TO OUR SHAREHOLDERS

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2 TO OUR SHAREHOLDERS

3 TO OUR SHAREHOLDERS Letter from Stefan Oschmann 50 The Executive Board 52 Our Shares

4 Letter from Stefan Oschmann 45 The publication of our Annual Report is a good opportunity to reflect for a moment and to take stock, not only from a financial perspective. In my letter to you last year, I explained how we at Merck KGaA, Darmstadt, Germany, want to help shape technological advances. Today we can see that we successfully did so in More about that later. Since 2018 is a very special year for our company, let us first take a look at the present. This year, we are celebrating the 350th anniversary of our company. Few companies have roots that date back so far. And in our industry, we are the only ones who have been successful for so long. For three and a half centuries, we have repeatedly contributed to advances in science. In 1668, Friedrich Jacob Merck laid the foundations with his pharmacy in Darmstadt. In the 19th century, Emanuel Merck was one of the industrial pioneers of modern pharmacy. Today, more than 6,000 scientists are working for our company on cutting-edge health solutions and technologies. Our company has constantly reinvented itself. But many important things have remained constant. Scientific curiosity has been, is and always will be the force that drives our scientists in Europe, Asia and North America to find new solutions for the most pressing questions facing humanity. In everything we do, we orient towards a clearly defined and binding set of values. For instance, this means we run our business as responsible entrepreneurs.

5 46 Letter from Stefan Oschmann Stefan Oschmann Chairman of the Executive Board and CEO

6 Letter from Stefan Oschmann 47 In 2017, we helped shape technological advances and achieved milestones in our markets. We received the first approvals for not one, but two important new medicines the immuno-oncology drug Bavencio and Mavenclad for relapsing multiple sclerosis in patients with high disease activity. Mavenclad offers patients an innovative dosing regimen. Taken orally for a maximum of 20 days in the first two years, it can deliver and sustain four years of disease control. The acquisition of BioControl Systems has enabled us to expand our offerings for customers in the food industry. We now offer them a comprehensive range of technologies to test for foodborne pathogens. In our new Food Safety Studio, our customers can collaborate with our scientists, for instance to develop rapid tests to check their products. We made our debut at the International Motor Show in Frankfurt, where we presented our technologies for future mobility. These include materials for smart headlights that can adapt light distribution as needed, thus providing for greater traffic safety. And liquid crystals for satellite antennas that permit reception of large data volumes nearly anywhere in the world, an important technology for autonomous driving. These are just a few examples of what we accomplished in 2017 thanks to the curiosity, the imagination, and the engagement of our more than 52,000 employees. On behalf of the Executive Board, I would like to cordially thank them. In business terms, 2017 was a good year. Our company again grew profitably. For 2017, we will propose to the Annual General Meeting a dividend of 1.25 per share, an increase of Our sales increased to 15.3 billion. At the same time, EBITDA pre, the key performance indicator used to steer our operating business, amounted to 4.4 billion, which was at the lower end of our annual forecast, despite unfavorable exchange rate developments. The impact of higher research and development costs in our Biopharma business as well as a challenging market environment in Liquid Crystals can be seen. We will continue to address both these issues in We are investing further in the development and launch of new medicines. Our earnings in 2018 will also reflect these expenses. Here, investing is the key term because we firmly believe that our financial commitment will pay off. That s why investing money now is the right thing to do.

7 48 Letter from Stefan Oschmann In view of limited resources, making targeted investments always also means setting priorities. That is why we divested our Biosimilars business in And it is why we announced in 2017 that we are analyzing strategic options for our Consumer Health business. In the Liquid Crystals business, we have been the market and technology leader for many years now. However, the market environment for well-established liquid crystal technologies has become more difficult, above all in China. By contrast, sales of innovative technologies, for instance of energy-saving UB-FFS materials, are growing sharply. This is why we are driving the launch of new liquid crystal products forward and capturing new application fields in this core business. These include, for example, windows with liquid crystal modules, which raise the energy efficiency of buildings. At the end of November, we opened a new factory in the Netherlands for this purpose. In addition, the positive development of the Semiconductor Solutions and Surface Solutions business units should mitigate the consequences of more intense competition in Liquid Crystals. This shows we are addressing topics that are important to the success of our company. And we are setting clear business priorities. In our Biopharma business, we are focusing on the development of innovative specialty medicines. Additionally, we want to further expand our highly successful Life Science business in a targeted manner. In our Performance Materials business, we will push forward especially with our rapidly growing businesses, for instance materials for semiconductor production. We will continue to maintain a high level of financial discipline in all of these efforts in Reducing our acquisition-related net financial debt remains a priority. What innovations will be the next to define the industries in which we operate? We are intensively addressing this question and setting the course to ensure that our company prospers tomorrow and beyond as it does today. We are using complex digital data analytics in the fight against cancer and other serious diseases. For instance, to increase the efficacy of drugs that activate the body s immune system to fight tumors, we have to have a better understanding of the interactions between the immune system and the tumor. To do so, we are building up a powerful data and analysis platform. We want to recognize meaningful patterns and develop new and effective treatment options.

8 Letter from Stefan Oschmann 49 We are creating new opportunities for scientists and biotech companies, for instance genome editing with CRISPR technology, which enables researchers to alter the genes of living cells more efficiently than with previous methods. For example, CRISPR is a key technology that can help to find new treatment options for serious diseases. We have received patents for a future-oriented CRISPR technology in the European Union, Australia, Canada, and Singapore. Despite our strong passion for discovery, we also know that genome editing touches on fundamental ethical questions. We take these topics very seriously. That is why we have clear policies in place for our research and business operations and an international ethics committee (Bioethics Advisory Panel). This too is responsible entrepreneurship. Our high-tech materials are an important basis for many technologies of the future. For example, organic photovoltaic materials permit entirely new, clean ways of generating power. They can be used to transform building façades into energy sources. This is creating entirely new options for architects and perhaps soon also for astronauts since we are cooperating with the European Space Agency (ESA) on future materials for outer space. You can read more on this in the magazine section of this Annual Report. This is no longer science fiction, but rather is increasingly becoming reality also with help from us. As a vibrant science and technology company, we are proud to be shaping crucial areas of the world we live in. Yet rest assured that we will always keep our feet on the ground, especially in view of our 350-year history. We will continue to run your company prudently, conservatively and successfully. And true to the motto of our anniversary year, we will remain always curious. You can count on that. Sincerely, Stefan Oschmann Chairman of the Executive Board and CEO

9 50 The Executive Board The Executive Board Walter Galinat Member of the Executive Board Marcus Kuhnert Member of the Executive Board Chief Financial Officer Stefan Oschmann Chairman of the Executive Board & CEO

10 The Executive Board 51 Udit Batra Member of the Executive Board CEO Life Science Belén Garijo Member of the Executive Board CEO Healthcare Kai Beckmann Member of the Executive Board CEO Performance Materials Short biographies More information can be found at Company Who We Are Management

11 52 Our Shares Our Shares At a glance Overall, the performance of our shares was characterized by volatility in Following an upswing thanks to a favorable market environment in the first half, the share price visibly came under pressure in the second half of the year. Our share price decreased nearly 10% over the entire period, finishing the year at The performance of our shares was significantly weaker than that of the relevant comparative indices, all of which posted an increase during the same period. Our shares were nearly 22 percentage points behind the comparative DAX index, which rose by 13% over the full year. They were around 20 percentage points lower than the relevant chemical industry index, which increased by over 11% in The pharmaceutical industry index rose by more than 5% in 2017, thus outperforming our shares by 15 percentage points in the same period. Since the end of 2016, our shares had seen a positive development that continued until early summer Among other things, this was driven by the marketing authorization of our immunotherapy Bavencio (avelumab) for the treatment of patients with metastatic Merkel cell carcinoma (mmcc) as well as locally advanced or metastatic urothelial carcinoma by the U.S. Food and Drug Administration (FDA). The announced divestment of our Biosimilars business to Fresenius on April 24, 2017 also resonated positively with investors and analysts. In addition, equity markets were positively impacted by encouraging signals for the global economic environment as well as the sustained optimism of market participants on the future economic prospects of the United States following the presidential election in November Our shares also benefited from this, increasing until May 12, 2017 to a new all-time high of However, as of the middle of the second quarter, a visible share price correction set in for our shares. Various influential factors were responsible for this. Towards the end of the second quarter, the environment for equities became more challenging owing to rising interest rates in important capital markets and the continued strong development of the euro against the U.S. dollar. The latter also had considerably negative effects on our share price since the company has a strong net exposure to the euro due to its geographic set-up. In Performance Materials, competition for liquid crystal materials in China increased in the course of the second quarter. These prolonged adaptation processes are impacting the profit development of our Performance Materials business in addition to the mentioned foreign exchange effects. Although in our report on the second quarter of 2017 we maintained our full-year guidance for EBITDA pre despite the intensification of these burdens compared with early summer 2017, capital market participants again reduced their earnings expectations for our shares. This led to noticeable profit taking and selling of shares by institutional investors. Positive newsflow from the company could do little to counteract this development and continued uncertainty among investors and analysts. In June 2017, we presented clinical data on key pipeline products at the American Society of Clinical Oncology (ASCO) Annual Meeting in Chicago, Illinois (USA) as well as in a conference call. This was received positively by capital market participants along with other examples such as the European Commission marketing authorizations of our immunotherapy Bavencio (avelumab) in the treatment of metastatic Merkel cell carcinoma (mmcc) and of cladribine tablets (trade name Mavenclad ) to treat relapsing multiple sclerosis in patients with high disease activity, and the closing of the divestment of our Biosimilars business. Likewise, the announcement on September 5, 2017 concerning the review of strategic options for our Consumer Health business temporarily helped lift our share price in a generally favorable equity market environment. As part of our annual analyst and investor meeting, capital market participants again had the opportunity for intensive and in-depth discussions with the management of our business sectors on September 28, Overall, the event resonated well. However, in the period that followed, analysts and investors began lowering their earnings expectations, particularly with respect to fiscal Although the results of the third quarter were slightly above market expectations and the guidance for 2017 was confirmed despite currency headwinds, capital market participants uncertainty concerning the future earnings development remained unchanged and adversely impacted our shares in contrast to the general development of the stock market. In 2017, the Executive Board and the Investor Relations team gave in-depth briefings to more than 780 investors at investor conferences as well as during roadshows and conference calls. We thus significantly strengthened our presence further among financial market participants compared with the previous year. The average daily trading volume of our shares increased minimally by around 1% from approximately 468,000 in 2016 to over 474,000 in The North America region continued to dominate, yet its proportion of the free float decreased to around 28% (2016: 31%) in comparison with the previous year. By investor type, GARP (growth at reasonable price) and value investors dominated, as in the previous year. In 2017, growing interest could be seen among growth-oriented investors, who meanwhile hold approximately 34% of the free float. At the end of 2017, the top five investors held around 19% of the free float (2016: 17%).

12 Our Shares 53 OUR SHARES Share price development from January 1, 2017 to December 31, 2017 in % 20 Merck KGaA, Darmstadt, Germany DAX MSCI European Pharma Index Dow Jones European Chemical Index 15 Share price high May 13, Share price low December 7, Jan. Febr. March Apr. May June July Aug. Sept. Oct. Nov. Dec. Source: Bloomberg (closing rates).

13 54 Our Shares OUR SHARES Key share price data Dividend Share price high Share price low Year-end share price Daily average number of shares traded 3 number 473, ,408 Market capitalization 4 (at year-end) million 39,021 43,108 Market value of authorized shares 5 (at year-end) million 11,599 12,814 1 Share-price relevant figures relate to the closing price in XETRA trading on the Frankfurt Stock Exchange. 2 Subject to approval by the Annual General Meeting. 3 Based on the floor trading systems of all German exchanges and the regulated market on XETRA. 4 Based on the theoretical number of shares (434.8 million). 5 Based on the number of shares in free float (129.2 million). Source: Bloomberg, ThomsonReuters. OUR SHARES OUR SHARES Identified investors by region as of December 2017 in % Identified investors by type as of December 2017 in % 18.9 % German Retail / Undisclosed 14.4 % Germany 4% Hedge 1% Other 6.0 % Rest of World 16.0 % Europe (excl. Germany/UK) 18% Index 34% Growth 16.5 % United Kingdom 28.2 % United States 25% Value 18% GARP (Growth At Reasonable Price) Source: Nasdaq Shareholder Identification. Total number of shares outstanding: million. Source: Nasdaq Shareholder Identification.