Report on Economic Position

Macroeconomic and sector-specific environment

According to the most recently available figures from the International Monetary Fund (IMF), industrial countries faced heightening growth expectations in 2017. In this context, the recovery of the global economy strengthened. In around 120 economies that account for three-­quarters of global GDP, growth increased in 2017 compared with the previous year. This has been the most extensive synchronized global growth since 2010.

According to the latest IMF forecasts, global gross domestic product (GDP) rose by 3.7% in 2017, equivalent to an increase of 0.5 percentage points in comparison with 2016. As in the previous year, strong regional differences could be seen. Industrial nations registered an increase in growth to 2.3% (2016: 1.7%). At 4.7% (2016: 4.4%), emerging economies and developing countries again achieved an increase in growth rates. The GDP of the United States, the world’s largest economy, grew by 2.3% (2016: 1.5%). The eurozone also registered an increase in GDP growth to 2.4% (2016: 1.8%). The emerging economies of Asia registered an increase in growth to 6.5% (2016: 6.4%). As in 2016, India (6.7%) and China (6.8%) were the strongest growth drivers. In the industrialized countries of Asia, the GDP of Japan grew by 1.8% (2016: 0.9%) and that of Taiwan by 2.0% (2016: 1.5%). Korea registered growth of 3.0% (2016: 2.8%).

In 2017, organic sales growth at Merck was largely attributable to the Asia-Pacific and Latin America regions. While Asia-Pacific accounted for approximately 60% of Group-wide growth, Latin America accounted for 18%. In the aforementioned regions, the Healthcare and Life Science business sectors contributed positively to organic sales growth. By contrast, however, sales of the Performance Materials business sector decreased organically in both regions. While North America still generated around 36% of organic growth in 2016, it accounted for roughly 3.5% in 2017. This was due to declining business in the Healthcare business sector. Healthcare sales in North America decreased organically by – 4.5%.

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  Development 2017 Development 2016
Healthcare  
Global pharmaceutical market 3.0% 4.7%
Market for multiple sclerosis therapies2 7.4% 8.4%
Market for type 2 diabetes therapies2 9.6% 11.3%
Market for fertility treatment2 7.2% 12.5%
Market for the treatment of colorectal cancer3 0.3% – 6.7%
Market for OTC pharmaceuticals 4.6% 4.2%
     
Life Science
Market for laboratory products 2.8% 2.4%
Share of biopharmaceuticals in the global pharmaceutical market2 25.6% 23.8%
   
Performance Materials  
Growth of LC display surface area 3.8% 5.2%
Global automobile sales volumes 2.0% 5.3%
Materials for production of cosmetics 1.8% 1.8%
     
Semiconductor industry sales 19.7% 2.6%
1
Predicted development. Final development rates for 2017 were not available for all industries when this report was prepared.
2
Growth rates based on market data in local currency, translated at a constant euro exchange rate. The IQVIA market data on the growth of indications are based on current figures, including the third quarter of 2017. Annual growth based on the values for the past 12 months. The type 2 diabetes market excludes the United States since this market is insignificant to Merck.
3
Growth rates based on market data stated in U.S. dollars. Market data from EvaluatePharma on the growth of indications are based on published company reports and are subject to exchange rate fluctuations.

Healthcare

In the latest study published in September 2017 by the pharmaceutical market research firm IQVIA entitled ‟Market Prognosis 2017 – 2021”, the growth of the global pharmaceutical market for 2017 is quantified at 3.0%. By comparison, in 2016, sales growth was still 4.7%. As was already the case in 2016, the EMEA region was a main contributor to growth in 2017. Latin America (excluding Venezuela) also fueled growth. Whereas growth in the United States fell significantly to 1.7%, (2016: 5.2%), at 6.2% the Latin American market (excluding ­Venezuela) continued to see strong growth (2016: 7.6%). The EMEA region was also robust with growth of 4.0% (2016: 4.7%). At 3.2%, the Asia-Pacific region recorded a decline in growth (2016: 6.2%).

Not only the growth of the pharmaceutical sector as a whole, but also in particular the development of the biopharmaceutical market is relevant for our business. According to IQVIA, the market volume of biological pharmaceuticals was approximately € 222 billion in 2017. In recent years, the share of the global pharmaceutical market accounted for by these products has grown continuously and already amounted to 25.6% in 2017 (2016: 23.8%). Globally, the largest share, or 34.7%, was attributable to the U.S. market.

A look at the therapeutic areas of relevance to Merck shows the following developments, which reflect robust growth, albeit with a weakening trend. The markets for the therapeutic areas multiple sclerosis grew by 7.4% (2016: 8.4%), type 2 diabetes1 by 9.6% (2016: 11.3%) and fertility by 7.2% (2016: 12.5%). The market for oncology drugs for the treatment of colorectal cancer showed a ­positive trend and grew by 0.6% (2016: – 6.7%).

According to the market research firm Nicholas Hall, the growth of the global over-the-counter pharmaceutical market was 4.6% in 2017, which represents an increase of 0.4 percentage points in comparison with 2016. At 8.6%, India again fueled growth in 2017 (2016: 8.2%). In Japan, growth was again weak at 0.6% (2016: 0.9%).

Life Science

Our Life Science business sector is a leading supplier of products and services for both research and applied laboratory applications, as well as for formulating, purifying, manufacturing, and quality-assuring drug therapies of biological and chemical origin.

According to the market research firm Frost & Sullivan, the laboratory product market relevant to Research Solutions and Applied Solutions achieved growth of 2.8% in 2017 (2016: 2.4%). Following a slow start to 2017, growth picked up. Growth was primarily driven by biopharmaceutical industry customers, specifically emerging biotech start-ups. In comparison with 2016, European market growth increased to 1.9% (2016: 1.5%), driven by stronger GDP forecasts and easing of the uncertainty over Brexit. The U.S. market grew by 3.2% (2016: 2.5%), with increased National Institutes of Health (NIH) funding and the expected tax reform spurring investment in 2017 and possibly also in 2018. Emerging countries recorded higher growth rates, with growth being mainly driven by China and India. Although the GDP growth of China slowed down, investments in research and development grew as one of the key priorities of the 13th five-year plan. India generated high single-digit growth with laboratory products and is focusing more strongly on supporting academic and government research.

The demand for Process Solutions products depends heavily on the sales of biopharmaceutical companies as well as the productivity of their research & development activities.

According to IQVIA, the market volume of biotechnological pharmaceuticals grew in 2017 to US$  222 billion (equivalent to 25.6% of the global pharmaceutical market). More than 8,0001 biotechnological drug candidates were in preclinical and clinical development. In 2016, monoclonal antibodies accounted for 26%1 of these drug candidates (2015: 25%1). Biosimilars are a small, but fast-growing part of the pharmaceutical market. For 2016, annual sales of biosimilars were estimated at US$  1.8 billion1; this figure is expected to increase to US$  10.8 billion1 by 2022.

Performance Materials

With its Liquid Crystals business, Merck is the leading producer of liquid crystal mixtures for the display industry. The dynamic growth rates of display surfaces have declined to an average of 4% in recent years according to surveys by the market researchers at IHS DisplaySearch. This growth was mainly attributable to increasing average display size amid slightly declining sales volumes. The display industry remains a growth sector in which the leading display technology is based on liquid crystals. OLED technology, for which Merck also ranks among the leading material suppliers, is gaining importance in the high-quality display sector.

The markets for automotive coatings and cosmetics are crucial to Merck’s Pigments business. As reported by IHS, global automobile sales volumes rose by approximately 2% in 2017. The growth drivers were China and Europe whereas the U.S. market declined slightly for the first time after a long period of growth. According to Euromonitor International, global consumption of materials used to produce cosmetics grew by around 2%.

The semiconductor industry is the most important sales market for the business with integrated circuit materials (IC Materials). The long-term growth of the semiconductor industry has a cyclical demand pattern. According to Gartner, a market research institute specializing in the technology and electronics markets, in 2017 the industry’s sales grew by around 20%, above all owing to strong demand for the storage technologies DRAM and NAND.

1Evaluate Pharma.