Our Group strategy is based on an almost 350-year history of success. General principles provide stability and guidance in all our business endeavors. They help those responsible within the company to shape strategic plans and make decisions.
The partner structure of Merck KGaA with members of the Merck family as personally liable partners requires the Executive Board, whose members are also personally liable partners, to pay special attention to the long-term development of value. Therefore, sustainability plays a special role for us. The objective is to align the long-term development of the company with the legitimate interests of shareholders, whose engagement in the company is normally of a shorter duration. That is why our business portfolio must always be balanced so that it reflects an optimum mix of entrepreneurial opportunities and risks. We achieve this through diversification in the Healthcare, Life Science and Performance Materials business sectors, as well as through our geographic breadth with respect to growth sources.
For us, however, the principle of sustainability applies not only to economic aspects. Instead, it also encompasses responsibility for society and environmental protection. With our existing and our future product portfolio, we want to help solve global challenges and shape a sustainable future. Around 50,000 employees work to further develop technologies that improve and enhance life, from biopharmaceutical therapies to treat cancer or multiple sclerosis, to cutting-edge systems for scientific research and production, to liquid crystals for smartphones and LCD televisions.
In 2007, we started a transformation process to secure our future through profitable growth in today’s Healthcare, Life Science and Performance Materials business sectors. With the completion of the acquisition of Sigma-Aldrich in November 2015, this transformation process achieved its aim. In recent years, we have thus transformed from a classic chemical and pharmaceutical group into a leading science and technology company. This change is also reflected by the repositioning of the Merck brand, which was launched with a revamped visual appearance and the introduction of a new logo in October 2015.
The process started with the change program “Sustain. Change. Grow.” and the two major acquisitions of Serono SA in 2007 and the Millipore Corporation in 2010. In 2011, we embarked on the “Fit for 2018” transformation and growth program with a new executive management team. In the first phase, we created the foundation for profitable growth by introducing a new global leadership organization and a comprehensive, Group-wide efficiency program. The second phase, which started in 2014, was aimed at successively implementing the growth options identified by establishing three strong platforms for sustainable profitable growth. We are building on our core competencies:
Overall, acquisitions and divestments since 2004 with a total transaction volume of around € 38 billion have helped cement the strategic change to a science and technology company. These also included the acquisition of AZ Electronic Materials, a leading supplier of high-tech materials for the electronics industry. A milestone in our growth strategy was the successful completion of the acquisition of Sigma-Aldrich in 2015, which has enabled us to become a leading company in the attractive Life Science industry. The aim of our strengthened Life Science business sector is to solve the greatest challenges in the industry globally. To this end, we now have a considerably broader range comprising more than 300,000 products offered via one of the industry's leading e-commerce platforms.
The complete overhaul of our brand is to communicate this new direction to our customers, partners and employees. A more self-confident and at the same time clearer tone of voice and the new visual appearance reflect our character as a vibrant science and technology company, ensuring that we are recognizable and remain visible as Merck. This investment in our Merck brand is also part of the strategic “Fit for 2018” transformation and growth program.
The strategic change is also indicated by the changing composition of sales, with a growing share of high-quality and innovative solutions in all three business sectors. The Healthcare business sector today generates around 60% of its sales with biopharmaceuticals. In 2006, there was only one such product, Erbitux®, which accounted for less than 10% of sales. The classic Chemicals business has increasingly become a premium materials business that offers Merck customers a wide range of value-adding products. Today, high-tech materials and Life Science tools make up around 80% of sales in the Life Science and Performance Materials business sectors. In 2006, the share was around 30%.
In addition, the geographic split of sales has changed, reflecting our mid- to long-term goal to further expand our strong market position in growth markets. In 2015, the growth markets of the reported regions Asia-Pacific and Latin America contributed 43% to Group sales.
With our three business sectors Healthcare, Life Science and Performance Materials we now hold leading positions in the corresponding markets. Our goal is to continue to generate sustainable and profitable growth. We intend to achieve this by growing organically and further developing our competencies, as well as by making targeted acquisitions that complement and expand existing strengths in meaningful ways. Building on leading products in all our businesses, we aim to generate income that is largely independent of the prevailing economic cycles. With innovative products and services and our unique combination of businesses, we have built the platforms to offer solutions to support global megatrends triggered for example by demographic changes or digitalization. Merck aims to drive innovations within the businesses as well as between and beyond the existing businesses. In order to foster innovations across the three businesses and external partners, an Innovation Center at Group headquarters in Darmstadt was opened in October 2015 (see magazine section of this Annual Report). The company also started a digitalization initiative aimed at driving digitalization within the business sectors and set up corresponding projects. A Chief Digital Officer was appointed in December 2015.
As Merck continues to grow in size and the business becomes increasingly global, we want Merck to be seen as ONE company. ONE Merck stands not only for a strong brand, but also comprises three other capability initiatives that are of strategic importance for the Group.
The capability initiative ONE Merck brand aims to strengthen the value of the Merck brand, to increase the company’s global visibility and reputation, and to become more attractive to customers, partners and talent. Our new brand orientation is a significant factor in achieving this goal: A self-confident and expressive design with a new logo and the “Vibrant M” as a distinguishing feature create a visual link between all our global businesses and products. This focus on Merck as our core brand will be supported by eliminating the former, separate division names (with the exception of the United States and Canada).
The framework for talent development, compensation and performance management is also to be harmonized globally (ONE Talent Development, Rewards and Performance Management). As part of this initiative, we established a consistent and integrated talent and performance management process and are proactively identifying and sourcing talent, as well as ensuring workforce diversity.
The goal of the third capability initiative ONE Process Harmonization, Standardization and Excellence is to better coordinate processes and apply them consistently. This is particularly the case with software applications. Continuous improvement will take place through benchmarking. This will allow us to adapt rapidly to business changes as well as to integrate future acquisitions into the company seamlessly and efficiently.
The importance of our global headquarters in Darmstadt is also to increase – along the lines of ONE Global Headquarters. Our headquarters is to become a central location for creativity, scientific exchange and innovation. With the new Innovation Center we have created a basis that will allow us to better use our employees’ innovation potential, optimize cross-functional and Group-wide collaboration on projects, and also give external innovators the opportunity to develop their ideas with support from Merck.
We aim to be a preferred global biopharmaceutical partner through an enduring commitment to transforming patients’ lives with innovative specialty medicines, leading brands and high-value solutions. Global megatrends such as world population growth and a general increase in life expectancy are bolstering the demand for our products. We are well-positioned for sustainable growth.
The first pillar of our strategy in Biopharma is to deliver innovation globally. We have redesigned our R&D operating model and improved the portfolio decision-making process. We have drastically improved the quality of our pipeline by aggressively pruning low probability assets and redirecting resources to priority programs. Efficiency in R&D has been strengthened with a focus on selected core therapeutic areas – oncology, immuno-oncology and immunology – and with the depth of talent in the respective Translational Innovation Platforms. We have also increased our focus on biomarker-driven programs to improve patient outcomes. Our development programs include avelumab, the anti-PD-L1 antibody that we are developing and will commercialize with Pfizer, and M7824, our first-in-class bi-functional fusion protein in immuno-oncology; tepotinib, a c-Met inhibitor in oncology; atacicept and BTKi447, a Bruton’s tyrosine kinase inhibitor, in immunology; and cladribine in multiple sclerosis.
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 strengthening our current portfolio. We look for partners who share our passion for innovation and whose expertise complements our existing portfolio, and who share our mission to discover treatments that improve patient lives.
We focus on balancing the right blend of internal capabilities and external partnerships, building strong collaborations with other leaders in industry including Pfizer, Genea and Biocartis, among others. Our integrated research and development capacity is strongly supported by partnering activities to complement our pipeline, strengthen our technology base and enhance our scientific capabilities.
The second pillar of our strategy is to maximize our existing portfolio in developed markets. In the Multiple Sclerosis franchise, the vision is to remain a leader by providing innovative solutions that include drugs, devices and services to help people living with multiple sclerosis. We plan to realize the potential of Rebif®, our top-selling product, in an increasingly competitive multiple sclerosis market. We now have full control of its promotion since the end of our collaboration with Pfizer in the United States in this field. We will position Rebif® as the best interferon-based therapeutic option for patients who suffer from the relapsing form of the disease. We are driving differentiation via smart injection devices and the first comprehensive support program for patients with multiple sclerosis including an e-health platform. In Fertility, our focus is on expanding market leadership and on providing innovative services and technologies beyond drugs to address patient needs and to improve outcomes beyond stimulation. In Oncology, we promote the value of Erbitux®, especially in Europe and Japan, and emphasize the importance of offering patients complete testing for RAS status in order to ensure optimal outcomes. Through the co-promotion of Xalkori® with Pfizer, we have entered the United States oncology market and will prepare for the future launch of avelumab, our anti-PD-L1 antibody across the major markets.
The third pillar of our Biopharma strategy is to expand further in growth markets. With a growing middle class, extended health care coverage, a shift towards chronic diseases, and rising demand for biologics, growth markets are a key driver for us. We are implementing strategic growth initiatives in our General Medicine and specialty medicine franchises to address specific needs. We are leveraging capabilities and local channels, for example by extending the breadth and depth of promotion in China, expanding our portfolio via regional and local licensing, and supporting market developments in Fertility. We are also investing selectively and growing our flagship brands with new formulations (Euthyrox® and Glucophage®), fixed-dose combinations (Concor®) and devices (Saizen®). And we are repatriating business, for example in China and in Russia, taking back the promotion of Merck products from industry partners where attractive.
Biosimilars is an attractive market in which we are well-positioned as we can build on existing strengths and capabilities across the biosimilars value chain. This comprises the ability to leverage internal assets or source capabilities from suppliers to ensure compliance with regulatory requirements, secure market access across key markets including growth markets, leverage commercial manufacturing capabilities and flexibility, as well as adopt a tailored go-to-market approach. In 2015, we made further progress with our biosimilars in clinical development. The first Phase III study for a biosimilar will start in the first quarter of 2016. We have established strategic alliances with Dr. Reddy’s in India to co-develop multiple cancer drugs as well as Bionovis in Brazil to supply the Brazilian market with biological products under the Product Development Partnership (PDP) policy of the Brazilian Ministry of Health. Moreover, we are committed to further expand the Biosimilars business through additional collaboration agreements and partnerships in the future.
Allergy remains a significant global problem as millions of people around the world suffer from allergies. Presently, the only way to prevent a potential worsening and chronic progression of the condition is Allergy Immunotherapy (AIT) comprising hyposensitization, desensitization and allergy immunization. Our Allergopharma business is a manufacturer of AIT diagnostics and prescription drugs. The market for causal allergy therapies is a global growth market. As expected by market researchers, the drivers are an increasing prevalence of allergies in a growing worldwide population as well as the growing use of Allergy Immunotherapy (AIT) in many emerging markets. A novel state-of-the-art production facility in Reinbek near Hamburg, will, from 2017 onwards advance global expansion and ensure that increasingly high manufacturing standards in the AIT industry are met. With its own research department and in cooperation with research institutes and other partners, Allergopharma is actively working on improving the efficacy, convenience and safety of current therapy options as well as on developing the next generation of drugs for allergen immunotherapy.
After strategically realigning our Consumer Health business in 2012 and 2013, we began pursuing an aggressive growth strategy as of 2014. This growth strategy is captured by “3 x 3”, indicating our aim to achieve a market share of at least 3% in each of our top markets (including Brazil, France, Germany, India, Indonesia, Mexico, Poland, and the United Kingdom), and at least three so-called “lovebrands” in leading positions within each respective market. An important milestone within the framework of this strategy was the transfer of the Neurobion® and Floratil® brands from Biopharma to Consumer Health in 2014. Following their transfer, both brands clearly demonstrated potential to focus more closely on consumer wishes and needs in core markets, an approach which we call “consumerization”. For instance, the growth of Floratil® in the key market of Brazil increased more than tenfold. Following this initial move, in 2015 further brand transfers – such as Vigantol in Germany and Europe or smaller local vitamin brands in Latin America and Southeast Asia – were successfully implemented. In 2015, the Consumer Health business again achieved very high organic sales growth, thus contributing noticeably to the growth of the Healthcare business sector. Further important components of implementing the “3 x 3” strategy are geographic expansion of existing brands into new markets, such as the market launch of the Bion® brand in Brazil throughout 2015, as well as possible tactical acquisitions, as long as these are in line with the strategic direction.
By adding Sigma-Aldrich to our existing Life Science business, we are now one of the leading players in the attractive global Life Science industry with a broad product range in attractive segments.
For 2016, the two major areas of focus for our Life Science business sector will be to execute the integration and to leverage the synergy potential of the acquisition. A seamless integration is of utmost importance to both customers and the organization. At our Capital Market Day in December 2015, we reiterated that we want to realize the announced synergies of approximately € 260 million within the third year after closing and that it is our ambition to be the profitability champion of the sector.
We want to create sustainable value that is based on three strong strategic levers that form the foundation for future top-line growth in Life Science: a broad, innovative portfolio, a balanced geographic footprint and excellent capabilities. Firstly, as regards the portfolio, with a catalog of more than 300,000 products, we now deliver many of the most highly-respected brands in the industry, such as Millipore, Sigma-Aldrich, Milli-Q, SAFC and BioReliance. Our offering covers every step of the biotech production chain, creating a complete end-to-end workflow. Secondly, through the acquisition of Sigma-Aldrich, we have significantly increased our geographic footprint, especially our presence in North America. Our geographic reach now consists of a presence in more than 60 countries. Building on the strengths of each legacy organization, we aim to increase our access to the Asian and Latin American processing market and the North American research market. Thirdly, our capabilities include excellent supply chain management able to deal with complexity, an outstanding e-commerce platform to simplify and optimize the customer experience and the expertise to manage regulatory barriers.
To best meet the needs of our customers and accelerate innovation, as of 2016 the teams responsible for Life Science innovation and product development are strategically organized around our customers – Research Solutions, Process Solutions and Applied Solutions. Our Research Solutions team is focused on helping customers to better understand biological function and disease through a complete portfolio of solutions that enable scientific discovery. Our Process Solutions team provides products that meet the highest quality and purity standards with extensive documentation and services to ensure regulatory compliance. Our Applied Solutions team is focused on supplying products and workflow solutions that streamline processes, lower costs and deliver consistent, reliable results for customers.
The demand for high-tech products in general and innovative display solutions in particular has seen high global growth in recent years. This trend is not expected to weaken in the coming years. Instead, we assume that increasing demand for these types of consumer goods will come from an expanding middle class in growth markets. Therefore, we aim to defend our position as the market and technology leader for liquid crystals and further expand it as far as possible.
Since the typical life cycle of liquid crystal mixtures is less than three years, innovation will remain the key success factor. Our liquid crystals pipeline is well-stocked with new technologies such as SA-VA (self-aligned vertical alignment) for large-area displays as well as UB-FFS (ultra-brightness fringe field switching), which has already achieved commercial success in tablets and smartphones. Apart from established applications in displays of mobile devices and televisions, we are working to use our expertise as the global market and technology leader to capture new fields of use for liquid crystal technology, for example for liquid crystal windows (LCWs) or mobile antennas.
Our OLED business, which is part of the Advanced Technologies business unit, posted strong, above-average growth in 2015. We want to further position ourselves in the OLED market and play a leading role in this market segment in the medium to long term. Lower production costs for OLED displays are a precondition for this. External partnerships will also be used in the future to ensure the required exchange of technology and expertise. This includes for example the partnership with Seiko Epson, which was signed in 2012. Merck and Seiko Epson together developed a technology to print OLEDs. As we expect OLED technology to increase in importance in the future, we are investing in the development of a comprehensive OLED portfolio. Among other things, we are investing in a new OLED production plant at our Darmstadt site, where we are planning to produce materials for modern flat screens and lighting starting in summer 2016.
The acquisition of AZ Electronic Materials in 2014 sustainably strengthened and diversified the portfolio and the market position of our Performance Materials business sector, also beyond the liquid crystals market. All integration measures were successfully implemented in 2014, adding a further premium business to the existing profitable businesses. The new Integrated Circuit Materials business unit offers ultrapure, innovative specialty chemicals and materials for use in integrated circuits (semiconductors) and equipment, in flat-panel displays, and for photolithographic printing. Its business model is similar to that of the other Performance Materials business units as it is based on innovation, customer proximity, high market share, and profitability in the growth areas of displays, semiconductors, organic electronics, and lighting. Additionally, the integration of the SAFC Hitech business of Sigma-Aldrich has complemented the product offering of the Integrated Circuit Materials business unit as a leading global supplier to the electronics and semiconductor industries.
Within our Pigments & Functional Materials business unit, the focus of decorative effect pigments is on market and technological leadership in clearly defined markets for pearl luster pigments, for instance in applications for high-quality automotive and industrial coatings. The main focus of functional materials is on niche applications in cosmetics, for example UV filters, insect protection, anti-aging, as well as technical functional materials such as laser marking and antistatic applications.
We are pursuing a conservative financial policy characterized by the following aspects:
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 maturing in 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 can use our € 2 billion commercial paper program to 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. Our € 15 billion Debt Issuance Program as one of the cornerstone financing vehicles enables us to issue bonds in Europe at short notice and at any time if markets allow. In addition, we issued hybrid bonds amounting to € 1.5 billion in 2014 and U.S. dollar bonds amounting to US$ 4 billion in 2015 outside the Debt Issuance Program in order to broaden the funding basis and to address different investor groups.
We mainly work with a well-diversified, financially stable and reliable banking group. 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, they are involved in important financing transactions, for instance the financing of the Sigma-Aldrich acquisition.
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 and an A rating from Standard & Poor’s (S&P), both with a negative outlook following the acquisition of Sigma-Aldrich. Within the next two to three years, it is of utmost importance to us to sharply reduce our debt and to regain the ratings we had prior to the Sigma-Aldrich acquisition.
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 follows 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 also aim for a target corridor of 20% to 25% of EPS pre exceptionals.