UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K/A

Amendment No. 1

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

MYLAN INC.

(Exact Name of Registrant as Specified in Charter)

Pennsylvania		1-9114		25-1211621
(State or Other Jurisdiction of		(Commission		(I.R.S. Employer
Incorporation)		File Number)		Identification No.)

1500 Corporate Drive
Canonsburg, PA		15317
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (724) 514-1800

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o		Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o		Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o		Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2 (b))
o		Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4 (c))

 

 

TABLE OF CONTENTS

Item 2.01 Completion of Acquisition or Disposition of Assets

Item 9.01 Financial Statements and Exhibits

EXHIBIT INDEX

SIGNATURE

EXPLANATORY NOTE

     As reported in a Current Report on Form 8-K filed by Mylan Inc. (“Mylan” or the “Company”) on October 5, 2007 (the “Initial Form 8-K”), Mylan acquired Merck KGaA’s generic pharmaceutical business (“Merck Generics”) on October 2, 2007. Pursuant to Item 9.01 (a) (4), this Form 8-K/A amends the Initial Form 8-K and is being filed in order to include the historical financial statements of Merck Generics and the related pro forma financial information that were excluded from the Initial Form 8-K as permitted by Item 9.01 of Form 8-K. In accordance with Securities Exchange Act Rule 12b-15, the complete text of Items 2.01 and 9.01 as amended are set forth below.

Item 2.01 Completion of Acquisition or Disposition of Assets

     As previously announced, on May 12, 2007, the Company entered into a Share Purchase Agreement (the “SPA”) with Merck Generics Holding GmbH, a German limited liability company, Merck S.A., a French stock corporation, and Merck Internationale Beteiligung GmbH, a German limited liability company, (such entities, the “Sellers”) and Merck KGaA, a German limited partnership (“Merck”), as sellers’ representative and guarantor to acquire Merck Generics. Pursuant to the SPA, Mylan had agreed to pay an aggregate cash purchase price of € 4.9 billion, subject to certain adjustments for Merck Generics, on a cash free and debt free basis. The preliminary purchase price is subject to change for working capital and certain other adjustments following provision by Merck KGaA to Mylan of an audited closing balance sheet for Merck Generics. The purchase price is expected to be finalized by the end of the calendar year. Mylan, Merck, the Sellers, Mylan Luxembourg 2 S.à r.l., a Luxembourg limited liability company, and Mylan Delaware Holding Inc., a Delaware corporation, entered into an Amendment to the Share Purchase Agreement dated as of October 1, 2007 that amends certain provisions of the SPA to detail the final structure of the closing transactions and to identify certain assets to be transferred in connection with the purchase.

     On October 2, 2007, in accordance with the terms of the SPA, as amended, the Company completed the acquisition of Merck Generics. On October 2, 2007, the Company issued a press release announcing the closing of the acquisition. A copy of the press release is attached hereto as Exhibit 99.1 and incorporated herein by reference.

Item 9.01 Financial Statements and Exhibits

     (a) Financial statements of business acquired

     The following historical financial information of Merck Generics is attached to this Current Report and is incorporated by reference in this Item 9.01.

		Page
		Number
Independent Auditors’ Report		7
Combined Income Statements for the years ended December 31, 2006, 2005 and 2004		8
Combined Balance Sheets as of December 31, 2006 and 2005		9
Combined Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		10
Combined Statements of Recognized Income and Expenses for the years ended December 31, 2006, 2005, and 2004		11
Combined Statements of Changes in Equity for the years ended December 31, 2006, 2005 and 2004		12
Notes to Combined Financial Statements		13
Unaudited Interim Condensed Combined Income Statements for the six month periods ended June 30, 2007 and 2006		49
Combined Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006		50
Unaudited Interim Condensed Combined Statements of Cash Flows for the six month periods ended June 30, 2007 and 2006		51
Unaudited Interim Condensed Combined Statements of Recognized Income and Expenses for the six month periods ended June 30, 2007 and 2006		52
Unaudited Interim Condensed Combined Statements of Changes in Equity for the six month periods ended June 30, 2007 and 2006		53
Notes to the Unaudited Interim Condensed Combined Financial Statements		54

     The combined financial statements of Merck Generics as of December 31, 2006 and 2005, and for each of the years in the three-year period ended December 31, 2006, have been incorporated in the Registration Statement No. 333-140778 on Form S-3 by reference from this Current Report on Mylan on Form 8-K/A, in reliance upon the report of KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, independent auditors, which is included herein, and upon the authority of said firm as experts in accounting and auditing. The audit report with respect thereto includes an explanatory paragraph relating to the adoption of IFRS 3, Business Combinations, IAS 36 (rev. 2004), Impairment of Assets, IAS 38 (rev. 2004), Intangible Assets, and IAS 21 (rev. 2004), The Effects of Changes in Foreign Exchange Rates, and an explanatory paragraph relating to the fact that IFRS vary in certain significant respects from U.S. generally accepted accounting principles and refers to note 27 summarizing the nature and effect of such differences.

(b) Pro forma financial information

The following pro forma financial information is attached to this Current Report and is incorporated by reference in this Item 9.01.

		Page
		Number
Unaudited Condensed Combined Pro Forma Financial Statements		60
Unaudited Condensed Combined Pro Forma Statement of Operations for the fiscal year ended March 31, 2007		62
Unaudited Condensed Combined Pro Forma Statement of Operations for the six months ended September 30, 2007		63
Unaudited Condensed Combined Pro Forma Balance Sheet as of September 30, 2007		64
Notes to Unaudited Condensed Combined Pro Forma Financial Statements		65

(c) Shell Company Transactions

       Not Applicable

(d) Exhibits

Exhibit No.		Description
12.1		Ratio of Earnings to Fixed Charges
23.1		Consent of KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, independent auditors
99.1		Press release of the registrant dated October 2, 2007.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Merck Generics Group

Annual Financial Statements 2006

Independent Auditors’ Report

To the Board of Directors of Merck KGaA:

     We have audited the accompanying combined balance sheets of the Merck Generics Group as of December 31, 2006 and 2005, and the related combined statements of income, cash flows, recognized income and expenses, and changes in equity for each of the years in the three-year period ended December 31, 2006. These combined financial statements are the responsibility of the management of Merck KGaA. Our responsibility is to express an opinion on these combined financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Merck Generics Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Merck Generics Group as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with International Financial Reporting Standards, as adopted by the European Union.

     As described in the note “Adoption of new accounting standards,” the Merck Generics Group adopted IFRS 3, Business Combinations, IAS 36 (rev. 2004), Impairment of Assets, and IAS 38 (rev. 2004), Intangible Assets, as of March 31, 2004 for business combinations that took place on or after March 31, 2004, and as of January 1, 2005 for business combinations that took place before March 31, 2004, and adopted IAS 21 (rev. 2004), The Effects of Changes in Foreign Exchange Rates” as of January 1, 2005.

     International Financial Reporting Standards, as adopted by the European Union, vary in certain significant respects from U.S. generally accepted accounting principles. Information relating to the nature and effect of such differences is presented in note 27 to the combined financial statements.

Mannheim, Germany
September 14, 2007

KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft

Merck Generics Group
Combined Income Statements

						2006				2005				2004
For the year ended December 31		Note				€ m				€ m				€ m
Revenues			[1]				1,807.0				1,711.0				1,544.8
Cost of sales			[2]				-954.6				-956.7				-854.3
Gross margin							852.4				754.3				690.5
Marketing and selling expenses			[3]				-323.2				-291.7				-294.0
Administration expenses							-83.1				-74.6				-68.1
Other operating expenses, net			[4]				-119.0				-90.9				-67.7
Research and development expenses							-131.8				-125.3				-99.4
Operating income							195.3				171.8				161.3
Financial income, net			[5]				8.9				0.1				0.9
Income before income tax							204.2				171.9				162.2
Income tax expense			[6]				-82.3				-59.9				-92.1
Net income							121.9				112.0				70.1
Attributable to:
Minority interest							0.3				1.7				2.5
Merck							121.6				110.3				67.6

The accompanying notes form an integral part of these combined financial statements.

Merck Generics Group
Combined Balance Sheets

						2006				2005
As of December 31		Note				€ m				€ m
ASSETS
Current assets
Cash and cash equivalents			[7]				503.4				401.5
Trade accounts receivable, net			[8]				361.6				339.4
Inventories			[9]				314.2				314.2
Prepaid expenses and other assets			[10]				18.7				49.7
Income tax receivables			[11]				19.7				38.8
Total current assets							1,217.6				1,143.6
Non-current assets
Goodwill			[12]				357.4				343.6
Other intangible assets, net			[12]				50.8				39.4
Property, plant and equipment, net			[13]				199.1				213.6
Prepaid expenses and other assets			[10]				6.6				8.3
Deferred tax assets			[14]				85.0				79.1
Total non-current assets							698.9				684.0
Total assets							1,916.5				1,827.6
LIABILITIES
Current liabilities
Financial liabilities			[15]				326.8				341.8
Trade payables			[16]				239.5				267.9
Other liabilities			[17]				68.6				131.6
Income tax liabilities			[18]				29.2				27.5
Provisions			[19]				35.3				25.9
Total current liabilities							699.4				794.7
Non-current liabilities
Financial liabilities			[15]				18.2				2.7
Other liabilities			[17]				4.8				4.2
Provisions			[19]				129.2				74.0
Pension and other post-employment benefits			[20]				17.1				18.2
Deferred tax liabilities			[14]				6.3				11.0
Total non-current liabilities							175.6				110.1
Total liabilities							875.0				904.8
EQUITY
Investment by Merck							1,040.6				914.9
Minority interests							0.9				7.9
Total equity							1,041.5				922.8
Total liabilities and equity							1,916.5				1,827.6

The accompanying notes form an integral part of these combined financial statements.

Merck Generics Group
Combined Statements of Cash Flows

						2006				2005				2004
For the year ended December 31		Note				€ m				€ m				€ m
Income before income tax							204.2				171.9				162.2
Income tax expense							-82.3				-59.9				-92.1
Financial income, net							-8.9				-0.1				-0.9
Depreciation							32.3				30.3				22.7
Amortization							11.2				9.5				31.1
Changes in:
Inventories							-10.6				27.7				-22.3
Trade receivables							-42.0				-18.6				-52.0
Trade payables							-16.7				8.7				27.8
Provisions							67.8				46.8				-4.7
Other assets and liabilities							37.1				-109.6				17.5
(Gains) Losses on disposal of assets, net							-0.6				-0.5				0.7
Interest paid							-14.3				-12.1				-10.0
Net cash flows from operating activities			[21]				177.2				94.1				80.0
Interest received							24.7				13.2				11.2
Purchase of intangible assets							-10.1				-8.0				-9.2
Purchase of property, plant and equipment							-29.1				-31.8				-34.6
Purchase of subsidiaries, net of cash acquired							-31.5				-4.2				-53.8
Proceeds from disposal of fixed assets							3.4				2.9				1.3
Proceeds from the sale of short-term financial investments							—				3.5				—
Purchases of short-term financial investments							—				—				-3.5
Net cash used in investing activities			[22]				-42.6				-24.4				-88.6
Changes in current financial liabilities							11.2				36.7				45.0
Changes in non-current financial liabilities							15.6				-6.2				8.9
Distributions to Minority interests							-0.5				-0.4				-0.3
Distributions to Merck							-9.2				-17.1				-268.8
Net cash from (used in) financing activities							17.1				13.0				-215.2
Changes in cash and cash equivalents							151.7				82.7				-223.8
Effect of exchange rate fluctuations on cash and cash equivalents							-49.8				48.9				-18.8
Cash and cash equivalents as of January 1							401.5				269.9				512.5
Cash and cash equivalents as of December 31			[7]				503.4				401.5				269.9

The accompanying notes form an integral part of these combined financial statements.

Merck Generics Group
Combined Statement of Recognized Income and Expenses

		2006				2005				2004
For the year ended December 31		€ m				€ m				€ m
Net income			121.9				112.0				70.1
Income (expense) recognized directly in equity:
Defined benefit plan actuarial gains (losses)			0.6				-3.4				-1.2
Deferred taxes on gains/losses recognized immediately in equity			-0.3				1.1				1.1
Currency translation difference			-52.2				60.7				-40.5
Total income (expenses) recognized directly in equity			-51.9				58.4				-40.6
Recognised income and expenses			70.0				170.4				29.5
Attributable to:
Minority interest			0.3				1.7				2.5
Merck			69.7				168.7				27.0

The accompanying notes form an integral part of these combined financial statements.

Merck Generics Group
Combined Statement of Changes in Equity

						Other changes
		Owner				recognized
		investment				directly in				Investment				Minority				Total
		by Merck				equity				by Merck				interests				equity
		€ m				€ m				€ m				€ m				€ m
January 1, 2006			902.3				12.6				914.9				7.9				922.8
Net income			121.6				—				121.6				0.3				121.9
Net contribution from owners			58.4				—				58.4				-0.5				57.9
Total income (expense) recognized directly in equity			—				-51.9				-51.9				—				-51.9
Changes in companies combined			-2.4				—				-2.4				-6.8				-9.2
December 31, 2006			1,079.9				-39.3				1,040.6				0.9				1,041.5

						Other changes
		Owner				recognized
		investment				directly in				Investment				Minority				Total
		by Merck				equity				by Merck				interests				equity
		€ m				€ m				€ m				€ m				€ m
January 1, 2005			870.6				-45.8				824.8				6.6				831.4
Net income			110.3				—				110.3				1.7				112.0
Net distributions to owners			-78.6				—				-78.6				-0.4				-79.0
Total income (expense) recognized directly in equity			—				58.4				58.4				—				58.4
December 31, 2005			902.3				12.6				914.9				7.9				922.8

						Other changes
		Owner				recognized
		investment				directly in				Investment				Minority				Total
		by Merck				equity				by Merck				interests				equity
		€ m				€ m				€ m				€ m				€ m
January 1, 2004			1,070.7				-5.2				1,065.5				4.4				1,069.9
Net income			67.6				—				67.6				2.5				70.1
Net distributions to owners			-267.7				—				-267.7				-0.3				-268.0
Total income (expense) recognized directly in equity			—				-40.6				-40.6				—				-40.6
December 31, 2004			870.6				-45.8				824.8				6.6				831.4

The accompanying notes form an integral part of these combined financial statements.

Merck Generics Group
Notes to the combined financial statements

Background and basis of presentation

Merck KGaA and its subsidiaries (“Merck”) comprise the worldwide operations of their pharmaceutical and chemical businesses. Merck KGaA is located in Darmstadt, Germany.

On May 12, 2007, Merck entered into a Share Purchase Agreement (“SPA”) with Mylan Laboratories Inc., USA (“Mylan”) to sell its generics drug business (“Generics Group” or the “Group”) to Mylan (the “Transaction”).

Merck has prepared these combined financial statements for the Generics Group in connection with the SPA. The combined financial statements of the Generics Group reflect the assets, liabilities and transactions of the generics operations which Mylan has agreed to acquire under the terms of the SPA. Mylan has not agreed to acquire all of the generics operations of Merck and accordingly, the generics operations of Merck affiliates that have historically formed part of Merck’s generics drug business but are excluded from the Transaction (“excluded operations”) have not been included in these combined financial statements. The excluded operations are minor divisions within multidivisional Merck affiliates and form part of the retained Merck subsidiaries. The primary business of the excluded operations is to distribute Generics Group products in certain jurisdictions. Within the first two years after closing of the Transaction, Mylan has the right to purchase the excluded operations for actual costs incurred by Merck to separate the excluded operations, including any restructuring costs and transfer taxes and value-added taxes.

These combined financial statements of the Generics Group constitute a carve-out from Merck’s consolidated financial statements and as such, the excess of assets over liabilities is reflected as “Investment by Merck” in the Generics Group in lieu of stockholders’ equity. Merck’s consolidated financial statements and the Generics Group combined financial statements were prepared in accordance with International Financial Reporting Standards, as adopted by the European Union (“IFRS”). All of the pronouncements of the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”) required to be adopted for periods ending December 31, 2006 have been applied to these combined financial statements of the Generics Group for all periods presented. IFRS which had not been endorsed by the European Union by December 31, 2006 had no effect on the combined financial statements. These combined financial statements were authorized for issuance by the management board of Merck on September 13, 2007. The combined financial statements are presented in millions of Euro (€), the reporting currency of Merck. The combined financial statements have been prepared on the historical cost basis except for available-for-sale assets and certain financial assets and liabilities, which are measured at fair value.

The combined financial statements of the Generics Group include the assets and liabilities of the companies that comprise the Generics Group subject to the Transaction and all revenues realized and expenses incurred by those companies during the periods presented. The combined financial statements also include amounts attributable to one special purpose entity and amounts allocated for certain corporate overhead and infrastructure provided by Merck, which primarily consists of liability insurance premiums and other general administrative expenses that are directly attributable to the operations of the Generics Group subject to the Transaction. Liability insurance premiums are allocated based on risk factors and sales volume of the respective companies. Costs for other general administrative functions which are allocated to the Generics Group primarily consist of information technology services which are charged to the respective companies. Costs for

accounting, legal and tax services are included in the combined financial statements primarily based on the amounts incurred by the separate accounting, legal and tax departments of the respective Generics Group companies. The combined financial statements also include interest related to intercompany loans between Generics Group companies and Merck. The allocation of interest is based on LIBOR plus a margin that, when taken together, reflects interest rates that management believes are comparable to the rates charged by third-party banks. For purposes of these combined financial statements, income taxes have been determined as if the companies within the Generics Group were separate tax-paying entities. Management believes that the assumptions underlying the combined financial statements including the methods and estimates used to allocate expenses incurred by Merck on behalf of the Generics Group are reasonable. However, the combined financial statements do not necessarily reflect what the equity, financial position, results of operations or cash flows would have been if the Generics Group had operated as an independent, stand-alone company during the periods presented. See Note 27, Related party disclosures, for more information about transactions between Merck and the Generics Group.

The preparation of combined financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of income, expenses, assets and liabilities. Actual results may differ from management’s estimates. Estimates and assumptions are reviewed on an ongoing basis and changes in estimates and assumptions are recognized in the period in which the changes occur and in future periods impacted by the changes. In addition to the carve-out assumptions which impacted the presentation of these combined financial statements, including the allocation of certain expenses incurred by Merck on behalf of the Generics Group, the areas involving a high degree of judgment or where estimates and assumptions are significant to the combined financial statements are disclosed under “Summary of critical accounting estimates and judgments” below.

Adoption of new accounting standards

IFRS 3 “Business Combinations”, IAS 36 (rev. 2004) “Impairment of Assets” and IAS 38 (rev. 2004) “Intangible Assets” were applied for business combinations that took place after March 31, 2004. In accordance with the transitional provision of those standards, goodwill which arose from business combinations before March 31, 2004, is no longer amortized from the beginning of 2005 but is subject to an annual impairment test and goodwill arising from business combinations after March 31, 2004 is not amortized. In 2004, the combined income statement includes goodwill amortization of €23.4 million in “Other operating expenses, net”.

IAS 21 (rev. 2004) “The Effects of Changes in Foreign Exchange Rates” was applied from January 1, 2005 with the effect that goodwill arising from business combinations which took place after January 1, 2005, is treated as an asset of the foreign entity.

The following standards and amendments to standards took effect in 2006: IFRS 6 “Exploration for and Evaluation of Mineral Resources”, the amendment to IAS 21 “The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation”, the amendment to IAS 39 “Financial Instruments: Recognition and Measurement for the Fair Value Option”, the amendment to IAS 39 “Financial Instruments: Recognition and Measurement for Cash Flow Hedges of Forecast Intragroup Transactions”, the amendment to IAS 39 “Financial Instruments: Recognition and Measurement” and the amendment to IFRS 4 “Insurance Contracts” for financial guarantee contracts. The following also took effect in 2006: The amendment to IFRS 1 “First-time Adoption of International Financial Reporting Standards”.

The following interpretations were also effective for the first time in 2006: IFRIC 4 “Determining Whether an Arrangement Contains a Lease”, IFRIC 5 “Rights to Interests Arising from Decommissioning, Restoration and Environmental Rehabilitation Funds” and IFRIC 6 “Liabilities Arising from Participating

in a Specific Market – Waste Electrical and Electronic Equipment”.

None of the new or amended standards and interpretations that took effect in 2006 had any material effects on the combined financial statements. The amendment to IAS 19 “Employee Benefits” was applied retrospectively.

The following standards and interpretations or amendments to standards and interpretations will not take effect until 2007 or later: IFRS 7 “Financial Instruments: Disclosures”, the amendment to IAS 1 “Presentation of Financial Statements – Capital Disclosures”, the amendment to IAS 23, “Borrowing Costs”, IFRIC 7 “Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies”, IFRIC 8 “Scope of IFRS 2”, IFRIC 9 “Reassessment of Embedded Derivatives”, IFRIC 10 “Interim Financial Reporting and Impairment” and IFRIC 11 “IFRS 2: Group and Treasury Share Transactions”. We do not expect the new or amended rules to have any material effect on the combined financial statements. IFRS 7 “Financial Instruments: Disclosures” and the amendment to IAS 1 “Presentation of Financial Statements — Disclosures about Capital” will result in additional notes to the accounts as of 2007. Upon adoption of the amended IAS 23, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the qualifying asset.

Furthermore, the following standards and interpretations have been issued by the IASB but not yet adopted by the EU and therefore are not reflected in theses combined financial statements: IFRS 8 “Operating Segments” and IFRIC 12 “Service Concession Agreements”. If these new standards are adopted by the EU as issued by the IASB, we do not expect them to have a material effect on the combined financial statements.

Significant accounting policies

Foreign currencies

The currency translation of financial statements of the combined operations outside the European Union prepared in a foreign currency into the reporting currency (Euro) is as follows: In accordance with IAS 21 (The Effects of Changes in Foreign Exchange Rates), assets and liabilities are translated at the closing rate, and income and expenses are translated to Euros, as the reporting currency, using average rates. Exchange differences are recognized directly in equity. If foreign operations are sold, recorded differences from currency translation are reversed and recognized in income.

The translation of foreign currency transactions into the functional currency (functional currency concept) of an entity is as follows: The functional currency of each entity in the Group which conduct its operations independently is the currency of the primary economic environment in which the entity operates. Transactions that are conducted in currencies other than the functional currency are recorded using the current exchange rate on the date of the transaction. Foreign currency denominated monetary items (e.g., cash and cash equivalents, receivables and payables) are translated at the respective closing rates. Exchange differences from the translation of monetary items are recognized in the combined income statement. Non-monetary items denominated in foreign currencies are carried at historical cost translated at the closing rate. Goodwill in the context of the acquisition of foreign entities generated prior to the date of initial application of IFRS 3 continues to be stated in Euros, the reporting currency of the Group, at the historical exchange rate upon the date of acquisition.

Revenue recognition

Revenue from the sale of products is recognized upon transfer of significant risks and rewards of ownership to the customer as long as collectibility is reasonably assured. Revenue from the sales of products is reported net of sales and value added taxes and net of provisions for rebates, discounts and product returns. Provisions for rebates and discounts are recognized in the same period that the related sales are recorded based on the contract terms or historical experience. Provisions for product returns are made based on historical trends and specific knowledge of any customer’s intent to return products. Royalty and licensing income related to cooperation agreements is recognized in accordance with the cooperation agreements on an accrued basis over the term of the cooperation agreement.

Research and development

The costs of research and development (“R&D”) are expensed in full in the period in which they are incurred. The Group considers that regulatory and other uncertainties inherent in the development of its new products preclude it from capitalizing development costs before regulatory approval, as technological feasibility has not been demonstrated. Costs incurred after regulatory approval are insignificant.

Income tax expense

Income tax expense comprises current and deferred tax. Income tax expense is recognized in the combined income statement except to the extent that it relates to items recognised directly in equity, in which case the related income tax is also recognised directly in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent it is not probable that they will reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantially enacted by the reporting date. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Cash and cash equivalents

Cash and cash equivalents consist of cash on hand and deposits with banks as well as amounts due on demand from Merck as a result of the cash pooling arrangement with Merck. Cash and cash equivalents normally has a maturity of three months or less from the date of acquisition. This definition is also used for the combined statements of cash flows.

Trade and other accounts receivables

Trade and other accounts receivable are carried at amortized cost. Amortized cost is the original invoiced amount adjusted for cumulative amortization using the effective interest method and adjusted for any provision for impairment or collectibility. Impairments are established when there is objective evidence that the Group will not be able to collect all amounts due and are estimated based on a review of all outstanding invoice amounts. Amounts that are expected to be realized within one year are classified as current.

Inventories

Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted average method, and includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Provisions are established for slow moving and obsolete inventories.

Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. The component approach is applied in accordance with IAS 16. Subsequent acquisition and internal construction costs are only capitalized if it is probable that future economic benefits will arise for the Generics Group and the cost of the asset can be measured reliably. The cost of manufacture of self-constructed property, plant and equipment is calculated on the basis of costs directly attributable including an appropriate share of relevant overheads bringing the asset to a working condition for its intended use. Borrowing costs are not capitalized. Repair and maintenance costs are expensed as incurred. Gains and losses on disposal or retirement of tangible fixed assets are determined by comparing the proceeds received with the carrying amounts and are included in the combined income statements.

Depreciation is recognised on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows:

- Production buildings		25-33 years
- Administration buildings		25-40 years
- Machinery and technical equipment		8-20 years
- Factory and office equipment		4-10 years

Depreciation methods, useful lives and residual values are reassessed each reporting date. The useful lives are reviewed regularly and adjusted if necessary. Impairment losses are charged in accordance with IAS 36 where required, and these are subsequently reversed if the reasons for the impairment no longer apply (refer to note “Impairment of non-current assets”).

Business combinations

The purchase method is used to account for acquisitions of businesses and acquisitions of minority interests of entities already included in the combined financial statements. The cost of an

acquisition is measured as the fair value of the consideration issued and liabilities incurred or assumed at the date of acquisition plus costs directly attributed to the acquisition. The excess of the cost of an acquisition over the fair value of the net assets of the business acquired is recorded as goodwill, which is not amortized but is tested for impairment annually or when changes in circumstances indicate that an impairment of the goodwill may have occurred. The proportion of net assets acquired that is attributed to minority interests is presented in the combined balance sheets within equity and the income attributed to minority interests is shown separately in the combined income statements.

Intangible assets

Goodwill

Goodwill represents the excess of the acquisition cost over the fair value of the net assets acquired, at the date of acquisition. Goodwill related to acquisitions prior to January 1, 1995, the date of transition of Merck to IFRS, was offset against equity and has not been retroactively capitalized and amortized. Goodwill arising between January 1, 1995 but before March 31, 2004 has been recorded as an intangible asset and amortized in line with IFRS over 20 years until December 31, 2004. For goodwill that results from acquisitions after March 31, 2004, no amortization has been recognized in line with the transitional rules of IFRS 3. Goodwill is considered to have an indefinite useful life and therefore it is not subject to amortization. Goodwill is carried at cost less impairment losses and is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For the impairment testing, goodwill is allocated to cash generating units which are the regions which represent the lowest level within the Generics Group at which the goodwill is monitored for internal management purposes. The recoverable amount of a cash-generating unit is determined by the higher of the two following values: Fair value less costs to sell or value in use. Impairments are determined by comparing the book value of the cash-generating unit with the recoverable amount which is the higher of the value in use or fair value less cost to sell.

Other acquired intangible assets

Expenditures on acquired technology rights, patents, trademarks, brand names and licenses are capitalized as intangible assets. Intangible assets acquired within the scope of business combinations are capitalized at fair value on the date of acquisition. The intangible assets of the Group have definite useful lives and are amortized on a straight-line basis over their estimated useful lives. The useful lives of other acquired intangible assets are between three and fifteen years. Depending on the type of asset, amortization is allocated to the corresponding operating expense line in the combined income statement.

Software development

Costs associated with developing or maintaining computer software are expensed as incurred. However, costs that are directly associated with an identifiable and unique asset controlled by the Group, and that is expected to generate economic benefits exceeding costs beyond one year, are capitalized as intangible assets and amortized on a straight-line basis over their useful lives, not exceeding six years. Direct costs include the salaries and wages of the development team and an appropriate portion of relevant overheads.

Impairment of non-current assets

Assets that have an indefinite useful life are not subject to amortization and are tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to depreciation and amortization (tangible fixed assets and intangible assets with definite useful lives) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of an asset’s fair value less costs to sell or its value in use. Value in use is calculated based on estimated future cash flows expected to result from the use of the asset. The discounted cash flow method discounts future cash flows based on both a medium-term business plan and a long-term growth rate forecast. The discount rate is 7.8% (7.0% in 2005 and 2004) and is based on the weighted average cost of capital (WACC). For the purposes of assessing impairment, assets are grouped at the lowest levels of cash generating units for which there are separately identifiable cash flows. For assets other than goodwill, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had originally been recognised.

Liabilities

Liabilities are generally carried at amortized cost. Amounts that are expected to be realized within one year are classified as current.

Provisions

The Generics Group recognizes provisions when a present legal or constructive obligation exists as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. Restructuring provisions are recorded in the period in which management has committed to a restructuring plan, started to implement the plan or announced in sufficient detail its main features to those affected by it, determined that it is probable that cash outflows will be required to settle obligations related to the plan, and can reliably estimate the amounts required to settle those obligations. Legal provisions include estimation for legal costs directly associated with the legal risks for which provisions have been recognized. Contingent liabilities are not recognized because it is not probable that cash outflows will be required to settle the obligation or the amount of the obligation cannot be reliably estimated. Material contingent liabilities have been disclosed.

Employee benefits

Provisions for pensions and other post-employment benefits are recorded in accordance with IAS 19. Depending on the legal, economic and fiscal circumstances prevailing in each country, different retirement benefit systems are provided for the employees of the Group. Pension obligations of the Group include both defined benefit and defined contribution plans and comprise both obligations from current pensions and accrued benefits for pensions payable in the future. In the Generics Group, some benefit plans are funded and some are unfunded. Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement when they are due.

The Generics Group’s net obligation for defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and any

unrecognised past service costs and the fair value of any plan assets are deducted. The calculation is performed using the projected unit credit method under which dynamic parameters are taken into account in calculating the expected benefit payments; these payments are spread over the entire period of service of the participating employees. Actuarial valuations are prepared annually for this purpose. Gains and losses resulting from changes in actuarial assumptions are recognized directly in equity.

When the calculation results in a benefit to the Generics Group, the recognised asset is limited to the net total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.

When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised in the combined income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the combined income statement.

Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the normal retirement date. Termination benefits for voluntary redundancies are recognised if the Generics Group has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably.

Summary of critical accounting estimates and judgments

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In addition to the carve-out assumptions described above, which impacted the presentation of these combined financial statements, management believes the following accounting policies are critical since they involve estimates and judgments that can significantly impact the reported amounts of revenues, expenses, assets and liabilities and the disclosure of contingent assets and liabilities at the reporting date.

Provisions for sales returns and sales deductions

The Group recognizes revenue from product sales upon transfer of significant risks and rewards of ownership to the customer. At the time of sale, the Group records estimates for product sales deductions, primarily representing rebates, chargebacks and discounts to government agencies, wholesalers and managed care organizations and estimates for product returns. Provisions for sales returns are based on actual historical returns adjusted for anticipated market and product development. The amount of returns received varies by region and is dependent upon the return policy within a given country, which is based on local industry practice. The Group performs periodic quantitative analyses by product for each reserve category to assess whether the current assumptions used to calculate the sales return provisions are valid. The quantitative analyses consider historical rates of returns, type of inventory, shipment history, estimated levels of product in the distribution channel, competition and other related factors. Provisions for rebates, chargebacks and discounts are calculated based upon historical experience, product growth, anticipated price increases and specific terms in agreements with individual governmental agencies, wholesalers and managed care organizations.

Inventory provisions

Inventory is written down, if necessary by an amount equal to the difference between the cost of inventory and the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated cost of completion and selling expense.

Impairment of goodwill and other long-lived assets

As of December 31, 2006, the Generics Group had intangible assets with a net book value of € 408.2 million, mainly consisting of goodwill, and long-lived tangibles assets with a net book value of € 199.1 million. Intangible assets with determinable useful lives are amortized and long-lived tangible assets other than land, which is not depreciated, are depreciated on a straight-line basis. Goodwill is not amortized, but is tested for impairment annually. Other long-lived assets are reviewed annually for indications of a decline in value. If there are any such indications, an impairment test is performed. The amount of any necessary impairment is determined by comparing the carrying amount of the long-lived asset or, for goodwill, the cash generating unit, with the higher of fair value less cost to sell or their values in use. The value in use is calculated by using the discounted cash flow method based on the weighted average cost of capital (WACC). The cash flows used are derived from assumptions, in particular relating to future selling prices, sales volumes and costs, and from projections for future years on the basis of expected rates of growth. These assumptions are based on market forecasts and estimates by management. Considerable management judgment is also necessary to identify the respective cash generating unit.

Assessment of legal risks

The Generics Group is a business with worldwide operations that is exposed to a multitude of legal risks, relating in particular to competition and anti-trust regulations. The outcome of pending legal proceedings cannot be predicted with certainty. An unfavourable outcome, from the Group’s point of view, of a legal case which has only partial insurance coverage or none at all can therefore impact the operating result and cash flow of the Group. Complex legal issues which are difficult to resolve or interpret are often involved in pending legal or administrative proceedings. Provisions for litigation are disclosed under Note 19 of the combined financial statements. The Generics Group regularly reviews the available information relating to legal proceedings and, where appropriate, the defense against claims which have been made, and recognizes the provisions required to reflect the amount of probable losses resulting from such proceedings, including the estimated legal costs of settling the matter. The Generics Group’s legal department carries out an assessment of legal cases. The Generics Group recognizes provisions if a loss from a legal dispute is expected to be probable from its point of view, and if a reliable estimate of the probable loss and related legal costs can be made.

Income taxes

The Generics Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining provisions for income taxes. Some of these estimates are based on interpretations of existing laws or regulations. Various internal and external factors, such as changes in tax laws, regulations and rates, changing interpretations of existing tax laws or regulations, future level of research and development spending and changes in overall levels of pre-tax income may have favorable or unfavorable effects on the income tax and deferred tax provisions in the period in which such determination is made.

Pension obligations

The Group operates a number of defined benefit and defined contribution retirement plans. The expense incurred under the defined benefit retirement plans is based upon statistical and actuarial calculations, and is impacted by assumptions on discount rates used to arrive at the present value of future pension liabilities, expected returns that will be made on existing pension assets, future salary increases as well as future pension increases and statistical based assumptions covering future withdrawals of participants from the plan and estimates of life expectancy. The actuarial assumptions used may differ materially from actual results due to changes in market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants and significantly impact the amount of pension costs and pension liabilities to be recognized in the period in which such determination is made.

Acquisitions and disposals

On February 20, 2006, the Generics Group acquired 100% of the shareholding in the Spanish company Prasfarma Oncológicos S.L., Barcelona, from Almirall Prodesfarma SA for € 19.3 million. The company was consolidated for the first time in February 2006. On April 28, 2006, the Generics Group acquired the remaining 6.5% minority interest in its Japanese subsidiary Merck Hoei Ltd. for € 13.8 million including transaction costs of € 0.6 million. Prior to the acquisition of the minority interest, the company was already consolidated. The company, which is headquartered in Tokyo, has been renamed Merck Seiyaku Ltd. On November 14 and December 22, 2006, the Generics Group increased its interest in its consolidated French subsidiary Société de Participation Pharmaceutique S.A.S., Lyon, from 65.6% to 96.0% for € 9.1 million. For those acquisitions in which we increased our interest, the purchase price reduced the minority interest in equity and increased the goodwill. There were no disposals of companies in 2006.

Overall, the above acquisitions had the following effects on the combined balance sheet of 2006:

		Acquisitions
		Pre-acquisition
€ m		book value				Adjustment				Fair value
Goodwill			—				12.8				12.8
Other intangible assets			—				13.3				13.3
Property, plant and equipment			2.4				—				2.4
Cash and cash equivalents			1.8				—				1.8
Other current assets			2.0				—				2.0
Current and non-current liabilities			0.2				—				0.2

Prasfarma Oncológicos S.L., which was included in the combined financial statements beginning February 2006, contributed in 2006 € 11.0 million to sales and € 0.6 million to operating result for the Generics Group. There were no acquisitions or divestitures in 2005. On September 24, 2004, the Generics Group acquired 100% of the shareholding in NM Pharma AB, Stockholm, the generics business of Pfizer in Scandinavia, at a net purchase price net of € 49.1 million including transaction costs of € 0.6 million. NM was included in the combined financial statements beginning October 2004 and in 2004 contributed € 8.4 million to sales and € 0.3 million to the operating result for the Generics Group.

Notes to the combined income statements

[1] Revenues

Revenues include royalty income amounting to € 5.6 million in 2006 (2005: € 10.6 million and 2004: € 28.6 million).

[2] Cost of sales

Cost of sales includes the cost of manufactured products as well as goods purchased for resale. Inventory write-downs recognized as cost of sales amounted to € 24.2 million in 2006 (2005: € 27.0 million and 2004: € 15.8 million). The amount of inventories recognised in cost of sales amounted to € 780.7 million in 2006 (2005: € 774.0 million and in 2004: € 684.9 million).

[3] Marketing and selling expenses

In addition to the cost of marketing and sales departments and of the sales force, marketing and selling expenses include advertising, logistics and license costs. Freight expenses charged to customers amounting to € 0.1 million in 2006 (€ 0.5 million in 2005 and € 0.1 million in 2004) have been deducted from marketing and selling expenses.

[4] Other operating expenses, net

		Year ended December 31
		2006				2005				2004
		€ m				€ m				€ m
Exchange rate differences from operating activities			-0.6				0.9				-1.5
Losses on disposals of assets and impairment losses			-6.7				-3.0				-0.7
Write-downs and recoveries of receivables			1.2				-1.6				1.0
Project costs			-4.4				-0.8				—
Premiums, fees and contributions			-9.8				-9.8				-9.3
Restructuring expenses			-2.6				-4.0				—
Litigation expenses			-98.9				-83.2				-43.8
Amortization of goodwill			—				—				-23.4
Other operating expenses			-17.7				-8.9				-8.1
Income from litigation settlements			4.8				6.9				3.0
Other operating income			15.7				12.6				15.1
Total other operating expenses, net			-119.0				-90.9				-67.7

Litigation expenses include € -79.6 million provided in connection with the accusation of misleading price information at our U.S. subsidiary Dey (2005: € -67.5 million and 2004: € -8.0 million) and € -4.4 million in connection with accusations of anticompetitive practices at Generics UK (2004: € -24.1 million). Other operating income comprises various smaller items including the profit on sales of product dossiers.

[5] Financial income, net

		Year ended December 31
		2006				2005				2004
		€ m				€ m				€ m
Interest and similar income			31.8				16.0				11.3
Interest and similar expenses			-22.8				-16.1				-10.2
Total interest and similar income (expenses), net			9.0				-0.1				1.1
Interest component of the addition to pension provisions and other provisions for personnel expenses			-0.4				-0.3				-0.2
Exchange rate differences from financing activities			0.3				0.5				—
Total financial income, net			8.9				0.1				0.9

[6] Income tax expense

		Year ended December 31
		2006				2005				2004
		€ m				€ m				€ m
Taxes of the current period			-106.3				-94.1				-87.4
Taxes for prior periods			6.5				-0.3				-5.2
Deferred taxes			17.5				34.5				0.5
Total income tax			-82.3				-59.9				-92.1

Tax expense consists of a variety of income taxes in jurisdictions in which the combined operations of the Generics Group do business. The majority of the deferred tax is in the context of the legal provision for Dey Inc (USA).

The reconciliation between deferred tax assets and liabilities shown in the combined balance sheet and deferred taxes in the combined income statement are presented below:

		Year ended December 31
		2006				2005				2004
		€ m				€ m				€ m
Change in deferred tax assets (balance sheet)			5.9				40.1				1.3
Change in deferred tax liabilities (balance sheet)			4.7				-0.6				-6.2
Deferred taxes credited/debited to equity			-0.3				1.1				1.1
Changes in companies combined/currency translation			7.2				-6.1				4.3
Deferred taxes (income statement)			17.5				34.5				0.5

Deferred tax assets are recognized for tax loss carry forwards only if realization of the related tax benefit is probable in the foreseeable future. Tax losses carried forward for income tax purposes by expiring date are as follows:

		€ m
2007			—
2008			3.4
2009			7.7
2010			1.9
2011			3.4
Thereafter (or unlimited)			59.5
Total			75.9

Of the € 75.9 million of tax losses carried forward for income tax purposes, € 3.2 million are losses or loss carry forwards that were utilized by Merck and therefore are not available for the Generics Group. Accordingly, as of the balance sheet date, tax loss carry forwards available for the combined operations of the Generics Group amounted to € 72.7 million (2005: € 57.7 million). Deferred tax assets were not recognized for losses or loss carry forwards, available for the Generics Group, totalling € 68.8 million (2005: € 57.5 million) since realization of the related tax benefits are not probable. Deferred tax assets relating to tax loss carry forwards totalled € 1.1 million (2005: € 0.1 million). Deferred tax assets of € 83.9 million (2005: € 79.0 million) were recognized for other temporary timing differences.

The following table gives the reconciliation of the tax expense based on the theoretical tax rate for the Generics Group which would result from applying the regular tax rates of the individual German and foreign companies to the effective tax expense recognized in the combined income statement.

		Year ended December 31
		2006				2005				2004
		€ m				€ m				€ m
Income before income tax			204.2				171.9				162.2
Tax expense with tax rates applicable to all German and foreign companies			-73.4				-61.2				-56.6
Theoretical tax rate			36	%			36	%			35	%
Tax effect of losses for which tax benefits were not recognizable and changes in valuation allowances			-11.3				-3.1				-10.7
Taxes for prior periods			6.5				-0.3				-5.2
Tax effect of non-deductible expenses and tax free income			-7.5				1.7				-13.4
Tax effect of non-deductible goodwill amortization			—				—				-5.4
Miscellaneous			3.4				3.0				-0.8
Income tax expense			-82.3				-59.9				-92.1
Effective tax rate			40	%			35	%			57	%

Notes to the combined balance sheets

[7] Cash and cash equivalents

		As of December 31
		2006				2005
		€ m				€ m
Cheques, cash and bank balances			48.7				43.8
Short-term cash investments			454.7				357.7
Total cash and cash equivalents			503.4				401.5

Short-term cash investments include receivables due from related parties (intercompany accounts towards Merck from cash pooling) amounting to € 427.0 million (2005: € 337.7 million). Cash and cash equivalents are mainly denominated in US dollars (80.3%) and Euros (10.0%) with an original maturity of three months or less. All bank balances are placed with banks with a high credit rating. The average effective interest rate on short-term cash investments in 2006 was 4.8% (2005: 3.8%) and these cash investments have an average maturity of 2 days (2005: 11 days) as of December 31. The average effective interest rate on Merck accounts in 2006 was 5.0% (2005: 4.2%) and the majority of those balances are due on demand.

[8] Trade accounts receivable, net

		As of December 31
		2006				2005
		€ m				€ m
Receivables from related parties			0.6				1.5
Receivables from third parties			361.0				337.9
Total trade accounts receivable			361.6				339.4

At 31 December 2006 trade accounts receivables are shown net of allowances for doubtful receivables of € 4.7 million (2005: € 7.1 million). The Group sells its products worldwide through major wholesale distributors and direct to clinics and hospitals. There is no concentration of credit risk with respect to trade accounts receivable as the Group has a large number of internationally dispersed customers.

[9] Inventories

		As of December 31
		2006				2005
		€ m				€ m
Raw materials and production supplies			61.8				59.0
Work in progress			40.0				51.6
Finished goods and goods purchased for resale			212.4				203.6
Total inventories			314.2				314.2

At 31 December 2006 write-downs of inventories amounted to € 50.5 million (2005: € 40.9 million). The fair value of those inventories which have been written down amounts to € 29.9 million (2005: € 23.2 million). As of the balance sheet dates, inventories were not used to secure liabilities.

[10] Prepaid expenses and other assets

Current prepaid expenses and other current assets:

		As of December 31
		2006				2005
		€ m				€ m
Other receivables:
from related parties (Merck)			1.5				11.5
from third parties			8.3				26.5
Total other receivables			9.8				38.0
Derivative assets			—				0.6
Prepaid expenses			6.0				8.4
Other assets			2.9				2.7
Total current prepaid expenses and other assets			18.7				49.7

Non-current prepaid expenses and other non-current assets:

		As of December 31
		2006				2005
		€ m				€ m
Prepaid expenses			1.9				1.4
Other assets			4.7				6.9
Total non-current prepaid expenses and other assets			6.6				8.3

Prepaid expenses and other assets include prepayments made, interest deferrals or refund claims in connection with non-income taxes, claims in connection with duties and import fees as well as the overfunded status of pension plans. In addition, receivables resulting from co-marketing agreements with other companies for various products are recorded in this item.

[11] Income tax receivables

Tax receivables at year-end amounted to € 19.7 million (2005: € 38.8 million) and result from tax refund claims for tax prepayments that exceed the actual amount of tax payable for the current and prior fiscal years, and from refund claims for prior years owing to tax audits as well as withholding tax credits.

[12] Goodwill and other intangible assets, net

		Goodwill				Other intangible assets
						Finite								Advance
						useful life				Software				payments				Total
		€ m				€ m				€ m				€ m				€ m
Acquisition cost January 1, 2005			524.0				69.3				5.4				3.1				77.8
Adjustment for accumulated amortization of goodwill in accordance with IFRS 3			-179.2				—				—				—				—
Additions			0.2				3.7				0.7				3.6				8.0
Disposals			—				-0.5				-0.3				-0.4				-1.2
Transfers			—				-0.3				2.7				-2.4				0.0
Currency translation			-1.4				-0.2				1.4				0.1				1.3
December 31, 2005			343.6				72.0				9.9				4.0				85.9
Accumulated amortization and impairment losses January 1, 2005			-179.2				-32.9				-3.3				—				-36.2
Adjustment for accumulated amortization of goodwill in accordance with IFRS 3			179.2				—				—				—				—
Amortization			—				-8.2				-1.3				—				-9.5
Disposals			—				0.3				0.2				—				0.5
Transfers			—				1.5				-1.5				—				0.0
Currency translation			—				-0.1				-1.2				—				-1.3
December 31, 2005			0.0				-39.4				-7.1				—				-46.5
Net book value as of December 31, 2005			343.6				32.6				2.8				4.0				39.4
Acquisition cost January 1, 2006			343.6				72.0				9.9				4.0				85.9
Changes in companies combined			—				13.3				—				—				13.3
Additions			12.8				2.0				2.3				5.8				10.1
Disposals			—				-1.1				-1.6				-0.7				-3.4
Transfers			—				4.8				0.3				-5.1				0.0
Currency translation			1.0				0.1				-0.6				—				-0.5
December 31, 2006			357.4				91.1				10.3				4.0				105.4
Accumulated amortization and impairment losses January 1, 2006			—				-39.4				-7.1				—				-46.5
Amortization			—				-9.8				-1.4				—				-11.2
Disposals			—				0.9				1.4				—				2.3
Currency translation			—				0.4				0.4				—				0.8
December 31, 2006			—				-47.9				-6.7				—				-54.6
Net book value as of December 31, 2006			357.4				43.2				3.6				4.0				50.8

The increase in goodwill in 2006 relates exclusively to the acquisitions of minority interests of certain subsidiaries in 2006. The acquisition of the remaining outstanding minority interests in our subsidiary Merck Seiyaku Ltd. increased goodwill by € 10.0 million. The acquisition of some of the outstanding minority interests in our subsidiary Société de Participation Pharmaceutique S.A.S. increased goodwill by € 2.8 million.

The acquisition of Prasfarma Oncológicos S.L. increased intangible assets (licenses) by € 13.3 million. The net book value of the acquired intangible assets (other than goodwill) at the end of December 31, 2006 amounts to € 12.1 million and the remaining amortization periods range from 9 to 11 years.

With the acquisition of NM Pharma in 2004 the Group acquired brand names which have a net book value at December 31, 2006 of € 13.1 million and a remaining amortization period of 8 years.

There were no impairments of intangible assets and no reversals of impairments in any period presented.

The aggregate carrying amounts of goodwill allocated to each cash generating unit are:

		As of December 31
		2006				2005
Cash generating unit		€ m				€ m
Europe			113.2				110.4
North America			102.2				102.2
Asia Pacific			142.0				131.0
Total			357.4				343.6

The recoverable amount was determined using a discounted cash flow method. The discounted cash flow method discounts future cash flows based on both a medium-term business plan and a long-term growth rate forecast. The discount rate is 7.8% (7.0% in 2005) and is based on the weighted average cost of capital (WACC). No impairment was recognised for goodwill in the years 2004, 2005 and 2006.

[13] Property, plant and equipment, net

		Land, land												Construction
		rights and								Other				in progress
		buildings,								facilities,				and advance
		including								operating and				payments to
		buildings on				Plant and				office				vendors and
		third-party land				machinery				equipment				contractors				Total
		€ m				€ m				€ m				€ m				€ m
Acquisition cost January 1, 2005			129.1				210.1				13.0				6.8				359.0
Additions			9.0				14.0				1.1				7.7				31.8
Disposals			-1.2				-10.3				-0.7				—				-12.2
Transfers			1.5				-0.2				5.5				-6.8				0.0
Currency translation			12.2				22.6				1.6				0.1				36.5
December 31, 2005			150.6				236.2				20.5				7.8				415.1
Accumulated amortization and impairment losses January 1, 2005			-25.6				-128.9				-9.4				—				-163.9
Depreciation			-5.5				-19.5				-2.6				—				-27.6
Impairment losses			-1.8				-0.9				—				—				-2.7
Disposals			0.1				9.8				0.6				—				10.5
Transfers			—				2.6				-2.6				—				0.0
Currency translation			-2.8				-13.8				-1.2				—				-17.8
December 31, 2005			-35.6				-150.7				-15.2				—				-201.5
Net book value as of December 31, 2005			115.0				85.5				5.3				7.8				213.6
Acquisition cost January 1, 2006			150.6				236.2				20.5				7.8				415.1
Changes in companies combined			1.9				0.5				—				—				2.4
Additions			4.6				11.3				1.0				12.2				29.1
Disposals			-0.1				-6.5				-0.7				-0.5				-7.8
Transfers			0.6				-7.6				12.3				-5.3				0.0
Currency translation			-9.2				-15.9				-1.4				-0.3				-26.8
December 31, 2006			148.4				218.0				31.7				13.9				412.0
Accumulated amortization and impairment losses January 1, 2006			-35.6				-150.7				-15.2				—				-201.5
Depreciation			-5.7				-18.4				-2.2				-0.1				-26.4
Impairment losses			-3.4				-2.5				—				—				-5.9
Disposals			—				5.7				0.4				—				6.1
Transfers			—				7.9				-7.9				—				0.0
Currency translation			2.5				11.1				1.2				—				14.8
December 31, 2006			-42.2				-146.9				-23.7				-0.1				-212.9
Net book value as of December 31, 2006			106.2				71.1				8.0				13.8				199.1

In 2006, impairment losses of € 5.9 million were recognized on property, plant and equipment in context with the closure of manufacturing and packaging activities in UK. The impairment is based on the calculation of the fair value less cost to sell. In 2005 impairment losses totalling € 2.7 million were recognized on property, plant and equipment. The impairment became necessary after the termination of a cooperation project for development and production of products at Genpharm Inc., Canada. Based on the fair value less cost to sell, the related tangible assets had been completely written-off. The charges for impairment losses are included in other operating expense, net for the respective period. There were no impairment losses on property, plant and equipment in 2004.

Changes in companies combined exclusively comprise additions resulting from the acquisition of Prasfarma Oncológicos S.L., Spain in 2006. No property, plant and equipment asset served as collateral in 2006 and 2005. There were no reversals of impairments of property, plant and equipment in any period presented.

Property, plant and equipment also includes assets that are leased under the terms of finance leases. The total value of leased assets (leased facilities) amounts to € 0.4 million (2005: € 0.4 million) and the corresponding obligations amount to € 0.3 million (2005: € 0.4 million).

[14] Deferred tax assets and liabilities

Deferred tax assets and liabilities relate to the following items:

		As of December 31
		2006								2005
		€ m								€ m
		Assets				Liabilities				Assets				Liabilities
Intangible assets			4.6				3.4				4.7				3.0
Property, plant and equipment			-0.8				2.1				0.5				5.2
Inventories			6.1				—				7.8				—
Current and non-current receivables/Other assets			7.4				—				6.1				0.1
Provisions for pensions and other post-employment benefits			3.3				—				4.7				—
Current and non-current other provisions			67.9				—				52.7				—
Current and non-current liabilities			0.9				—				1.8				—
Tax loss carry forwards			1.1				—				0.1				—
Other			1.8				8.1				1.5				3.5
Offsetting of deferred tax assets and liabilities			-7.3				-7.3				-0.8				-0.8
Total deferred taxes			85.0				6.3				79.1				11.0

The potential for offsetting deferred tax assets and liabilities is limited to those arising in the same tax jurisdiction.

[15] Financial liabilities

Current financial liabilities:

		As of December 31
		2006				2005
		€ m				€ m
Bank loans and overdrafts			—				9.6
Loans from third parties			4.3				—
Loans from related parties (Merck)			295.5				316.0
Other financial liabilities to related parties (Merck)			26.1				16.2
Other financial liabilities			0.9				—
Total current financial liabilities			326.8				341.8