Objectives and Strategies
General principles and Group strategy
Merck is a vibrant science and technology company. Across Healthcare, Life Science and Performance Materials, we bring expert and high-quality products to the world. Our aim is to achieve technological progress that will improve life and make our customers and business associates more successful. This aspiration is embodied by value- based and economically sustainable corporate governance, and steers the strategic development of the Group.
Our annual strategic development process follows firmly defined principles. Our business portfolio is expected to be adequately balanced at all times so as to reflect an optimum mix between entrepreneurial opportunities and risks and ensure the long-term success of the company. We achieve this through our diversification into three complementary business sectors that make the company as a whole less dependent on economic cycles, as well as by further expanding our presence in global growth markets. This exemplifies the long-term direction of our Group strategy. The company structure of Merck KGaA also contributes to this. The Merck family holds approximately 70% of the capital of Merck KGaA via E. Merck KG, the personally liable partner. In addition, the structure requires the Executive Board, whose members are also personally liable partners, to pay special attention to the long-term value creation.
For us, the principle of long-term thinking and actions applies not only to economic aspects, but also encompasses corporate responsibility. We pursue three strategic spheres of activity: health, environment as well as culture and education. The focus is always on the future viability of society and the competitiveness of our company. With our current and future product portfolio, we want to help meet global challenges, from urbanization to aging populations.
Over the past decade, Merck has transformed itself from a classic supplier of chemicals and pharmaceuticals into a global science and technology company. The main driver was the transformation of our business portfolio, particularly through the divestment of our Generics business (2007) and the acquisitions of Serono (2007), Millipore (2010), AZ Electronic Materials (2014), and Sigma-Aldrich (2015). In addition, we focused our businesses on innovation-driven and highly specialized products, extensively revamped our internal structures and processes, and expanded our presence in global growth markets. In line with this strategy, we completed the divestment of our Biosimilars business in 2017. In addition, we are preparing strategic options for our Consumer Health business, including a potential full or partial sale of the business as well as strategic partnerships.
Today, we hold leading positions in the respective markets of our three business sectors Healthcare, Life Science and Performance Materials, and are working to bolster and expand these. To this end, we are pursuing innovation-driven, organic growth. For instance, by 2022 we are targeting sales of around € 4 billion with new products. New medicines from the pharmaceutical pipeline are to contribute around € 2 billion, with Life Science and Performance Materials innovations each contributing around € 1 billion in sales.
Targeted acquisitions capable of meaningfully complementing or boosting our strengths remain a growth option. However, we continue to rule out major acquisitions of more than € 500 million as long as the debt level expressed as the ratio of net financial debt to EBITDA pre is greater than 2, unless divestments could be used to finance them. By the end of 2018, we aim to reduce our debt level to below 2 again. At Group level, we reduced our net debt by around € 1.4 billion in 2017. At the same time, strict financial discipline supports the rating of the Merck Group. Our dividend policy reflects a sustainable earnings trend.
Our Group strategy aims to resolutely continue the transformation of Merck into a science and technology company and to position the company as a leading player in a changing market environment. We focus on three areas of key priority, namely ‟Performance”, ‟People” and ‟Technology”.
Priority area “Performance”
The priority area ‟Performance” encompasses all activities that create sustainable, profitable growth. To this end, we are closely aligning our businesses with the wishes and needs of customers and patients, not only through our products, but also best possible proximity. The basis for this is formed by efficient structures and processes as well as sustainable financial management.
In Healthcare, the strategic direction is to become a global specialty innovator and we aim to maximize growth of existing franchises and to deliver pipeline with an average of one product launch or indication per year from 2017. We intend to keep our base business organically stable until 2022. In 2017, the potential of the pipeline materialized with six approvals for Bavencio®, two in the United States, and one in the EU, in Switzerland, in Japan, and in Canada, as well as for Mavenclad® in the EU, Canada and Australia.
In Life Science we deliver above-market organic growth by having a broad portfolio that addresses the needs of the scientific community, particularly in high-growth areas, for instance bioprocessing. We achieve solid organic sales growth consistently, even during the integration. Our profitability is industry-leading, driven by our e-commerce platform and synergies from the rapid integration of Sigma-Aldrich into our Life Science business sector. By the end of 2018, we expect to realize € 280 million in planned synergies.
In Performance Materials, we expect that our Semiconductor and Surface Solutions business units, which are developing well, will continue to mitigate the consequences of the fiercer competitive environment in our Liquid Crystals business in 2018. Going forward, we want to further enhance our degree of diversification. In addition, new technologies are in the testing phase. Our goal is to achieve innovation and technology leadership in all businesses and to push forward with innovative solutions in applications beyond displays.
From a regional perspective, in view of the importance of the Chinese market and China’s ambitious plan to become a global leader in innovation and technology, we are placing further importance on bolstering our positioning in this country. China will remain one of the most strategically important markets for us globally. By focusing on growth contributions from China and driving innovation and digitalization across our business sectors, we are fostering the development and evolution of the Chinese innovation landscape. Our Healthcare business sector continues to aim for very strong growth and is improving the lives of millions of patients in China, in particular with medicines from our General Medicines franchise, for example to treat cardiovascular diseases, as well as our Fertility franchise. Our Life Science and Performance Materials business sectors help Chinese companies and research institutes to become more competitive and efficient. We work with Chinese pharmaceutical companies on manufacturing and research processes and we make materials for Chinese electronic and display manufacturers.
Priority area “People”
The priority area ”People” addresses how we as a science and technology company can create a working environment that meets our employees’ individual needs and allows curiosity to unfold. Our growth strategy calls for people with diverse experience and backgrounds who work together on the basis of shared values to create innovation and respond flexibly to changing demands.
The basis for this is the ability to identify talented employees within the company early on and to systematically promote them – also across business sectors and countries. Moreover, it is crucial to be perceived as an attractive employer in the market in order to continue to capture the interest of potential employees. The fact that we rank among the world’s best employers was also confirmed by the distinction as ‟Global Top Employer 2017” by the Dutch Top Employers Institute. In addition, we were ranked fourth among biotechnology and pharmaceutical companies worldwide by Science magazine, a leading peer-reviewed international scientific publication.
In the course of our transformation, our leaders play a key role. They are responsible for driving our strategy forward by building the right competencies, thereby enabling innovation. We therefore place great importance on the continuous advanced training and further development of our leaders. This is essential for them to address the diverse needs of their team members and the changing requirements of the businesses and of digitalization.
Based on employee feedback and external benchmarking, we are also continuously further developing our existing programs and processes. Our award-winning people analytics approach, which for example empowers our leaders to make data-driven decisions on matters relating to their functions and people, has been rolled out to all people managers globally. Other pilot initiatives focus on, among other things, strengthening the engagement and innovation potential of our research and development units, and on flexible ways of collaborating across national and departmental boundaries.
Priority area “Technology”
The priority area ”Technology” covers the closely interlinked areas of innovation and digitalization. Developing and marketing innovative products and services are at the forefront of our Group strategy and all the business strategies. Our objective is to foster innovations both within the businesses and between them as well as beyond existing businesses into areas in which we are not yet active.
In particular, we want to capture the opportunities that digitalization offers in order to create value for patients, customers and business associates. To us, digitalization means the digital integration of our entire value chain, the digitalization of our products, services and communication interfaces to customers as well as the development of new digital business models. This is supported by state-of-the-art methods to collect and analyze vast amounts of data. For example, we generate additional sales from our e-commerce platform www.sigmaaldrich.com using algorithmic optimization of ads and product recommendations. Other examples include a supply chain project with our partner Palantir Technologies, where we are using advanced analytics to better forecast drug demand and to optimize our inventories. Within the scope of this partnership, we want to leverage Palantir’s advanced data analytics capabilities to more rapidly develop and deliver medicines and commercialize new products. This could also play a part in the development of entirely new therapeutic options for patients in the future. Initially, we will use Palantir’s technology in cancer treatment and patient services. Later on it can be used in other areas of the company. Our computer-aided retrosynthesis tool Chematica is also using advanced algorithms to help customers in medicinal chemistry and drug discovery to identify synthesis pathways.
Furthermore, we are working Group-wide to expand the physical and virtual infrastructure for technology-driven growth. The centerpiece is formed by our Innovation Center in Darmstadt. A modular Innovation Center was opened in April 2015 in Darmstadt as a prototype of the new Innovation Center that will be opened in spring 2018. The Innovation Center aims to develop entirely new businesses beyond the current scope, bringing together people, technologies, and skills from different areas under one roof.
We seek to establish projects in various strategic innovation fields of interest that we consider promising. The first such innovation field, ‟Biosensing and Interfaces”, focuses on the vast opportunities created by combining new sensor technology with smart algorithms and Big Data technology. This is expected to lead to new predictive and prescriptive approaches to treat and support patients in the therapeutic areas that we address. We want to offer innovation projects ideal conditions in the Innovation Center to grow into viable new businesses in an environment that provides both entrepreneurial freedom and dedicated support.
Additionally, the Innovation Center establishes strong connections to the start-up community, scientific centers of excellence, and external partners across industries, for example via our Accelerator program, that supports early-stage start-ups for a period of three months. The start-ups receive financial support, training and coaching as well as access to our experts from the businesses. Since the program began in September 2015, we have received more than 2,000 applications from over 70 countries and have mentored 30 start-ups.
Within the scope of our innovation strategy, we have established Merck Ventures as the strategic, corporate venture capital fund of Merck with a total volume of € 300 million to manage funds focused on Healthcare, Life Science, Performance Materials and New Businesses. Merck Ventures invests globally in transformational ideas driven by strong entrepreneurs. We take an active role in our portfolio companies and team up with entrepreneurs and co-investors to translate innovation into commercial success. We have a significant focus on early-stage investing and company creation, including the formation of spin-offs to leverage our science and technology base. Merck Ventures currently has an active portfolio of 30 companies.
Building on our 350-year history, the Darmstadt site is making a vital contribution to the company’s future in research-based specialty businesses. It serves as a key site for R&D and high-quality production for all our business sectors in their global markets, as the heart of Merck, as our global headquarters as well as the base for the family boards, executive management and our Group functions.
Our Healthcare business sector comprises the three businesses Biopharma, Consumer Health and Allergopharma. The diversity and profound medical expertise we have in these businesses are core strengths and key differentiators in the market. Within each business, we specialize in key therapeutic areas and specific diseases.
Global megatrends such as a growing world population and an increase in average life expectancy are driving the demand for our healthcare products. To meet these demands and respond appropriately to the dynamics of our healthcare markets, we have significantly transformed our Healthcare business sector in recent years. Following on our successes of the past year, we continue to drive pipeline projects with the aim of bringing groundbreaking medicines to patients, maximizing our existing portfolio and continuing our expansion in growth markets.
The ambition of the Healthcare business sector is to become a global specialty innovator, to operate in therapeutic areas with significant unmet medical need and to bring high value to patients and consumers. Therefore, we invest heavily in research and development to discover new treatment options and improve existing ones. Together with our stakeholders and partners, we want to ensure that people can access the medicines they need to stay healthy and live longer.
The first pillar of our strategy is to reinforce our global footprint by developing our tailored portfolio to address unmet medical needs in all regions worldwide. While developed markets such as the United States, Japan and Europe are key strategic markets for our specialty products, sales in growth markets such as China will be driven by both our biologics and broad general medicine and cardiometabolic care portfolios. At the same time, it will be essential for us to continue to focus our efforts on growing in the United States in order to realize our ambition of becoming a truly global leader.
The second pillar of our strategy is the focus on specialty medicine therapeutic areas. Here, we are concentrating our efforts on oncology, immuno-oncology, as well as neurology and immunology. For example, we have made significant investments in R&D, especially in areas of unmet medical need, and refined our focus on mechanisms of action and molecules that are expected to lead to transformative innovations in cancer care and immunological disorders. Our aim is to turn cancer patients into cancer survivors by being at the forefront of changing the future of cancer care. Further development programs for neurology and immunology include evobrutinib as a potential treatment for multiple sclerosis, systemic lupus erythematosus as well as rheumatoid arthritis; atacicept as a potential treatment option for lupus patients with high disease activity; and sprifermin as a potential therapy for patients with osteoarthritis of the knee.
Our aspiration is to develop high-quality, first-to-market and best-in-disease assets, and to build a portfolio in each of our therapeutic areas. We have streamlined our pipeline and expanded our innovation capabilities with strong investigational drug candidates. In order to maximize the impact of our R&D investments and increase our chances of success in discovering and developing new therapies, we focus our expertise on specific therapeutic areas and are exploiting synergies in disease mechanisms and biological pathways.
In this context, strategic collaborations are an integral part of delivering on our commitment to transforming the lives of patients living with serious unmet medical needs. We recognize the value of collaboration in the research and development of breakthrough therapies, as well as in strengthening our current portfolio. Here, we focus on balancing the right blend of internal capabilities and external partnerships, building strong collaborations with other leaders in industry, including Pfizer, Genea Biomedx and Vertex Pharmaceuticals.
We are innovating beyond our pipeline projects with our Medical Devices and Services unit and our Fertility Technologies. In addition to innovative therapeutic approaches, the way in which we engage with patients will be vital to achieving our objective of becoming a global specialty innovator.
Our divestment of the Biosimilars business to Fresenius closed on August 31. On September 5, we announced that we are preparing strategic options for our Consumer Health business, including a potential full or partial sale of the business as well as strategic partnerships. The Biosimilars divestment as well as the decision to examine strategic options for Consumer Health were both aligned with our strategy to focus on our pipeline of innovative medicines.
Life Science strategy
As a leader in the large and growing life science industry, our purpose is to solve the toughest problems in life science by collaborating with the global scientific community.
We have a portfolio of more than 300,000 products, in order to support a broad customer base – including academia, pharma and biotech labs, pharma manufacturing, biotech manufacturing, clinical diagnostics, environmental testing, food and beverage and industrial. We have an industry leading e-commerce platform, www.sigmaaldrich.com, which offers life science solutions, services and expertise across the entire biopharma value chain.
To create sustainable value for the future, Life Science has set a strategy to:
- Deliver the integration to combine the strengths of Merck Millipore and Sigma-Aldrich
- Strengthen the core business by investing in high growth areas, addressing our customer needs and enhancing capabilities
- Place bold bets in areas with transformative potential in order to establish new pillars of growth
The Sigma-Aldrich integration has been ahead of plan and we continue to be on track as we begin year three of the integration. The synergy estimate was raised from € 260 million to € 280 million. We will leverage best practices from both organizations, combine our sales force for one face to the customer, and continue to harmonize processes for employees and customers.
We have tailored our strategy and will continue to manage our business based on scale and growth to optimize the overall performance and portfolio of the Life Science business sector. We have further streamlined our organizational structure to capture growth opportunities even more strongly. Strategic Marketing & Innovation units and commercial teams are now reorganized into three distinct, vertically integrated business units: Research Solutions, Process Solutions and Applied Solutions, with each designed to increase agility and drive sustained entrepreneurship to better serve our customers. We also announced a number of acquisitions in 2017. These include BioControl Systems to strengthen our leadership in biomonitoring, specifically in the food and beverage sector, as well as Grzybowski Scientific Inventions to boost capability in chemical synthesis, and Natrix Separations to advance in next-generation bioprocessing.
Based on a broad assessment of the market, competitive landscape and key industry trends, in 2016 we identified several strategic initiatives in important growth areas. For example, in genome editing and novel modalities, we have built intellectual property in key areas, with patents granted in the European Union, Australia, Canada, and Singapore. The patents provide protection of our CRISPR technology, while giving scientists the ability to advance treatment options for the toughest medical challenges. In our BioReliance® End-to-End initiative we work with emerging biotech companies in process development, drug production and facility design services that help biopharmaceutical companies accelerate the progression of molecules into the clinic and towards commercialization.
In the Performance Materials business sector, we want to sustainably secure our market and technology leadership in display materials. In addition, we want to leverage our expertise in liquid crystals beyond the application field of displays. At the same time, we benefit from the trends in the semiconductor industry, continue to lead the market in pearlescent pigments, and share in the growth of the cosmetics industry.
Global demand for innovative display solutions grew further in recent years. We assume that increasing demand for high-quality consumer goods will come from an expanding middle class in growth markets in the coming years, too. Therefore, we aim to continue to strengthen our position as the market and technology leader for liquid crystals. Key to this are new, sophisticated liquid crystal technologies for further asserting our market and technology leadership, especially in the highly competitive Chinese market. In 2017, we sold the first quantity of our eco-friendly, resource-conserving and efficient liquid crystal technology SA-VA (self-aligned vertical alignment) for manufacture of large-area LC displays. In 2017, we opened the first production facility for switchable liquid crystal window modules in Veldhoven, the Netherlands. This is an important milestone for capturing an entirely new and attractive market segment for liquid crystals.
The OLED (organic light-emitting diodes) business contributes significantly to the growth of Performance Materials. It is our declared goal to strengthen our position as a leading global supplier of OLED materials. Continuous investments in research and development at the Darmstadt site as well as application laboratories at the Asian sites make an essential contribution to this. The opening of a new application laboratory in Shanghai is planned for 2018.
The great potential of OLED technology is confirmed by the development of the display market. OLED-based smartphone displays are the standard among all premium suppliers. OLED technology is also showing dynamic growth in the TV segment, bolstered by high investments by the leading OLED TV display manufacturer. The advantages offered by self-luminous OLED displays, such as intense colors, an especially deep black, thin structure, flexible use and low energy consumption are of importance here.
The Integrated Circuit Materials business unit supports the entire semiconductor industry with a portfolio of customized solutions. Increasingly higher storage capacity, faster process performance and lower power consumption are being demanded by the semiconductor industry. In addition, market trends such as mobility, Big Data and the Internet of Things are leading to higher demand for semiconductor materials and higher specialization at the same time. By means of novel materials and innovative technologies, we enable our customers to meet these requirements, produce more powerful chips, and counteract rising costs.
In the Pigments & Functional Materials business unit, we are further expanding our leading position in pearlescent pigments for automotive coatings. We are continuing to defend our good market position in plastics, printing and cosmetics applications. Here we are focusing on high-quality products and innovations. In functional materials, the focus of our growth strategy continues to be on niche applications in cosmetics (such as UV filters, insect repellents and anti-aging substances) as well as technical functional materials. In the latter, we see great growth potential for laser-marking additives and for novel coating materials. With these and further innovative product groups we will drive our growth in segments beyond our established markets.
Our Advanced Technologies business unit aims to develop profitable future businesses – both for Performance Materials and for our other business sectors. Besides a broad portfolio for the innovative LED industry, these also include organic photovoltaics and materials for flexible display technologies. In accordance with the Performance Materials strategy, our projects for future business fields are aligned to megatrends such as miniaturization and the Internet of Things.
The LC 2021 strategic initiative is to significantly contribute to our future growth and continue to generate attractive margins. Under the umbrella of the LC 2021 strategic initiative, we are combining future applications of liquid crystals beyond classic displays. In six fields altogether, we are focusing on improved user experience, on the one hand, and light and data management, on the other. First and foremost, this comprises liquid crystal windows. In Veldhoven, the Netherlands, we opened the first production facility for modules used in LC windows with sun protection and privacy control.
In 2018, we want to focus even more strongly on the needs of our customers and markets. Therefore, in December 2017, we announced that we will combine our expertise in three newly created business units, which are aligned to our target markets: Display Solutions, Semiconductor Solutions and Surface Solutions.
Strategic finance and dividend policy
We are pursuing a conservative financial policy characterized by the following aspects:
Financial flexibility and a conservative funding strategy
We ensure that we meet our obligations at all times and adhere to a conservative and proactive funding strategy that involves the use of various financial instruments.
We have diversified and profitable businesses as the basis for our strong and sustainable cash flow generation capacity. Moreover, we have several funding resources in place. A € 2 billion syndicated loan facility through to 2020 exists to cover any unexpected cash needs. The facility is a pure back-up credit facility and has not been drawn on so far. In addition, we have a commercial paper program with a volume of € 2 billion at our disposal. Within the scope of this program, we can issue short-term commercial paper with a maturity of up to one year.
Furthermore, we are using bilateral bank loan agreements with first-class banks in order to optimize the funding structure and cost. Additionally, the bond market generally represents a key element. However, owing to our focus on deleveraging, no bonds were issued in 2017. The most recent bond issues took place in 2014 and 2015 in connection with the acquisition of Sigma-Aldrich. A hybrid bond, a U.S. dollar bond and a euro bond were issued. The use of various instruments provides a broad financing basis and addresses different investor groups.
Maintaining sustainable and reliable business relations with a core group of banks
We mainly work with a well-diversified, financially stable and reliable group of banks. Due to Merck’s long-term-oriented business approach, bank relationships typically last for many years and are characterized by professionalism and trust. The banking group consists of banks with strong capabilities and expertise in various products and geographic regions. We regard these banks as strategic partners. Accordingly, we involve them in important financing transactions.
Strong investment grade rating
The rating of our creditworthiness by external rating agencies is an important indicator of the company’s financial stability. A strong investment-grade rating is an important cornerstone of Merck’s financial policy, as it safeguards access to capital markets at attractive financial conditions. Merck currently has a Baa1 rating from Moody’s, an A rating from Standard & Poor’s (S&P) and an A- rating from Scope, each with a stable outlook. Continuing to reduce our debt, as in 2017, is of utmost importance to us.
We are pursuing a sustainable dividend policy. Provided that the economic environment develops in a stable manner, the current dividend represents the minimum level for future dividend proposals. The dividend policy is oriented towards the business development and earnings increase of the coming years. However, dividend growth could deviate, for example, within the scope of restructuring or in the event of significant global economic developments. We aim for a target corridor of 20% to 25% of EPS pre.