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Objectives and Strategies

We want to advance technologies for a better life. Based on scientific research and in collaboration with partners, we are focusing on specialty products in healthcare, life science and performance materials.

General principles and Group strategy

General principles

Merck is a vibrant science and technology company. 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 values-based and economically sustainable corporate governance, has been anchored in our new brand promise since 2015, and steers the strategic development of the Group.

Our annual strategic planning process follows firmly defined principles. Our business portfolio must always be balanced so that it reflects an optimum mix of entrepreneurial opportunities and risks. 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 expanding our presence in global growth markets. This exemplifies the long-term direction of our Group strategy. We want to continue the nearly 350-year-old success story of Merck into future generations and to achieve sustainable profitable growth. The partner structure of Merck KGaA with members of the Merck family as personally liable partners also contributes to this. It requires the Executive Board, whose members are also personally liable partners, to pay special attention to the long-term development of value.

For us, the principle of sustainability applies not only to economic aspects, but also encompasses corporate responsibility. We pursue three strategic spheres of activity: health, the environment and culture. 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 solve global challenges, from urbanization to aging populations.

Group strategy

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.

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, Merck continues 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 exceptionals is greater than 2, unless divestments could be used to finance them. By 2018, we aim to reduce our debt level to below 2 again.

Our Group strategy aims to resolutely continue the transformation of Merck into a specialized technology company and to position the company as a leading player in a changing market environment. For this purpose, we set up the Group Strategy & Transformation function in 2016. It unites the previously separately managed units Strategy, Innovation and Digitalization, and is designed to ensure the successful and timely implementation of core strategic projects. We have assigned these projects to three areas of key priority, namely “Performance”, “People” and “Technology”.

“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. “Performance” is illustrated by the rapid and seamless integration of Sigma-Aldrich into our Life Science business as well as the realization of the associated ­synergies. We have progressed here faster than planned. In addition, previously unplanned top-line synergies are expected to ­contribute an additional € 20 million to earnings by the end of 2018. Consequently, total synergies from the Sigma-Aldrich acquisition will amount to € 280 million instead of originally € 260 million per year.

Merck’s growth strategy calls for a work culture that values diversity, promotes collaboration and responds flexibly to changing requirements. That’s because in today’s global knowledge society, qualified and motivated people are a crucial factor for entrepreneurial success, especially in a science and technology company like Merck. As a key priority area, “People” includes the further development of people management practices and creating an environment where innovation and creativity can thrive. We are paying particularly close attention to our leadership culture, talent pipeline and strengthening collaboration across national and departmental borders, for example through flexible work models or the use of a modern communication infrastructure.

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 customers, business associates and patients. 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 (Big Data).

Additionally, we are working Group-wide to expand the physical and virtual infrastructure for technology-driven growth. The center­piece will be formed by the Innovation Center in Darmstadt. ­Currently under construction, this 7,000 m2 building is scheduled for completion by the end of 2017. Until its opening, our modular Innovation Center, which opened in 2015, offers a platform for the development of new technologies, for instance within the scope of our Accelerator program. Through this initiative and our expertise in science and technology, we support start-ups in transforming their visions into viable business models.

In 2016, we expanded our existing Biopharma venture fund to all three business sectors, increasing the total funding volume to € 300 million. Additionally, businesses beyond our current portfolio represent the fourth investment arm of the new Merck Ventures fund.

Capability initiatives

In 2013, Merck introduced four capability initiatives. They address topics that are of strategic importance to the performance of the entire company: The capability initiatives ONE Merck brand, ONE Talent Development, Rewards, and Performance Management, ONE Process Harmonization, and ONE Global Headquarters continue to drive important change or have started to evolve into regular activities. In October 2015, we introduced a fundamental revision of our brand design along with a simplified brand architecture, which we are currently implementing globally at all levels. In this context, we launched the digital brand campaign in 2016 called “Breakthroughs begin with curiosity” (curiosity.merckgroup.com), which puts the spotlight on scientific curiosity and passion for discovery as the driving forces of innovations.

Business strategies

Healthcare strategy

Global megatrends such as a growing world population and general increase in life expectancy are driving the demand for our healthcare products, namely biopharmaceuticals primarily for high unmet medical needs as well as consumer health brands that reflect the rising demand for preventive healthcare from an increasingly health-­conscious society.

To meet these demands and appropriately respond to the dynamics of our healthcare markets, we have significantly transformed our Healthcare business sector in recent years. We are driving pipeline projects with the aim of bringing new groundbreaking medicines to patients, maximizing our existing portfolio and continuing our expansion in growth markets.

Our Healthcare business sector comprises the four businesses Biopharma, Consumer Health, Biosimilars, 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.

Our ambition in Healthcare is to become a global specialty innovator, to operate in therapeutic areas with significant unmet medical needs and to bring significant value to patients and consumers. Therefore, we invest heavily in research and development to discover new treatment options and improve existing ones. We are committed to working with our stakeholders and our partners to ensure that people can access the medicines they need to stay healthy and live longer.

In order to succeed in these areas, we seek sustainable ways to leverage our size, global set-up and innovation power. Here, striking the balance between innovation and operational excellence will be key. We are pursuing a comprehensive effort to further enhance our focus on customers. To boost customer intimacy, we are strengthening our relationships with healthcare professionals and building capabilities in digital, predictive and Big Data analytics.

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 innovation products, sales in growth markets such as China will be driven by our mature specialty, established biologics and broad general medicine 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 being a truly global leader. For example, with the co-promotion of Xalkori®with Pfizer, we have entered the United States oncology market, which is helping us to prepare for the future launch of avelumab, our anti-PD-L1 antibody.

The second pillar of our strategy is to develop specialty assets in early- and late-stage clinical development. Here, we are concentrating our efforts on oncology and immunology as well as ensuring we remain a relevant player in our core therapeutic areas. 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, neurology and immunology. 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 immunology and neurology include cladribine tablets, with a first-of-its-kind dosing regimen that serves as an important therapeutic option for patients with relapsing-remitting multiple sclerosis, and atacicept as a potential therapy of choice for lupus patients with high disease activity.

The third pillar of our strategy is innovation. Our aspiration is to develop high-quality, first-to-market and best-in-disease assets, and to build a portfolio in each of our chosen therapeutic areas. We have streamlined our pipeline and upgraded 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 medical 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 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 and Genea.

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 customers will be vital to achieving our objective of becoming a global specialty innovator.

Merck is in advanced stages of negotiations to divest the ­Biosimilars business and the transaction is expected to close in 2017.

Life Science strategy

As a leading business in the € 100 billion life science industry, the purpose of the Life Science business sector is to solve the toughest problems in life science by collaborating with the global scientific community. To best meet the needs of our customers and accelerate innovation, the business areas responsible for life science innovation and product development are strategically organized around our customers. Research Solutions focuses on academia and pharma­ceutical research institutions. Process Solutions markets products for the entire pharmaceutical production value chain. Applied Solutions serves clinical and diagnostic testing laboratories as well as the food and environmental industries. With an expanded portfolio of more than 300,000 products, most of which are available on our industry leading e-commerce platform sigmaaldrich.com, Life Science offers solutions, services and expertise across the entire biopharma value chain.

Our strategy focuses on three areas: driving our core business; realizing the planned synergies from the Merck Millipore and ­Sigma-Aldrich integration by the end of 2018, and establishing new pillars of growth.

To grow our portfolios, we are refreshing our operating model and go-to-market strategy. Additionally, we will strengthen key capabilities across Life Science by optimizing supply chain performance to align service levels in Research Solutions and Applied Solutions. In Process Solutions, we are showing strong business continuity and upgrading quality performance in specific areas. Our innovation capabilities remain critical for future growth and we will leverage intellectual property as a strategy in key areas such as gene editing. Information technology is a core capability for Life Science as we work to improve our eCommerce, digital marketing and analytics competences. Here we are building on and further expanding our leadership position from legacy Sigma-Aldrich.

We have completed the first of three years of integration and have made tremendous progress with all relevant roles in the new organization in place and consolidation of integration teams into respective business functions. The value of the integration is evident, with a significant increase in sales and the realization of synergies faster than anticipated through multiple geographic synergy initiatives, the eCommerce platform and complementary customer accounts. We continue to focus on basic process harmonization throughout the organization for employees and customer satisfaction.

Based on a broad assessment of the market and competitive landscape and key industry trends, we have identified six strategic initiatives to drive future growth. These include gene editing and cell therapy as well as end-to-end solutions, where we aim to be the partner of choice to accelerate product and drug development. We are focused on completing our end-to-end offering of early and late stage process development and facility design services for accelerating local drug production. In addition, we are creating a new connected lab ecosystem to solve laboratory pain points such as data collection, documentation and replenishment.

Performance Materials strategy

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 and will also continue to dominate the effect pigments market in applications for coatings.

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 also in the coming years. 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. Our eco-friendly, resource-conserving and efficient liquid crystal technology SA-VA (self-aligned vertical alignment) for large-area displays is the next technology, with which the first products are expected on the market in 2017.

The Integrated Circuit Materials business unit supports the entire semiconductor industry with a portfolio of customized solutions. There are limits to further increasing the capacity of conventional silicon chips. At the same time, the costs, which for modern chips today already amount to more than 50% of manufacturing costs, are no longer declining at the same pace as before. This offers us the opportunity to develop novel materials that allow our customers to produce more powerful chips on the one hand, and to counteract rising costs with innovative processes on the other hand. Photo­lithography, deposition materials and dielectrics can increase semi­conductor efficiency. Packaging materials are becoming increasingly important for the development of 3D chip variants. This is precisely where we have strengthened our portfolio through the acquisition of Ormet Circuits.

In the Pigments & Functional Materials business unit, we are further expanding our leading position in effect pigments for automotive coatings. We are continuing to defend our good market position in pearlescent pigments for plastics, printing and cosmetics applications. Here we are concentrating on high-quality products and on optimizing the supply chain. 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 (such as laser marking and antistatic applications). Collaborations with external partners are particularly attractive here.

Our Advanced Technologies business unit aims to develop profitable future businesses – both for Performance Materials and for Merck’s other business sectors. These also include the further development of OLED materials as well as organic photovoltaics. In 2016, we realigned our projects for future business fields to megatrends such as miniaturization and the Internet of Things.

Strategic initiatives

The two strategic initiatives OLED (organic light-emitting diodes) and LC 2021 are to significantly contribute to our future growth and continue to generate attractive margins. It is our declared goal to become the leading supplier of OLED materials. The commissioning of our new production plant for OLED materials in Darmstadt, which significantly increases our production capacity, has brought us an important step closer to this goal. The technology has the potential to change the future for displays and lighting. Intense colors, an especially deep black, thin structure, flexible use and low energy consumption are just some of the advantages offered by self-luminous OLED displays. OLED lighting applications score high with thin, filigree, lightweight lighting panels and a natural-­appearing color spectrum. 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 hand. First and foremost, this comprises liquid crystal windows. In Veldhoven, the Netherlands, we are establishing our own production for modules used in sun protection and privacy control variants. It is scheduled to be commissioned at the end of 2017.

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 can use a € 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. In this context, the bond market generally represents a key element. However, owing to our focus on deleveraging, no bonds were issued in 2016. In the past, Merck has mainly focused on bond issues in Europe. 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.

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 and an A rating from Standard & Poor’s (S&P), both with a stable outlook. In addition, the European rating agency Scope began covering our credit rating in 2016. The rating is A- with a stable outlook. 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.

Dividend policy

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 exceptionals.