-1,099

-2

-1,101

-1,080

33

-1,047

5.1%

Impairment losses and reversals of impairment losses

on financial assets (net)

1

-

1

-2

-

-2

> 100.0%

Other operating expenses and income

-240

91

-148

-1

34

33

> 100.0%

Operating result (EBIT)1

1,207

997

Depreciation / amortization / impairment losses / reversals

of impairment losses

988

-114

874

929

-

929

-5.9%

EBITDA1

2,195

1,927

Restructuring expenses

37

-37

-

100

-100

-

Integration expenses / IT expenses

59

-59

-

35

-35

-

Gains (-) / losses (+) on the divestment of businesses

-28

28

-

-

-

-

Acquisition-related adjustments

-11

11

-

-

-

-

Other adjustments

4

-4

-

5

-5

-

EBITDA pre1

2,256

-

2,256

2,068

-

2,068

9.1%

of which: organic growth1

0.2%

of which: exchange rate effects

-0.8%

of which: acquisitions / divestments

9.7%

1 Not defined by International Financial Reporting Standards (IFRSs).

In the first six months of 2020, EBITDA pre rose by 9.1% and amounted to € 2,256 million (January-June 2019: € 2,068 mil- lion). The increase in this key performance indicator was driven by the acquisitions of Versum and Intermolecular (9.7%).

At 26.6%, the EBITDA pre margin was at the year-earlier level (January-June 2019: 26.8%). Earnings per share pre rose by

4.9% to € 2.80 in the first half of 2020 (January-June 2019: € 2.67).

17

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Group

NET ASSETS AND FINANCIAL POSITION

GROUP

Balance sheet structure

June 30, 2020

Dec. 31, 20191

Change

€ million

in %

€ million

in %

€ million

in %

Non-current assets

34,096

77.8%

34,808

79.4%

-712

-2.0%

of which:

Goodwill

17,118

17,141

-23

Other intangible assets

8,664

9,175

-510

Property, plant and equipment

6,067

6,213

-146

Other non-current assets

2,246

2,278

-32

Current assets

9,726

22.2%

9,003

20.6%

723

8.0%

of which:

Inventories

3,537

3,342

195

Trade and other current receivables

3,509

3,488

21

Other current financial assets

32

57

-25

Other current assets

1,136

1,336

-200

Cash and cash equivalents

1,512

781

731

Total assets

43,822

100.0%

43,811

100.0%

11

0.0%

Equity

18,026

41.1%

17,914

40.9%

112

0.6%

Non-current liabilities

15,716

35.9%

14,056

32.1%

1,660

11.8%

of which:

Provisions for pensions and other post-employment benefits

3,525

3,194

331

Other non-current provisions

255

254

1

Non-current financial debt

10,081

8,644

1,437

Other non-current liabilities

1,856

1,965

-109

Current liabilities

10,080

23.0%

11,842

27.0%

-1,762

-14.9%

of which:

Current provisions

861

933

-72

Current financial debt

4,009

4,550

-541

Trade and other current payables / Refund liabilities

2,360

2,618

-258

Other current liabilities

2,850

3,740

-890

Total liabilities and equity

43,822

100.0%

43,811

100.0%

11

0.0%

1 Previous year's figures have been adjusted, see ‟Notes to the Consolidated Half-Year Financial Statements­ as of June 30, 2020".

18

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Group

The total assets of the Group amounted to € 43,822 million as of June 30, 2020, which was consistent with the level of Decem- ber 31, 2019. Since the beginning of 2020, working capital has risen by 13.4% to € 4,474 million (December 31, 2019: € 3,944

million). This development was mainly due to higher inventories as well as to a decline in trade accounts payable.

The composition and the development of net financial debt were as follows:

GROUP

Net financial debt1

June 30, 2020

Dec. 31, 2019

Change

€ million

€ million

€ million

in %

Bonds and commercial paper

9,556

10,059

-503

-5.0%

Bank loans

2,702

1,587

1,115

70.2%

Liabilities to related parties

1,166

809

358

44.3%

Loans from third parties and other financial liabilities

56

97

-40

-41.9%

Liabilities from derivatives (financial transactions)

86

76

10

12.9%

Lease liabilities

523

567

-44

-7.7%

Financial debt

14,090

13,194

896

6.8%

less:

Cash and cash equivalents

1,512

781

731

93.7%

Current financial assets2

18

50

-33

-65.2%

Net financial debt1

12,560

12,363

197

1.6%

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. Excluding current derivatives (operational).

GROUP

Reconciliation of net financial debt1

€ million

2020

January 1

12,363

Currency translation difference

20

Dividend payments / Profit withdrawals2

686

Acquisitions2

7

Payments from other divestments2

-56

Free cash flow1

-434

Other

-25

June 30

12,560

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. As reported in the Consolidated Cash Flow Statement.

Equity rose in the first six months of 2020 by 0.6% to € 18,026 million (December 31, 2019: € 17,914 million). Consequently, the equity ratio increased to 41.1% (December 31, 2019:

40.9%). More information on the development of equity can be found in the Consolidated Statement of Changes in Net Equity in the Consolidated Half-Year Financial Statements.

19

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Group

The composition of free cash flow as well as the development of the relevant items are presented in the following table:

GROUP

Free cash flow1

€ million

Jan.-June

Jan.-June

Q2 2020

Q2 2019

Change

2020

2019

Change

Cash flow from operating activities

as reported in the consolidated cash flow statement

502

743

-32.4%

1,019

1,235

-17.5%

Payments for investments in intangible assets

-48

-83

-41.9%

-66

-93

-28.4%

Payments from the disposal of intangible assets

7

-

-

13

17

-22.3%

Payments for investments in property,

plant and equipment

-200

-165

21.4%

-541

-374

44.8%

Payments from the disposal of property,

plant and equipment

6

3

73.6%

10

6

49.3%

Free cash flow1

266

497

-46.4%

434

792

-45.2%

1 Not defined by International Financial Reporting Standards (IFRSs).

Business free cash flow of the Group improved in the second quarter of 2020 by 16.0% to € 813 million (Q2 2019: € 701 million). The development of receivables had a positive effect

whereas lower EBITDA pre and higher capital spending lowered business free cash flow.

GROUP

Business free cash flow1

€ million

Jan.-June

Jan.-June

Q2 2020

Q2 2019

Change

2020

2019

Change

EBITDA pre1

1,074

1,139

-5.7%

2,256

2,068

9.1%

Investments in property, plant and equipment, software

as well as advance payments for intangible assets

-221

-193

14.3%

-396

-319

24.2%

Changes in inventories

-94

-96

-2.0%

-195

-269

-27.3%

Changes in trade accounts receivable and receivables

from royalties and licenses

85

-116

> 100.0%

-77

-175

-56.2%

Lease payments2

-31

-33

-5.9%

-68

-59

14.2%

Elimination of changes in consolidations

-

-

-

-45

-

-

Business free cash flow1

813

701

16.0%

1,474

1,246

18.3%

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. Excluding payments for low-value leases and interest components included in lease payments.

In comparison with the year-earlier period, business free cash flow rose by 18.3% to € 1,474 million in the first six months of 2020 (January- June 2019: € 1,246 million). Higher EBITDA

pre and the development of receivables in the reporting period had a positive effect in comparison with the year-earlier period.

20

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Healthcare

Healthcare

HEALTHCARE

Key figures

€ million

Q2 2020

Q2 2019

Net sales

1,677

1,499

Operating result (EBIT)1

269

345

Margin (% of net sales)1

18.0%

20.6%

EBITDA1

359

523

Margin (% of net sales)1

23.9%

31.2% 

EBITDA pre1

374

528

Margin (% of net sales)1

24.9%

31.5% 

Business free cash flow1

261

346

1 Not defined by International Financial Reporting Standards (IFRSs).

DEVELOPMENT OF NET SALES

AND RESULTS OF OPERATIONS

In the second quarter of 2020, the Healthcare business sector reported an organic sales decline of -7.4%. Including negative foreign exchange effects of -2.3%, net sales amounted to

  • 1,499 million (Q2 2019: € 1,677 million). The exchange rate effect reflects the positive impact of the increase in the value

Change

Jan.-June 2020

Jan.-June 2019

Change

-10.6%

3,158

1.3%

3,200

-22.0%

692

473

46.2%

21.6%

15.0% 

-31.3%

860

852

1.0%

26.9%

27.0% 

-29.1%

846

860

-1.6%

26.4%

27.2% 

-24.4%

638

568

12.4%

of the U.S. dollar against the euro which was offset by the

negative­ effects of the development of individual Latin Ameri- can currencies and the Chinese renminbi.

Sales of the key product lines and products developed in the second quarter of 2020 as follows:

HEALTHCARE

Net sales by major product lines / products

€ million

Organic

Exchange rate

Q2 2020

Share

growth1

effects

Total change

Q2 2019

Share

Oncology

258

17%

6.3%

-2.8%

3.5%

250

15%

thereof: Erbitux®

207

14%

1.1%

-3.2%

-2.1%

212

13%

thereof: Bavencio®

30

2%

29.6%

-1.3%

28.3%

23

1%

Neurology & Immunology

372

25%

-5.1%

-

-5.1%

392

23%

thereof: Rebif®

290

19%

-12.7%

0.3%

-12.4%

331

20%

thereof: Mavenclad®

82

5%

35.8%

-1.5%

34.2%

61

4%

Fertility

190

13%

-38.9%

-0.4%

-39.4%

313

19%

thereof: Gonal-f®

112

7%

-40.7%

-0.4%

-41.1%

191

11%

General Medicine & Endocrinology

638

42%

3.9%

-4.1%

-0.2%

640

38%

thereof: Glucophage®

226

15%

-0.6%

-4.2%

-4.8%

237

14%

thereof: Concor®

130

9%

8.9%

-3.7%

5.3%

124

7%

thereof: Euthyrox®

114

8%

22.0%

-5.3%

16.8%

97

6%

thereof: Saizen®

54

4%

-0.8%

-6.0%

-6.7%

58

3%

Other

40

3%

82

5%

Healthcare

1,499

100%

-7.4%

-2.3%

-10.6%

1,677

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

21

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Healthcare

The oncology drug Erbitux® generated slightly positive organic sales growth of 1.1%. Negative foreign exchange effects were responsible for a -2.1% decline in global net sales to

  • 207 million (Q2 2019: € 212 million). In the Asia-Pacific region, growth slowed in comparison with the previous year. In this region, sales stagnated at € 83 million (Q2 2019: € 81
    million)­ . Performance in Europe continued to be influenced
    by the difficult­ competitive environment. Organically, sales in Europe fell by -5.8% to € 93 million (Q2 2019: € 101
    million­ . Due to negative foreign exchange effects, sales in
    Latin America­ declined to € 14 million (Q2 2019: € 18 million). Within Immuno-Oncology, sales of the oncology medicine
    Bavencio® (avelumab) rose organically by 29.6% to € 30 million­
    (Q2 2019: € 23 million) amid negative foreign exchange effects
    of -1.3%. This growth was mainly driven by the approvals­ of

Bavencio® in Germany and Japan in 2019 in combination with axitinib for the treatment of patients with advanced renal cell carcinoma.

Mavenclad®, for the oral short-course treatment of highly active relapsing multiple sclerosis, generated growth of 35.8% in the second quarter of 2020. Including negative foreign exchange effects, the corresponding sales amounted to

  • 82 million (Q2 2019: € 61 million). The prescription rates for Mavenclad® decreased as expected in a market environ- ment adversely impacted by the Covid-19 pandemic. This was reflected in particular by sales in Europe. An organic sales decline of -14.6% was recorded in this region. The correspond- ing sales amounted to € 34 million (Q2 2019: € 41 million). In North America, sales more than doubled over the year-earlier quarter to € 39 million (Q2 2019: € 15 million).

HEALTHCARE

Product sales and organic growth1 of Rebif®, Glucophage® and Erbitux® by region - Q2 2020

Asia-Pacific

Middle East and

Total

Europe

North America

(APAC)

Latin America

Africa (MEA)

€ million

290

72

188

3

11

16

Rebif®

Organic growth1 in %

-12.7%

-7.3%

-12.3%

3.3%

-22.4%

-30.0%

% of sales

100%

25%

65%

1%

4%

5%

€ million

226

27

-

140

31

28

Glucophage®

Organic growth1 in %

-0.6%

-13.7%

-

-2.5%

23.5%

-2.2%

% of sales

100%

12%

-

62%

14%

12%

€ million

207

93

-

83

14

17

Erbitux®

Organic growth1 in %

1.1%

-5.8%

-

2.2%

6.2%

47.1%

% of sales

100%

45%

-

40%

7%

8%

1 Not defined by International Financial Reporting Standards (IFRSs).

Sales of the drug Rebif®, which is used to treat relapsing forms of multiple sclerosis, saw an organic decline of -12.7% to € 290 million (Q2 2019: € 331 million) amid constant exchange rates. Organically, sales fell by -12.3% in North America. Including currency tailwinds of 1.8%, net sales amounted to € 188 million (Q2 2019: € 210 million). Due to the continued difficult competitive situation in the interferon market as well as competition from oral dosage forms and high-efficacy therapies, the second quarter of 2020 reflected effects of an anticipated price increase in the United States as of April 1, which partly led to a shift in sales into the first quarter of 2020. In Europe, the declining sales trend also continued, however at a slower pace. Sales in this region amounted to € 72 million (Q2 2019: € 78 million). The decline in the other regions, where Rebif® generated sales of € 30 million (Q2 2019: € 42 million), was mainly attributable to the organic sales decline in the Middle East & Africa region and in Latin America. Negative foreign exchange developments stemming from individual Latin American currencies amplified this effect.

Within the Healthcare business sector, the Fertility franchise­

was, as expected, affected most strongly by the effects of the Covid-19 pandemic. Gonal-f®, the leading recombinant

hormone used in the treatment of infertility, saw an organic decline of -40.7% to € 112 million (Q2 2019: € 191 million). This development could be seen in all regions.

The General Medicine & Endocrinology franchise (includ- ing CardioMetabolic Care), which commercializes products to treat cardiovascular diseases, thyroid disorders, diabetes and growth disorders, among other things, generated organic growth of 3.9%. Including currency headwinds of -4.1%, sales of this franchise stagnated at € 638 million (Q2 2019:

  • 640 million). At 22.0%, only Euthyrox® recorded double-digit organic growth.
    The diabetes medicine Glucophage® from the General
    Medicine­ franchise could not maintain sales at the level of the previous year. Including an organic decline of -0.6% and
    currency­ headwinds of -4.2%, net sales amounted to € 226 million (Q2 2019: € 237 million). Whereas it was still possible to generate double-digit organic growth in the Latin America­ region, sales fell organically in Europe and the Asia-Pacific region. This was partly due to the fact that owing to the Covid­ -19 pandemic, customers pulled orders forward into the first quarter of 2020.

22

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Healthcare

Net sales of the business sector by region developed in the second quarter of 2020 as follows:

HEALTHCARE

Net sales by region

€ million

Organic

Exchange rate

Acquisitions /

Q2 2020

Share

growth1

effects

divestments

Total change

Q2 2019

Share

Europe

452

30%

-14.9%

-1.4%

-2.7%

-19.0%

558

33%

North America

330

22%

-10.6%

1.6%

-

-9.0%

363

22%

Asia-Pacific (APAC)

442

29%

-4.7%

-0.8%

-

-5.5%

468

28%

Latin America

143

10%

0.0%

-18.7%

-

-18.7%

176

10%

Middle East and

Africa (MEA)

131

9%

17.0%

0.3%

-

17.4%

112

7%

Healthcare

1,499

100%

-7.4%

-2.3%

-0.9%

-10.6%

1,677

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

In the first six months of 2020, the Healthcare business sector generated net sales of € 3,200 million (January-June 2019:

  • 3,158 million). This development reflected organic growth of
    3.2% as well as negative foreign exchange effects of -1.4%.
    Sales performance differed between the first two quarters of the first half of 2020. While it was still possible to generate above-average organic growth in the first quarter of 2020, the second quarter of 2020 was negatively impacted by the Covid-19 pandemic. The key drivers of the nevertheless pos- itive development in the first half of 2020 were the organic growth of Glucophage® (13.3%) and Concor® (18.7%) from the General Medicine franchise. Accounting for a steadily increasing share of sales, Mavenclad® (97.2%) and Bavencio® (39.3%), also contributed to the business sector's overall favor- able performance. In terms of sales, Glucophage® has become

the second-leading medicine in the product portfolio of the Healthcare business sector, generating sales of € 460 million (January-June 2019: € 418 million). Sales of Mavenclad® rose to € 206 million (January-June 2019: € 105 million) while sales of Bavencio® increased to € 63 million (January-June 2019:

  • 45 million). Among our fertility products, especially Gonal-f®, the effects of the Covid-19 crisis became apparent early in the year since China is a highly important market for this franchise. Amid an organic decline of -22.2%, sales of Gonal-f® totaled
  • 279 million (January-June 2019: € 359 million). Rebif® also suffered an organic decline (-8.3%), generating­ sales of € 584 million in the first six months of 2020 (January-June 2019:
  • 630 million).

Sales of the key product lines and products developed in the first half of 2020 as follows:

HEALTHCARE

Net sales by major product lines / products

€ million

Jan.-June

Organic

Exchange rate

Jan.-June

2020

Share

growth1

effects

Total change

2019

Share

Oncology

518

16%

10.2%

-1.9%

8.3%

479

15%

thereof: Erbitux®

419

13%

4.0%

-2.2%

1.9%

411

13%

thereof: Bavencio®

63

2%

39.3%

-0.4%

38.9%

45

1%

Neurology & Immunology

790

25%

6.8%

0.8%

7.6%

735

23%

thereof: Rebif®

584

18%

-8.3%

1.1%

-7.2%

630

20%

thereof: Mavenclad®

206

6%

97.2%

-0.8%

96.3%

105

3%

Fertility

468

15%

-22.0%

-0.2%

-22.1%

601

19%

thereof: Gonal-f®

279

9%

-22.2%

0.0%

-22.2%

359

11%

General Medicine & Endocrinology

1,318

41%

11.9%

-2.9%

9.0%

1,209

39%

thereof: Glucophage®

460

14%

13.3%

-3.2%

10.1%

418

13%

thereof: Concor®

281

9%

18.7%

-2.3%

16.4%

241

8%

thereof: Euthyrox®

228

7%

24.8%

-3.9%

20.9%

189

6%

thereof: Saizen®

118

4%

10.2%

-5.0%

5.2%

112

4%

Other

105

3%

134

4%

Healthcare

3,200

100%

3.2%

-1.4%

1.3%

3,158

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

23

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Healthcare

In the first six months of 2020, net sales by region were as follows:

HEALTHCARE

Net sales by region

€ million

Jan.-June

Organic

Exchange rate

Acquisitions /

Jan.-June

2020

Share

growth1

effects

divestments

Total change

2019

Share

Europe

1,074

33%

-

-0.6%

-1.4%

-2.0%

1,096

35%

North America

700

22%

2.5%

2.4%

-

4.9%

668

21%

Asia-Pacific (APAC)

884

28%

3.5%

-0.3%

-

3.2%

857

27%

Latin America

321

10%

12.2%

-15.9%

-

-3.6%

333

11%

Middle East and

Africa (MEA)

221

7%

7.1%

0.9%

-

7.9%

204

6%

Healthcare

3,200

100%

3.2%

-1.4%

-0.5%

1.3%

3,158

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

The following table presents the composition of EBITDA pre for the reporting period in comparison with the year-earlier quar-

ter. The IFRS figures have been modified to reflect the elimination of adjustments included in the respective functional costs.

HEALTHCARE

Reconciliation EBITDA pre1

Q2 2020

Q2 2019

Change

€ million

Elimination of

Elimination of

IFRS

adjustments

Pre1

IFRS

adjustments

Pre1

Pre1

Net sales

1,499

-

1,499

1,677

-

1,677

-10.6%

Cost of sales

-364

-

-364

-421

-

-421

-13.5%

Gross profit

1,135

-

1,135

1,256

-

1,256

-9.6%

Marketing and selling expenses

-409

8

-401

-599

-

-599

-33.0%

Administration expenses

-81

2

-79

-84

3

-81

-2.9%

Research and development costs

-366

-

-366

-395

-

-395

-7.3%

Impairment losses and reversals of impairment losses

on financial assets (net)

-3

-

-3

2

-

2

> 100.0%

Other operating expenses and income

-7

6

-1

165

2

168

> 100.0%

Operating result (EBIT)1

269

345

Depreciation / amortization / impairment losses / reversals

of impairment losses

90

-

90

177

-

177

-49.4%

EBITDA1

359

523

Restructuring expenses

12

-12

-

5

-5

-

Integration expenses / IT expenses

1

-1

-

4

-4

-

Gains (-) / losses (+) on the divestment of businesses

1

-1

-

-3

3

-

Acquisition-related adjustments

-

-

-

-

-

-

Other adjustments

-

-

-

-

-

-

EBITDA pre1

374

-

374

528

-

528

-29.1%

of which: organic growth1

-25.9%

of which: exchange rate effects

-4.1%

of which: acquisitions / divestments

0.9%

1 Not defined by International Financial Reporting Standards (IFRSs).

24

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Healthcare

In the second quarter of 2020, gross profit decreased to € 1,135 million (Q2 2019: € 1,256 million). The resulting gross margin increased to 75.7% (Q2 2019: 74.9%), which was due among other things to product mix changes.

After eliminating adjustments, marketing and selling expenses declined by -33.0% to € 401 million in comparison with the year-earlier quarter (Q2 2019: € 599 million). The significant reduction in costs was primarily attributable to two effects: firstly, the expiration of amortization in connection with the purchase price allocation for the Serono acquisition in 2006, and secondly lower marketing and selling expenses, partly due to the Covid­-19 restrictions.

Research and development costs amounted to € 366 million in the second quarter of 2020 (Q2 2019: € 395 million). This reflects the currently somewhat lower spending requirement for our development portfolio.

The development of other operating expenses and income to € -1 million (Q2 2019: € 168 million) was mainly due to the

fact that the second quarter of 2019 was positively affected by a milestone payment of € 75 million from BioMarin Pharma­ ceutical Inc., USA, in connection with the sale of the rights to Palynziq™ in 2016 as well as a milestone payment of € 36 million for the approval of Bavencio® in the United States as a first-line treatment in patients with advanced renal carcinoma (RCC) in combination with axitinib.

In the second quarter of 2020, EBITDA pre dropped ­organically by -25.9%. Including negative foreign exchange effects of -4.1%, the figure amounted to € 374 million (Q2 2019: € 528 million). The EBITDA pre margin fell to 24.9% (Q2 2019: 31.5%).

The following table presents the composition of EBITDA pre for the first six months of 2020 in comparison with the year-earlier period. The IFRS figures have been modified to reflect the elimination of adjustments included in the respective functional costs.

HEALTHCARE

Reconciliation EBITDA pre1

Jan.-June 2020

Jan.-June 2019

Change

€ million

Elimination of

Elimination of

IFRS

adjustments

Pre1

IFRS

adjustments

Pre1

Pre1

Net sales

3,200

-

3,200

3,158

-

3,158

1.3%

Cost of sales

-758

-

-758

-746

-

-746

1.6%

Gross profit

2,442

-

2,442

2,411

-

2,411

1.3%

Marketing and selling expenses

-832

8

-824

-1,150

-

-1,150

-28.3%

Administration expenses

-160

3

-157

-172

5

-167

-5.9%

Research and development costs

-783

-

-783

-775

-

-775

1.1%

Impairment losses and reversals of impairment losses

on financial assets (net)

2

-

2

-1

-

-1

> 100.0%

Other operating expenses and income

24

-23

-

159

4

163

-100.0%

Operating result (EBIT)1

692

473

Depreciation / amortization / impairment losses / reversals

of impairment losses

168

-2

167

379

-

379

-56.0%

EBITDA1

860

852

Restructuring expenses

14

-14

-

5

-5

-

Integration expenses / IT expenses

2

-2

-

5

-5

-

Gains (-) / losses (+) on the divestment of businesses

-30

30

-

-2

2

-

Acquisition-related adjustments

-

-

-

-

-

-

Other adjustments

-

-

-

-

-

-

EBITDA pre1

846

-

846

860

-

860

-1.6%

of which: organic growth1

-0.1%

of which: exchange rate effects

-2.0%

of which: acquisitions / divestments

0.6%

1 Not defined by International Financial Reporting Standards (IFRSs).

25

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Healthcare

In the first half of 2020, EBITDA pre of the Healthcare business sector decreased by -1.6% to € 846 million (January-­June 2019: € 860 million). Amid stagnant organic growth (-0.1%), currency headwinds of -2.0% adversely impacted this develop- ment. Effects from the Covid-19 pandemic were largely offset by the above-average, positive performance in the first quarter of 2020. In addition, the year-earlier period was favorably affected by two milestone payments in connection with the sale of the rights to Palynziq™ as well as the approval of Bavencio® as a first-line treatment for advanced renal cell carcinoma (RCC) in combination with axitinib in the United

States. The EBITDA pre margin of the business sector fell in the first six months of 2020 by 0.8 percentage points to 26.4% (January-June 2019: 27.2%).

DEVELOPMENT OF BUSINESS FREE CASH FLOW

In the second quarter of 2020, business free cash flow amounted to € 261 million (Q2 2019: € 346 million). The decrease was mainly due to the development of EBITDA pre as well as the increase in inventories. This was mitigated by the favorable development of trade accounts receivable in comparison with the year-earlier quarter.

HEALTHCARE

Business free cash flow1 

€ million

Jan.-June

Jan.-June

Q2 2020

Q2 2019

Change

2020

2019

Change

EBITDA pre1

374

528

-29.1%

846

860

-1.6%

Investments in property, plant and equipment,

software as well as advance payments for intangible

assets

-70

-75

-7.0%

-143

-122

17.2%

Changes in inventories

-50

2

> 100.0%

-55

-64

-13.7%

Changes in trade accounts receivable and receivables

from royalties and licenses

19

-97

> 100.0%

40

-83

> 100.0%

Lease payments2

-11

-12

-11.0%

-23

-23

2.3%

Elimination Allergopharma divestment

-

-

-

-26

-

-

Business free cash flow1

261

346

-24.4%

638

568

12.4%

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. Excluding payments for low-value leases and interest components included in lease payments.

In the first six months of 2020, the business sector generated business free cash flow of € 638 million (January-June 2019: € 568 million). The slight decline in EBITDA pre was mitigated

by the favorable development of trade accounts receivable in comparison with the year-earlier period.

26

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Lif e ­Scien

Life Science

LIFE SCIENCE

Key figures

€ million

Q2 2020

Q2 2019

Net sales

1,705

1,806

Operating result (EBIT)1

386

322

Margin (% of net sales)1

21.3%

18.9%

EBITDA1

584

518

Margin (% of net sales)1

32.4%

30.4%

EBITDA pre1

569

533

Margin (% of net sales)1

31.5%

31.3%

Business free cash flow1

472

323

1 Not defined by International Financial Reporting Standards (IFRSs).

DEVELOPMENT OF SALES

AND RESULTS OF OPERATIONS

In the second quarter of 2020, the Life Science business sector generated strong organic sales growth of 6.3% amid a slightly negative foreign exchange impact of -0.4%, resulting in net

Change

Jan.-June 2020

Jan.-June 2019

Change

5.9%

3,575

3,366

6.2%

19.9%

731

635

15.1%

20.4%

18.9%

12.8%

1,126

1,025

9.8%

31.5%

30.5%

6.7%

1,122

1,049

6.9%

31.4%

31.2%

46.0%

718

591

21.4%

sales growth of 5.9% compared with the year-earlier quarter. Overall, Life Science net sales increased to € 1,806 million (Q2 2019: € 1,705 million).

LIFE SCIENCE

Net sales by business unit

€ million

Organic

Exchange rate

Acquisitions /

Q2 2020

Share

growth1

effects

divestments

Total change

Q2 20192

Share

Process Solutions

892

49%

19.8%

0.4%

-

20.1%

743

44%

Research Solutions

501

28%

-7.1%

-0.9%

-

-8.0%

544

32%

Applied Solutions

413

23%

-

-1.3%

0.1%

-1.3%

418

24%

Life Science

1,806

100%

6.3%

-0.4%

-

5.9%

1,705

100%

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. Previous year's figures have been adjusted owing to an internal realignment.

The Process Solutions business unit, which markets products and services for the entire pharmaceutical production value chain, generated organic sales growth of 19.8%, which was the highest rate within the Life Science business sector. Assisted by a slight foreign exchange effect of 0.4%, sales totaled € 892 million in the second quarter of 2020 (Q2 2019: € 743 million). Process Solutions thus accounted for 49% of Life Science net sales. Apart from Latin America, all regions saw double-digit growth within Process Solutions.

The Research Solutions business unit, which provides products and services to support life science research for pharmaceutical, biotechnology, and academic research laboratories, recorded an organic sales decline of -7.1%.

Weaker demand due to the temporary closure of academic laboratories had a negative impact here. With a slightly negative foreign exchange impact of -0.9%, sales totaled

  • 501 million in the second quarter of 2020 (Q2 2019: € 544 million). Research Solutions thus accounted for 28% of Life Science net sales. Only Asia-Pacific generated sales growth, however, this was more than offset by weaker performance in all other regions.
    The Applied Solutions business unit with its broad range of products for researchers as well as scientific and industrial
    laboratories accounted for a 23% share of the Life Science­ busi- ness sector's sales. Applied Solutions recorded flat organic sales growth in the second quarter of 2020. The Covid-19 pandemic

27

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Lif e ­Scien

impacted the entire product portfolio; in Lab Water Solutions clear signs of a recovery were recognizable in June 2020. Including a foreign exchange effect of -1.3%, net sales totaled € 413 million (Q2 2019: € 418 million). Applied Solutions was mainly

impacted by weaker performance in North America, which was offset by higher sales in Asia-Pacific.

Net sales of the business sector by region developed in the second quarter of 2020 as follows:

LIFE SCIENCE

Net sales by region

€ million

Organic

Exchange rate

Acquisitions /

Q2 2020

Share

growth1

effects

divestments

Total change

Q2 2019

Share

Europe

610

34%

8.3%

-

-

8.3%

563

33%

North America

648

36%

2.7%

2.0%

0.1%

4.7%

619

36%

Asia-Pacific (APAC)

471

26%

11.2%

-1.1%

-

10.1%

428

25%

Latin America

55

3%

-4.0%

-19.8%

-

-23.8%

73

4%

Middle East and

Africa (MEA)

21

1%

-3.0%

-3.1%

-

-6.1%

23

2%

Life Science

1,806

100%

6.3%

-0.4%

-

5.9%

1,705

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

In the first half of 2020, Life Science net sales reflected strong organic sales growth of 5.9% assisted by a foreign exchange impact of 0.2%, resulting in total growth of 6.2% over the year-earlier period. Process Solutions reported double-digit

sales growth, whereas Research Solutions saw a decline in sales. Net sales of Applied Solutions remained flat. Taking these developments into account, Life Science net sales increased overall to € 3,575 million (January-June 2019: € 3,366 million).

LIFE SCIENCE

Net sales by business unit

€ million

Jan.-June

Organic

Exchange rate

Acquisitions /

Jan.-June

2020

Share

growth1

effects

divestments

Total change

20192

Share

Process Solutions

1,695

48%

16.6%

0.8%

-

17.4%

1,443

43%

Research Solutions

1,047

29%

-3.6%

-

-

-3.6%

1,086

32%

Applied Solutions

834

23%

-

-0.5%

0.1%

-0.4%

837

25%

Life Science

3,575

100%

5.9%

0.2%

-

6.2%

3,366

100%

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. Previous year's figures have been adjusted owing to an internal realignment.

In the first half of 2020, sales by region developed as follows:

LIFE SCIENCE

Net sales by region

€ million

Jan.-June

Organic

Exchange rate

Acquisitions /

Jan.-June

2020

Share

growth1

effects

divestments

Total change

2019

Share

Europe

1,224

34%

6.7%

0.3%

-

7.0%

1,144

34%

North America

1,293

36%

5.7%

2.6%

-

8.3%

1,194

36%

Asia-Pacific (APAC)

893

25%

5.9%

-0.3%

-

5.6%

846

25%

Latin America

121

4%

4.6%

-16.4%

-

-11.9%

137

4%

Middle East and

Africa (MEA)

44

1%

-0.4%

-1.7%

-

-2.1%

45

1%

Life Science

3,575

100%

5.9%

0.2%

-

6.2%

3,366

100%

28

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Lif e ­Scien

LIFE SCIENCE

Net sales by region

1 Not defined by International Financial Reporting Standards (IFRSs).

The following table presents the composition of EBITDA pre for the second quarter of 2020 in comparison with the year-­earlier period. The IFRS figures have been modified to reflect the

elimination of adjustments included in the respective functional­ costs.

LIFE SCIENCE

Reconciliation EBITDA pre1

Q2 2020

Q2 2019

Change

€ million

Elimination of

Elimination of

IFRS

adjustments

Pre1

IFRS

adjustments

Pre1

Pre1

Net sales

1,806

-

1,806

1,705

-

1,705

5.9%

Cost of sales

-774

-

-774

-724

-

-723

7.0%

Gross profit

1,033

-

1,033

982

-

982

5.1%

Marketing and selling expenses

-488

-

-488

-490

-

-490

-0.3%

Administration expenses

-100

12

-88

-68

-1

-69

27.7%

Research and development costs

-75

-

-75

-69

-

-69

8.6%

Impairment losses and reversals of impairment losses

on financial assets (net)

-1

-

-1

-

-

-

-

Other operating expenses and income

18

-27

-10

-32

15

-17

-42.5%

Operating result (EBIT)1

386

322

Depreciation / amortization / impairment losses / reversals

of impairment losses

199

-

199

197

-

197

1.1%

EBITDA1

584

518

Restructuring expenses

1

-1

-

4

-4

-

Integration expenses / IT expenses

14

-14

-

10

-10

-

Gains (-) / losses (+) on the divestment of businesses

-

-

-

1

-1

-

Acquisition-related adjustments

-30

30

-

-

-

-

Other adjustments

-

-

-

-

-

-

EBITDA pre1

569

-

569

533

-

533

6.7%

of which: organic growth1

9.7%

of which: exchange rate effects

-2.4%

of which: acquisitions / divestments

-0.6%

1 Not defined by International Financial Reporting Standards (IFRSs).

Adjusted gross profit rose by 5.1% to € 1,033 million (Q2 2019:

  • 982 million). This increase was driven by organic sales growth as well as higher production capacity utilization. Marketing and selling expenses remained flat despite higher logistics costs

while administration expenses increased. After eliminating adjustments, amortization and depreciation, EBITDA pre rose by 6.7% to € 569 million (Q2 2019: € 533 million). Organic earnings growth was 9.7%.

29

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Lif e ­Scien

The following table presents the composition of EBITDA pre for the first half of 2020 in comparison with the year-earlier period.

The IFRS figures have been modified to reflect the elimination of adjustments included in the respective functional costs.

LIFE SCIENCE

Reconciliation EBITDA pre1

Jan.-June 2020

Jan.-June 2019

Change

€ million

Elimination of

Elimination of

IFRS

adjustments

Pre1

IFRS

adjustments

Pre1

Pre1

Net sales

3,575

-

3,575

3,366

-

3,366

6.2%

Cost of sales

-1,518

-

-1,518

-1,443

1

-1,442

5.3%

Gross profit

2,057

-

2,057

1,924

1

1,925

6.9%

Marketing and selling expenses

-986

-

-986

-959

1

-959

2.8%

Administration expenses

-189

21

-168

-156

6

-150

11.7%

Research and development costs

-151

-

-151

-131

-

-131

15.0%

Impairment losses and reversals of impairment losses

on financial assets (net)

-

-

-

-

-

-

-

Other operating expenses and income

0

-26

-26

-42

16

-25

0.8%

Operating result (EBIT)1

731

635

Depreciation / amortization / impairment losses / reversals

of impairment losses

395

-

395

390

-

390

1.2%

EBITDA1

1,126

1,025

Restructuring expenses

3

-3

-

5

-5

-

Integration expenses / IT expenses

23

-23

-

16

-16

-

Gains (-) / losses (+) on the divestment of businesses

-

-

-

2

-2

-

Acquisition-related adjustments

-30

30

-

-

-

-

Other adjustments

-

-

-

-

-

-

EBITDA pre1

1,122

-

1,122

1,049

-

1,049

6.9%

of which: organic growth1

9.0%

of which: exchange rate effects

-1.5%

of which: acquisitions / divestments

-0.6%

1 Not defined by International Financial Reporting Standards (IFRSs).

In the first half of 2020, adjusted gross profit increased by 6.9% to € 2,057 million (January-June 2019: € 1,925 million). The increase was mainly driven by the strong sales growth in the Process Solutions business unit. After eliminating adjust- ments, amortization and depreciation, EBITDA pre rose by

6.9% to € 1,122 million (January-June 2019: € 1,049 million) reflecting the strong resilience of the Life Science business. Organically, EBITDA pre rose by as much as 9.0% in the first six months of 2020.

30

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Lif e ­Scien

DEVELOPMENT OF BUSINESS FREE CASH FLOW

In the second quarter of 2020, Life Science generated business free cash flow of € 472 million (Q2 2019: € 323 million). This

was driven by an increase in EBITDA pre and a favorable development of trade accounts receivable in the second quarter of 2020 compared with the year-earlier quarter.

LIFE SCIENCE­

Business free cash flow1 

€ million

Jan.-June

Jan.-June

Q2 2020

Q2 2019

Change

2020

2019

Change

EBITDA pre1

569

533

6.7%

1,122

1,049

6.9%

Investments in property, plant and equipment,

software as well as advance payments for intangible

assets

-82

-79

4.1%

-140

-137

2.1%

Changes in inventories

-33

-62

-46.4%

-122

-149

-18.3%

Changes in trade accounts receivable and receivables

from royalties and licenses

29

-57

> 100.0%

-115

-148

-21.7%

Lease payments2

-12

-13

-9.7%

-26

-24

11.5%

Business free cash flow1

472

323

46.0%

718

591

21.4%

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. Excluding payments for low-value leases and interest components included in lease payments.

In the first half of 2020, Life Science generated business free cash flow of € 718 million (January-June 2019: € 591 mil- lion). This was mainly driven by an increase in EBITDA pre and

favorable developments of both inventories and trade accounts receivable in the first six months of 2020 compared with the year-earlier period.

31

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Performanc e Materia

Performance Materials

PERFORMANCE MATERIALS

Key figures

€ million

Q2 2020

Q2 2019

Net sales

814

589

Operating result (EBIT)1

-30

100

Margin (% of net sales)1

-3.7%

16.9%

EBITDA1

219

161

Margin (% of net sales)1

26.9%

27.4%

EBITDA pre1

238

190

Margin (% of net sales)1

29.3%

32.3%

Business free cash flow1

204

153

1 Not defined by International Financial Reporting Standards (IFRSs).

DEVELOPMENT OF NET SALES

AND RESULTS OF OPERATIONS

In the second quarter of 2020, the net sales of the Performance Materials business sector increased by 38.1% to € 814 million (Q2 2019: € 589 million). The key factor behind this

Change

Jan.-June 2020

Jan.-June 2019

Change

38.1%

1,714

1,193

43.7%

> 100.0%

86

195

-55.8%

5.0%

16.3%

35.9%

470

318

47.6%

27.4%

26.7%

25.2%

524

383

36.8%

30.6%

32.1%

33.5%

389

326

19.4%

growth was the net sales contribution from the acquisitions of

Versum­ Materials and Intermolecular (50.1%). Sales growth was softened by an organic decrease of -13.7%. Favorable foreign exchange effects had a minor impact of 1.8% on net sales.

PERFORMANCE MATERIALS

Net sales by business unit

€  million

Organic

Exchange rate

Acquisitions /

Q2 2020

Share

growth1

effects

divestments

Total change

Q2 2019

Share

Display Solutions

263

32%

-20.8%

1.7%

-

-19.1%

325

55%

Semiconductor Solutions

475

59%

12.1%

3.5%

> 100.0%

> 100.0%

155

26%

Surface Solutions

76

9%

-29.6%

-0.5%

-

-30.1%

109

19%

Other

0

0%

-60.1%

0.3%

-

-59.9%

0

0%

Performance Materials

814

100%

-13.7%

1.8%

50.1%

38.1%

589

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

The Display Solutions business unit, consisting mainly of the business with liquid crystals, photoresists for display applications as well as OLED materials, recorded an organic decrease of -20.8% in the second quarter of 2020 amid slightly positive foreign exchange effects of 1.7%. The organic sales decline was mainly driven by weaker end-user demand triggered by Covid-19, resulting in low customer production capacity uti- lization.

The Semiconductor Solutions business unit was transformed through the acquisitions of Versum Materials and Intermolecular in the fourth quarter of 2019. As a result, the share of Performance Materials sales attributable to Semiconductor Solutions increased from 26% to 59%. Semiconductor

Solutions now comprises two new businesses, namely Semiconductor Materials and Delivery Systems & Services. Semiconductor Materials will continue to focus on the development and commercialization of material-based solutions for the semiconductor industry. Delivery Systems & Services will focus on developing and operating delivery systems for semiconductor manufacturers. Additionally, the unit will offer services to support the equipment install base and safe handling of the specialty materials that flow through it.

Excluding the effects of the Versum Materials and Inter­ molecular acquisitions, the Semiconductor Solutions business unit generated double-digit organic growth of 12.1% in the second quarter of 2020. A favorable change in market conditions

32

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Performanc e Materia

versus the challenging environment of 2019 was a key factor. Exchange rate effects were positive at 3.5%. The Covid-19 pandemic only had a negligible impact on the Semiconductor Solutions business unit in the second quarter of 2020.

Net sales of the Surface Solutions business unit declined by a total of -30.1% in the second quarter of 2020. The organic

decrease of-29.6% resulted from declining demand, primarily in the automotive and decorative cosmetic markets, which have been more severely impacted by the Covid-19 pandemic. At -0.5%, foreign exchange effects were insignificant.

Net sales of the business sector by region developed as follows:

PERFORMANCE MATERIALS

Net sales by region

€ million

Organic

Exchange rate

Acquisitions /

Q2 2020

Share

growth1

effects

divestments

Total change

Q2 2019

Share

Europe

55

7%

-24.4%

-0.1%

30.0%

5.5%

52

9%

North America

115

14%

-20.8%

1.6%

> 100.0%

> 100.0%

55

9%

Asia-Pacific (APAC)

628

77%

-11.8%

2.3%

42.6%

33.1%

472

80%

Latin America

5

1%

-23.5%

-13.4%

6.9%

-30.0%

7

1%

Middle East and

Africa (MEA)

11

1%

19.8%

-0.6%

> 100.0%

> 100.0%

2

1%

Performance Materials

814

100%

-13.7%

1.8%

50.1%

38.1%

589

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

In the first six months of 2020, net sales of the Performance Materials business sector increased by 43.7% to € 1,714 million (January-June 2019: € 1,193 million). The portfolio effect of the Versum Materials and Intermolecular acquisitions on net sales was 51.1%. The organic sales decrease of -9.5% was

­primarily driven by challenges in the Display Solutions and Surface Solutions business units, which was partially ­offset by

growth in Semiconductor Solutions. Display Solutions­ saw an organic sales decrease of -15.6% in the first half of 2020, which was driven by two factors. First, Display Solutions benefited in the first half of 2019 from projects by panel ­manufacturers in

China to ramp up production capacities. Second,­ the Covid-19 pandemic has led to a decrease in end-user demand, which has adversely impacted customer production capacity utili- zation. Surface Solutions recorded an organic sales decrease of -18.8% stemming from demand weakness in both the automotive and cosmetic markets from the uncertainty surrounding the Covid-19 pandemic. Organic growth of 10.4% in Semi­ conductor Solutions was primarily attributable to a rebound in market demand over 2019. Foreign exchange effects contributed 2.1% to the increase in the business sector's net sales in the first half of 2020.

PERFORMANCE MATERIALS

Net sales by business unit

€  million

Jan.-June

Organic

Exchange rate

Acquisitions /

Jan.-June

2020

Share

growth1

effects

divestments

Total change

2019

Share

Display Solutions

567

33%

-15.6%

2.1%

-

-13.5%

656

55%

Semiconductor Solutions

960

56%

10.4%

3.6%

> 100.0%

> 100.0%

307

26%

Surface Solutions

187

11%

-18.8%

0.1%

-

-18.7%

230

19%

Other

0

0%

-46.2%

1.2%

-

-45.0%

1

0%

Performance Materials

1,714

100%

-9.5%

2.1%

51.1%

43.7%

1,193

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

33

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Performanc e Materia

In the first half of 2020, sales by region developed as follows:­

PERFORMANCE MATERIALS

Net sales by region

€ million

Jan.-June

Organic

Exchange rate

Acquisitions /

Jan.-June

2020

Share

growth1

effects

divestments

Total change

2019

Share

Europe

130

7%

-11.4%

0.1%

28.6%

17.2%

111

9%

North America

250

15%

-4.9%

2.4%

> 100.0%

> 100.0%

110

9%

Asia-Pacific (APAC)

1,300

76%

-9.8%

2.5%

43.9%

36.6%

951

80%

Latin America

13

1%

-12.5%

-9.1%

6.5%

-15.0%

16

1%

Middle East and

Africa (MEA)

21

1%

-3.0%

0.2%

> 100.0%

> 100.0%

6

1%

Performance Materials

1,714

100%

-9.5%

2.1%

51.1%

43.7%

1,193

100%

1 Not defined by International Financial Reporting Standards (IFRSs).

The following table presents the composition of EBITDA pre for the reporting period in comparison with the year-earlier ­quarter.

The IFRS figures have been modified to reflect the elimination of adjustments included in the respective functional costs.

PERFORMANCE MATERIALS

Reconciliation EBITDA pre1

Q2 2020

Q2 2019

Change

€ million

Elimination of

Elimination of

IFRS

adjustments

Pre1

IFRS

adjustments

Pre1

Pre1

Net sales

814

-

814

589

-

589

38.1%

Cost of sales

-472

2

-470

-307

3

-304

54.5%

Gross profit

342

2

344

282

3

285

20.7%

>

Marketing and selling expenses

-134

3

-131

-66

5

-62

100.0%

Administration expenses

-44

9

-36

-25

1

-24

47.1%

Research and development costs

-68

-

-69

-74

17

-57

19.7%

Impairment losses and reversals of impairment losses

on financial assets (net)

-1

-

-1

-

-

-

-

Other operating expenses and income

-124

117

-7

-17

4

-13

-47.1%

Operating result (EBIT)1

-30

100

Depreciation / amortization / impairment losses / reversals

>

of impairment losses

249

-112

138

62

-

62

100.0%

EBITDA1

219

161

Restructuring expenses

2

-2

-

26

-26

-

Integration expenses / IT expenses

16

-16

-

3

-3

-

Gains (-) / losses (+) on the divestment of businesses

-

-

-

-

-

-

Acquisition-related adjustments

-

-

-

-

-

-

Other adjustments

-

-

-

-

-

-

EBITDA pre1

238

-

238

190

-

190

25.2%

of which: organic growth1

-29.7%

of which: exchange rate effects

3.1%

of which: acquisitions / divestments

51.8%

1 Not defined by International Financial Reporting Standards (IFRSs).

34

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Performanc e Materia

Adjusted gross profit for the Performance Materials business sector was € 344 million in the second quarter of 2020 (Q2 2019: € 285 million). A key driver of this 20.7% increase over the year-earlier quarter was the contribution from the Versum acquisition. At 42.3%, adjusted gross margin was below the year-earlier figure (Q2 2019: 48.4%). Excluding adjustments, the operating result (EBIT) decreased by

  • 130 million to € -30 million in the second quarter of 2020 (Q2 2019: € 100 million). This was mainly driven by the addi- tional amortization and impairments in the second quarter partially offset by the EBIT contribution from the acquisition of Versum.
    The increase in marketing and selling expenses as well as administration expenses was attributable to the additional costs of the Versum and Intermolecular organizations. After eliminating adjustments, the decrease in research and devel-

opment costs from the successful implementation of the ‟Bright Future" transformation program was exceeded by additional expenses from the Versum and Intermolecular organizations. EBITDA pre of the business sector grew by 25.2% to € 238 million (Q2 2019: € 190 million). Additional EBITDA pre from the acquisitions (51.8%) and positive foreign exchange effects (3.1%) more than offset the organic decline in EBITDA pre (-29.7%). The organic decline was mainly attributable to the loss of sales related to the Covid-19 pandemic as discussed above. At 29.3%, the EBITDA pre margin was below the year-earlier figure (Q2 2019: 32.3%).

The following table presents the composition of EBITDA pre for the first half of 2020 in comparison with the year-earlier period. The IFRS figures have been modified to reflect the elimination of adjustments included in the respective functional costs.

PERFORMANCE MATERIALS

Reconciliation EBITDA pre1

Jan.-June 2020

Jan.-June 2019

Change

€ million

Elimination of

Elimination of

IFRS

adjustments

Pre1

IFRS

adjustments

Pre1

Pre1

Net sales

1,714

-

1,714

1,193

-

1,193

43.7%

Cost of sales

-987

22

-965

-645

18

-627

54.0%

Gross profit

727

22

749

548

18

567

32.2%

Marketing and selling expenses

-270

4

-266

-132

7

-125

> 100.0%

Administration expenses

-83

9

-74

-49

2

-46

58.9%

Research and development costs

-140

-2

-141

-146

33

-114

24.4%

Impairment losses and reversals of impairment losses

on financial assets (net)

-

-

-

-

-

-

-

Other operating expenses and income

-149

132

-17

-27

5

-22

-24.2%

Operating result (EBIT)1

86

-

195

Depreciation / amortization / impairment losses / reversals

of impairment losses

384

-112

272

124

-

124

> 100.0%

EBITDA1

470

318

Restructuring expenses

10

-10

-

60

-60

-

Integration expenses / IT expenses

24

-24

-

4

-4

-

Gains (-) / losses (+) on the divestment of businesses

-

-

-

-

-

-

Acquisition-related adjustments

19

-19

-

-

-

-

Other adjustments

-

-

-

-

-

-

EBITDA pre1

524

-

524

383

-

383

36.8%

of which: organic growth1

-19.2%

of which: exchange rate effects

4.1%

of which: acquisitions / divestments

51.9%

1 Not defined by International Financial Reporting Standards (IFRSs).

At € 749 million, adjusted gross profit for the Performance Materials business sector in the first half of 2020 rose by 32.2% over the previous year (January-June 2019: € 567 million). The increase is primarily due to the acquisition of Versum. At € 86 million, the operating result (EBIT) was € 109 million lower than in the year-earlier period (January-June 2019: € 195

million). The decrease was largely attributable to an increase in amortization and impairment losses partially offset by the EBIT contributed by the Versum acquisition. EBITDA pre of the business sector rose by 36.8% to € 524 million (January-June 2019: € 383 million). At 30.6%, the EBITDA pre margin was below the year-earlier figure of 32.1%.

35

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

­Performanc e Materia

DEVELOPMENT OF BUSINESS FREE CASH FLOW

In the second quarter of 2020, Performance Materials generated business free cash flow of € 204 million, representing an

increase of 33.5% (Q2 2019: € 153 million). Cash flow contributed by the acquisition of Versum was a key factor.

PERFORMANCE MATERIALS

Business free cash flow1 

€ million

Jan.-June

Jan.-June

Q2 2020

Q2 2019

Change

2020

2019

Change

EBITDA pre1

238

190

25.2%

524

383

36.8%

Investments in property, plant and equipment,

software as well as advance payments for intangible

assets

-60

-29

>100.0%

-95

-43

>100.0%

Changes in inventories

-10

-36

-71.5%

-19

-56

-65.7%

Changes in trade accounts receivable and receivables

from royalties and licenses

41

31

31.4%

7

46

-84.5%

Lease payments2

-4

-3

59.1%

-9

-5

97.6%

Elimination first-time consolidation

of Versum / Intermolecular

-

-

-

-19

-

-

Business free cash flow1

204

153

33.5%

389

326

19.4%

  1. Not defined by International Financial Reporting Standards (IFRSs).
  2. Excluding payments for low-value leases and interest components included in lease payments.

In the first six months of 2020, business free cash flow rose by 19.4% to € 389 million (January-June 2019: € 326 million). The primary reason for the increase was the cash flow contributed by the Versum acqusition.

36

Interim Management Report as of June 30, 2020

Course of Business and Economic Position

Corporate and Other

Corporate and Other

Corporate and Other comprises Group administration expenses for Group functions that cannot be directly allocated to the business sectors, such as Finance, Procurement, Legal, Com- munications, and Human Resources. Corporate and Other

additionally encompass expenses for central, non-allocated IT functions, including expenses related to the expansion and harmonization of IT systems within the Group as well as research and development costs spanning business sectors.

CORPORATE AND OTHER

Key figures

€ million

Jan.-June

Jan.-June

Q2 2020

Q2 2019

Change

2020

2019

Change

Operating result (EBIT)1

-133

-148

-9.7%

-301

-305

-1.3%

EBITDA1

-115

-128

-10.4%

-261

-268

-2.9%

EBITDA pre1

-107

-112

-4.5%

-236

-224

5.5%

Business free cash flow1

-125

-121

2.8%

-271

-239

13.4%

1 Not defined by International Financial Reporting Standards (IFRSs).

After eliminating adjustments, administration expenses amounted to € 63 million in the second quarter of 2020 (Q2 2019: € 84 million). Research and development costs spanning business sectors, for instance expenses for the Innovation Center were allocated to Corporate and Other in the amount of € 11 million in the second quarter of 2020 (Q2 2019:

  • 15 million). After eliminating adjustments, other operating expenses (net) rose to € 49 million in the second quarter of 2020 (Q2 2019: € 29 million), among other things due to

higher exchange rate losses. After eliminating depreciation, amortization and adjustments, EBITDA pre totaled € -107 million in the second quarter of 2020 (Q2 2019: € -112 million).

Negative­ business free cash flow rose by 2.8% to € -125 million (Q2 2019: € -121 million). In the first half of 2020, EBITDA pre of Corporate and Other totaled € -236 million (January-June 2019: € -224 million). Business free cash flow amounted to

  • -271million in the first six months of 2020 (January-June
    2019: € -239 million).

37

Interim Management Report as of June 30, 2020

Report on Risks and Opportunities

Report on Risks and Opportunities

As a global company operating a large number of highly ­innovative business fields, our company is exposed to potential risks and opportunities. The risk categories presented as well as the opportunities described in the Report on Risks and Opportunities in the Annual Report for 2019 remain valid for the Group in the current reporting period. At present, we are not aware of any risks that could jeopardize the continued

existence­ of Merck KGaA, Darmstadt, Germany.

We have a Group-wide risk management system in place to identify, control and mitigate potential risks. We continu-

ously monitor business risks such as issues regarding liquidity, defaults on payables and receivables, currency and interest rates, market pricing, pension obligations, assessment of independent rating agencies, human resources, and information technology. Regarding legal risks, we monitor a host of potential issues such as litigation regarding product liability, antitrust law, pharmaceutical law, patent law, and environmental protection. More information on the expected impact of the Covid-19 pandemic on fiscal 2020 can be found in the ‟Report on Expected Developments".

38

Interim Management Report as of June 30, 2020

Report on Expected Developments

Report on Expected Developments

With the quarterly statement as of March 31, 2020, we updated our forecast for the development of net sales and EBITDA pre for the Group and the individual business sectors in 2020.

The divestment of Allergopharma to Dermapharm Holding SE (‟Dermapharm") closed on March 31, 2020. The allergy business of the Group in Europe was transferred to Derma-

pharm on March 31, 2020. The transfer­ of the Allergopharma business in China is expected in the second half of 2020. The following forecast reflects this divestment and correspondingly shows a portfolio effect from this transaction over 2019, which however is not expected to be material at Group level.

For fiscal 2020, we confirm the assumptions made in the context of the global outbreak of the Covid-19 pandemic which were published in the outlook of the report on the first quarter of 2020. We continue to assume that our businesses will be impacted to varying degrees. Adverse effects can be seen particularly­ in Healthcare and Performance Materials, whereas we do not anticipate any negative effects in Life

Science­ . Due to the high level of uncertainty with respect to the further development of the Covid-19 pandemic, this outlook is being made with a considerably higher degree of uncertainty.

Varying dynamics of the outbreak in the different regions of the world are being presumed. Our presumptions largely remain unchanged in comparison with the most recent fore- cast. For China, we assume that the Covid-19 pandemic reached its peak at the end of the first quarter and that the economic recovery began in the second quarter. For Europe and the United States, we expect an economic recovery in the second half of the year, even if the situation following the initial­ outbreak of the pandemic has not yet normalized throughout these regions as of the beginning of the third quarter.

Moreover, this latest forecast assumes that there will be no further disease waves in any of the named regions leading to widespread lockdowns and thus considerably negative consequences for the economic recovery.

Group

FORECAST FOR THE GROUP 

Actual

€ million

results 2019

Forecast for 2020

Net sales

16,152

~16,900 to 17,700

• Slight to moderate organic growth

• Portfolio effect in the mid single-digit

percentage range

• Exchange rate effect -2% to +0%

EBITDA pre

4,385

~4,450 to 4,850

• Slight to moderate organic growth

• Positive portfolio effect in the

mid single-digit percentage range

• Negative foreign exchange effect

of -4% to -2%

Business

2,732

~2,750 to 3,250

free cash flow

Stable to strong increase

Key assumptions

  • Organic growth driven by Life Science; Healthcare with a slight increase, Performance Materials with a moderate to strong organic decline
  • Positive portfolio effect in the mid single-digit percentage range, mainly resulting from the acquisition of Versum Materials
  • Negative foreign exchange effect due to emerging market currencies
  • Strong organic growth in Life Science, Healthcare
    stable,­ decline in Performance Materials in the low teens percentage range
  • Realization of synergies from the integration of Versum Materials in Performance Materials as planned
  • Negative foreign exchange effect due to emerging market currencies

Rise in EBITDA pre and positive effects from working ­capital compensate for higher capital spending

NET SALES

Following a strong first quarter, the effects of the Covid-19 pandemic became clearly apparent in the second quarter. For the full year 2020, we expect slight to moderate organic net sales growth compared with the previous year. We continue to expect that Life Science will be a major driver of this organic growth. Against the backdrop of the Covid-19 pandemic, we forecast that the Healthcare business sector will see a slight organic increase in net sales, whereas our Performance ­Materials ­business will see a moderate to strong organic decline in net

sales. In the first three quarters, the effect of the acquisition of Versum Materials will be reported as a portfolio effect, which we still forecast in the mid single-digit percentage range at Group level. With regard to exchange rate developments, we continue to expect a volatile environment due to political and macroeconomic developments. Overall, we forecast a foreign exchange effect of -2% to +0% that can be attributed to the currencies of numerous growth markets, especially in Latin America. Overall, we therefore forecast Group net sales of € 16.9 billion to € 17.7 billion for 2020.

39

Interim Management Report as of June 30, 2020

Report on Expected Developments

EBITDA PRE

According to our expectations, in 2020 Group EBITDA pre will be in a corridor between € 4.45 billion and € 4.85 billion (2019:

  • 4.38 billion). Contrary to our expectations in the first quar- ter, we now expect slight to moderate organic growth. Never­ theless, earnings show significant adversity stemming from strong government restrictions of public life in the context of the Covid-19 pandemic.
    For the full year, we expect strong organic growth in Life
    Science­ and a stable development in Healthcare, whereas we forecast an organic decline in the low teens percentage range in Performance Materials.

The portfolio effect from the acquisition of Versum Materials is still likely to be in the mid single-digit percentage range and will have a slightly positive impact on the margin of the Group. The expected foreign exchange development is forecast to have a negative effect of between -4% and -2% on Group EBITDA pre; it will be seen particularly in the Healthcare and Life ­Science businesses. In particular, currency developments in multiple growth markets will have an adverse impact on earnings.

Healthcare

FORECAST FOR THE HEALTHCARE BUSINESS SECTOR 

Actual

€ million

results 2019

Forecast for 2020

Net sales

6,714

• Slight organic growth

• Adverse portfolio effect in the

mid double-digit million range

• Slight to moderately adverse

foreign exchange effect

EBITDA pre

1,922

• Organic stable

• Significantly negative foreign

exchange effect

Business

1,252

Stable to slight decline

free cash flow

Key assumptions

  • Decline in the core business owing to strong impacts of the Covid-19 pandemic particularly on the Fertility business
  • Substantial growth contribution by our newly approved products, particularly Mavenclad®
  • Slight adverse portfolio effect from the divestment of
    Allergopharma
  • Adverse foreign exchange effect due to the currency
    developments­in multiple growth markets
  • Significant negative effects of the Covid-19 pandemic,
    particularly­ in the Fertility business, as well as the continued expected decline in sales of Rebif® will lead to negative mix effects. These will be softened by the expected significant earnings contributions from our new products, particularly Mavenclad®.
  • Marketing and selling expenses as well as research and development costs, which are decreasing both as a percentage of sales and in absolute terms due to rigorous cost management and strict pipeline prioritization, can partly offset the decline in sales
  • Adverse foreign exchange effect due to the currency developments in multiple growth markets
  • Decline in EBITDA pre, higher investments in property, plant and equipment
  • Partly offset by positive effects from working capital management

NET SALES

For the Healthcare business sector, we now expect a slightly positive organic development of net sales in 2020. Here we expect significantly negative effects from the Covid-19 pandemic on the core business, particularly in the Fertility busi- ness. We confirm the previously communicated decline in Rebif® sales. Positive contributions to sales growth by the products from General Medicine & Endocrinology, primarily attributable to performance in growth markets, cannot fully compensate for the decline. We expect our new products to

contribute significantly to organic sales. For 2020, we believe that both Mavenclad® and Bavencio® will each generate a further significant increase in sales, however due to the effects of the Covid-19 pandemic, these will not be as high as assumed before the outbreak of the pandemic. The divestment of Aller- gopharma will result in a slightly negative portfolio effect in the mid double-digit million range. Unfavorable foreign exchange developments in multiple growth markets are expected to lead to a slight to moderately adverse foreign exchange effect.

40

Interim Management Report as of June 30, 2020

Report on Expected Developments

EBITDA PRE

Based on the stated impacts of the Covid-19 pandemic, we forecast an organically stable development for EBITDA pre of the Healthcare business sector in 2020 (previously slight organic decline).

The negative earnings effects in the core business owing to the expected decline in sales of Rebif® will now amplify due to the additional sales decline in the Fertility business. Since the highly profitable business with fertility medicines is among those most strongly affected by the pandemic, this will also lead to a negative mix effect. However, significant earnings contributions from our new products, particularly Mavenclad®, will still have a mitigating effect, albeit to a lower extent owing to the negative impact of the Covid-19 crisis here as well. In addition, we will continue our rigorous cost management and continuous pipeline prioritization. We therefore expect marketing and selling expenses as well as research and development costs to decline both as a percentage of sales and in absolute terms.

Research and development costs will remain heavily dependent on the development of clinical data and further expected study results. As of 2020, the upfront cash payment from the global strategic alliance with Pfizer for Bavencio® and Xalkori® will no longer be reflected in profit and loss. Furthermore, the previous year included positive effects from milestone payments. By contrast, the upfront cash payment in the context of the global strategic alliance with GlaxoSmithKline plc (GSK) for the joint development and marketing of bintrafusp alfa will have a positive earnings effect in the high double-digit to low triple-digit euro millions in 2020. The exact amount is dependent on the cost evolution and on reaching development milestones and will be recognized in other operating income. Moreover, the forecast for Healthcare includes effects from active pipeline and portfolio management. Overall, the contribution to earnings attributable to one-time effects will be significantly below the prior-year figure. Furthermore, we expect EBITDA pre to be significantly burdened by foreign exchange effects.

Life Science

FORECAST FOR THE LIFE SCIENCE BUSINESS SECTOR 

€ million

Actual

Forecast for 2020

Key assumptions

results 2019

Net sales

6,864

• Strong organic growth

• Slightly negative foreign exchange effect

EBITDA pre

2,129

• Strong organic earnings growth

• Moderately negative foreign exchange

effect

Business

1,375

Increase in the low percentage

free cash flow

teens range

  • Process Solutions remains the main driver of growth, followed by Applied Solutions
  • Positive effect from Covid-19 in Process Solutions apparent; this will compensate for slightly negative effects in the other business units
  • Adverse foreign exchange impact due to exchange rate developments in multiple growth markets
  • Organic earnings growth owing to the expected sales growth
  • Negative foreign exchange effect owing to exchange rate developments in multiple growth markets
  • Rise in EBITDA pre
  • Improved management of working capital
  • Offset by higher capital spending on strategic projects

NET SALES

EBITDA PRE

For our Life Science business sector, we continue to assume strong organic growth of net sales in 2020 compared with the previous year. The Process Solutions business unit will again remain the strongest driver of organic growth in 2020, followed by Applied Solutions. In Process Solutions we expect additional positive effects from the Covid-19 pandemic, which can at least compensate for the slightly negative impacts on the other business units. As previously stated, we do not expect that the acquisitions of FloDesign Sonics Inc. and BSSN Software GmbH will have a material portfolio effect. We expect slightly negative foreign exchange effects as a result of devaluating currencies in various growth markets.

For EBITDA pre of the Life Science business sector, we confirm our forecast of strong organic growth in fiscal 2020. The persistently dynamic demand trend is the driver of organic earnings growth. Within the Life Science business sector, in fiscal 2020 we expect moderately adverse foreign exchange effects stemming from the development of various emerging market currencies.

41

Interim Management Report as of June 30, 2020

Report on Expected Developments

Performance Materials

FORECAST FOR THE PERFORMANCE MATERIALS BUSINESS SECTOR 

€ million

Actual

Forecast for 2020

Key assumptions

results 2019

Net sales

2,574

• Moderate to strong organic decline

• Portfolio effect in the mid-thirties

percentage range

• Neutral to slightly positive foreign exchange effect

EBITDA pre 803• Organic decline in the low teens percentage range

• Portfolio effect in the mid-thirties percentage range

• Slightly positive foreign exchange effect

Business

641

Increase with growth rates

free cash flow

in the low twenties range

  • Continued strong growth momentum in Semiconductor Solutions
  • Continued price decline in Liquid Crystals
  • Significant decrease in Surface Solutions
  • Overall significant negative effects apparent from the Covid-19 pandemic
  • Portfolio effect due to Versum Materials in the mid- thirties percentage range, no material portfolio effect from Intermolecular
  • Slightly positive foreign exchange effect due to the trend of exchange rates in several Asian growth markets
  • Strong growth in Semiconductor Solutions cannot offset price decline in Liquid Crystals or the significantly adverse impact of the Covid-19 pandemic despite strict cost discipline
  • Versum Materials earnings contribution in the mid- thirties percentage range to affect margin positively
  • Planned realization of synergies of at least € 25 million from the integration of Versum Materials
  • Slightly positive foreign exchange effect due to the trend of exchange rates in individual Asian growth markets

Rise in EBITDA pre including the contribution from Versum Materials, softened by higher capital spending

NET SALES

EBITDA PRE

For our Performance Materials business sector we forecast a moderate to strong organic decline in net sales in 2020. For our Semiconductor Materials business, we continue to expect strong growth dynamics this year as stated in our previous forecast. By contrast, in addition to the continued price erosion owing to price pressure common in the industry, our Liquid Crystals business is suffering from the adverse effects in connection with the economic slowdown in the context of the Covid-19 pan- demic. This slowdown in the dynamics of the global economy will also lead to significantly deteriorating business prospects for our Surface Solutions business in 2020. Thanks to Versum Materials, we expect a portfolio effect in the mid-thirties percentage range in first three quarters of 2020. Moreover, the acquisition of Intermolecular closed on September 20, 2019. We do not consider the resulting portfolio effect to be material.

Due to the development of the euro against the U.S. dollar as well as the development of several currencies of Asian growth markets, we expect a neutral to slightly positive foreign exchange effect for 2020.

For our Performance Materials business sector, in comparison with the previous year we expect the economic slowdown within the scope of the Covid-19 pandemic to have a significantly adverse impact on EBITDA pre. The strong growth of our Semiconductor Materials business will not be able to compensate for this. As a result of additional high cost discipline, in comparison with the outlook published in the first quarter, we now assume that the percentage year-on-year decline in organic EBITDA pre will only be in the low teens range. We estimate that the portfolio effect of Versum Materials will be in the mid-thirties percentage range, which will have a slightly positive effect on the margin of the business. We confirm the planned realization of synergies of at least € 25 million, which are included in this forecast.

Owing to the foreign exchange development of the euro- U.S. dollar and several Asian currencies, we assume a slightly positive foreign exchange effect.

42

Interim Management Report as of June 30, 2020

Report on Expected Developments

Corporate and Other

Overall, in contrast to our estimation in the first quarter, we forecast a slight decline in corporate costs in 2020 in comparison with the previous year. The forecast figures will be adversely affected by currency hedging.

GROUP 

Forecast for FY 2020

€ million

Net sales

EBITDA pre

Business free cash flow

Group

~16,900 to 17,700

~4,450 to 4,850

~2,750 to 3,200

• Slight to moderate organic growth

• Slight to moderate organic growth

Stable to strong increase

• Portfolio effect in the

• Positive portfolio effect in the

mid single-digit percentage range

mid single-digit percentage range

• Exchange rate effect -2% to +0%

• Negative foreign exchange effect

of -4% to -2%

Healthcare

• Slight organic growth

• Organic stable

Stable to slight decline

  • Adverse portfolio effect in the mid double-digit million range
  • Slight to moderately adverse foreign exchange effect
  • Significantly negative foreign exchange effect

Life Science

• Strong organic growth

• Strong organic earnings growth

• Slightly negative foreign

• Moderately negative foreign exchange

exchange effect

effect

Performance

• Moderate to strong organic decline

• Organic decline in the low teens

Materials

• Portfolio effect in the mid-thirties

percentage range

percentage range

• Portfolio effect in the mid-thirties

• Neutral to slightly positive foreign

percentage range

exchange effect

• Slightly positive foreign exchange effect

<