INFINITELY CURIOUS ANNUAL GENERAL MEETING 2017 SPEECH BY STEFAN OSCHMANN EXECUTIVE BOARD CHAIRMAN AND CEO

Transcription

1 1 INFINITELY CURIOUS ANNUAL GENERAL MEETING 2017 SPEECH BY STEFAN OSCHMANN EXECUTIVE BOARD CHAIRMAN AND CEO

2 Annual General Meeting 2017 Dear Shareholders, FRANKFURT AM MAIN APRIL 28, 2017 Check against delivery Merck is delivering. We defended our leadership position in display materials in a highly competitive environment. The integration of Sigma-Aldrich is exceeding all our expectations. And we have received the first approval for our new medicine Bavencio. As you can see, our strategy is working. Our company is well on track. With this, I warmly welcome you to the 22nd Annual General Meeting of Merck. I am pleased to report to you on an excellent fiscal Merck is a science and technology company driven by a passion for research and discovery. Scientific curiosity fuels us. We are convinced that technology can improve the lives of patients and create great benefit for our customers. And we know that we are just at the beginning of a rapid development to which we can contribute a great deal. Business results and share price performance Yet, as is customary at an Annual General Meeting, let s first discuss the figures. The most important thing in advance: We finished fiscal 2016 with record results and continued to grow profitably. We achieved all the financial targets that we had set for ourselves. Our sales increased by 17% to 15 billion. The acquisition of Sigma-Aldrich was responsible for this extraordinary growth. Organically, meaning without the effects of this acquisition, our sales grew by 3.2%, with all regions contributing. We suffered headwinds from negative exchange rate effects. They lowered our net sales by 2.6%. EBITDA pre exceptionals, our most important earnings figure, increased by nearly 24% to 4.5 billion. Business free cash flow rose by 20% to 3.3 billion. Net income soared by 46% to 1.6 billion. Thanks to this good business performance, we were able to lower our debt by more than 1 billion to 11.5 billion. We will continue to reduce our debt since this strengthens our good reputation in the financial markets. And it give us scope for entrepreneurial options. For you, dear shareholders, Merck shares were once again a worthwhile investment in Our share price rose by nearly 11%, outperforming the DAX by four percentage points and the relevant comparative index for the chemical industry by nearly seven percentage points. The comparison is even better with the corresponding pharmaceutical industry index, which fell by around 12%. As shareholders, we want you to participate directly in our good business performance. Therefore, we will propose to you today a 15 cent increase in the dividend to 1.20 the fifth increase in our dividend payment since As you can see, Merck is in excellent shape. Your company is doing well. That is above

3 4 5 all due to the accomplishments of our more than 50,000 employees who apply their strong expertise, engagement and passion as well as extraordinary scientific curiosity to manufacture and commercialize technologies that can make a difference in the lives of numerous people. On behalf of the Executive Board, I would like to cordially thank them all was a successful year. That applies to Merck as a whole. Yet it also applies to each of our three business sectors. Healthcare, Life Science and Performance Materials made important advances. Healthcare Healthcare consists of our business with prescription drugs in particular, as well as overthe-counter pharmaceuticals and allergy treatments. Healthcare performed well in Our net sales grew organically by 4.6%. However, primarily negative foreign exchange effects led to a slight decrease in sales. EBITDA pre exceptionals rose by 6.3% to 2.1 billion. Rebif for the treatment of relapsing forms of multiple sclerosis remains our top-selling product. Rebif is under high competitive pressure from oral therapies. Nevertheless, sales decreased organically by just 1.7% in The most important market for Rebif is North America, which accounts for 61% of sales. Here we generated organic growth of 2.1%. Our second top-selling product is the oncology drug Erbitux. Organically, sales of Erbitux increased by 1.1% in Last year, we committed ourselves to making this drug available to more patients, above all in growth markets. In April 2016, we presented positive results of a pivotal Phase III study in China. We thus achieved an important milestone in order to give further patients access to Erbitux. Another area of focus for Healthcare is the treatment of infertility. Our most important medicine in this field and simultaneously Healthcare s number three top-selling product is Gonal-f. It is the world s leading bioengineered hormone for the treatment of infertility. Organically, our sales of Gonal-f rose by an exceptionally high 12.4% in This was also favorably influenced by the temporary unavailability of two competing products in the United States. Fertility is a special business. To date, around 2.5 million babies have been born with the help of our products and technologies. In my opinion, there can be no nicer example of the success of our work. And in the future, we will have a lot to do in this area because around the world, people are postponing childbearing until later in life. Particularly in growth markets, we are therefore seeing steadily increasing demand for such therapies. At the same time, the fertility market is changing. Medicines are increasingly coming under price pressure. Patients are better informed. The importance of fertility technologies is growing. Therefore, we have adapted our strategy. We want to move from being a global market leader in medicines to a partner for the entire fertility therapy spectrum. So we are expanding our offering. Last year, we launched new fertility technologies. They make it possible to preserve human egg cells and embryos at the main stages of assisted reproductive technology and thus help even more people to realize their dream of having a child. Consumer Health, our business with over-thecounter pharmaceuticals, also grew organically in 2016, by 3.4%. The key driver was our vitamin preparation Neurobion. As you can see, the business with our existing portfolio is showing very solid organic growth. And that is important because good business performance gives us the scope we need to set our future course. We have formulated a clear strategy for Healthcare: We want to be a global supplier of innovative specialty products. This kind of a strategy of course impacts our portfolio. On Monday, we announced that we are selling our Biosimilars business to Fresenius. The entry into biosimilars was the right step when the prospects for our pharmaceutical research were unclear. For us, biosimilars was plan B. The framework conditions have now changed. Building up a biosimilars business is no longer a strategic priority in view of the good advances in our pharmaceutical research. Being a supplier of innovative specialty products means developing new therapies for unmet medical needs. In recent years, we have invested a great deal of time and energy in realigning our research activities. We set clear areas of focus: immunology, oncology and immuno-oncology. And we have introduced rigorous success criteria, which all research projects must meet. The hard work of recent years has now started bearing fruit. Last year, we submitted two new active ingredients for regulatory review: cladribine tablets for the treatment of multiple sclerosis in Europe, and our antibody avelumab for use in metastatic Merkel cell carcinoma a rare and highly aggressive form of skin cancer in Europe and the United States. In February of this year, the U.S. Food and Drug Administration (FDA) also accepted for priority review our regulatory submission of avelumab in the treatment of locally advanced or metastatic bladder cancer. On March 23, 2017 the day had arrived: On this date we achieved a milestone in the history of our company. The FDA approved Bavencio for the treatment of Merkel cell carcinoma. Bavencio is the brand name for our new drug based on avelumab. For us, this was a historic decision. Not only because

4 6 7 Bavencio is the first new medicine from Merck in many years. But mainly because it marks our entry into the immuno-oncology market. No other form of treatment in oncology promises so much potential. What makes immunotherapy so special? Previous cancer therapies, in other words surgery, chemotherapy and radiation, fight tumors head-on. Immunotherapy is different. It does not directly attack the tumor. Instead, it activates the body s immune system to fight the tumor. This is not a new concept. Yet we only became capable of harnessing it a few years ago. In connection with cancer, I am extremely cautious when it comes to using terms such as revolution or breakthrough. But in this case, they are appropriate. That s because immunotherapy is a breakthrough. In a certain proportion of patients, the medicines are effective over a longer period of time. However, we must also admit that many patients do not respond to the new drugs. We are therefore conducting further research in order to offer even better therapeutic options to more patients. The JAVELIN program for avelumab, which we are running with Pfizer, encompasses 30 ongoing clinical studies with more than 4,000 patients in over 15 tumor types. Nine of these are late-stage pivotal trials. And we are working hard to advance in further indications. Our research encompasses other areas besides oncology. We also made progress in immunology. In August 2016, we initiated a Phase IIa study of our investigational compound M2951, a so-called BTK inhibitor, for the treatment of patients with rheumatoid arthritis. Since December, we have been testing the same compound in a further Phase II study investigating the treatment of lupus, a rare autoimmune disease. And just a few weeks ago we started a third Phase II study in multiple sclerosis. As you can see, we are working on numerous projects in order to improve the lives of patients. The most recent approval of avelumab for the treatment of Merkel cell carcinoma encourages us to continue to vigorously advance our development program. Life Science Let s move to Life Science now. This business sector offers researchers and biotech companies everything they need to speed up science and biotech production processes. Our business is aligned with the needs of our customers. The Research Solutions business area 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. Life Science is a very attractive business for Merck. The market is worth around 100 billion and offers stable, recurring sales and cash flows. We have a loyal customer base of more than 1 million customers, whom we offer more than 300,000 products. Moreover, we have a highly efficient supply chain through which we can deliver standard products in 24 to 48 hours worldwide. Our e-commerce platform sigmaaldrich.com is one of the leading online distributors worldwide. Nearly 80% of addressable legacy Merck Millipore products are now also available there. Our Life Science business is developing superbly. In 2016, sales increased by 68.6% to 5.7 billion, primarily as a result of the acquisition of Sigma-Aldrich. Organically, our business grew by 6.3%. The key driver was Process Solutions. EBITDA pre exceptionals totaled 1.7 billion, 93% more than in Life Science will grow further. In line with our business strategy, we are focusing on three topics. First, we want to drive our core business in all three business areas forward. To this end, we are working on the further development of our product portfolio and the optimization of our supply chain, for example. Secondly, we want to push ahead with the integration of Sigma-Aldrich. The overriding principle here is: Nothing is to change for our customers. Unless of course, it makes their experience better. We can already see today that the integration is progressing better than expected. All key positions have been filled. The integration teams are working seamlessly. All of this has been paying off: At the end of 2016, we had already achieved 105 million as compared with the originally planned amount of 90 million in annually recurring cost synergies. The combined business is not only more efficient, it is also stronger. Therefore, we now assume that as of 2018, total annual synergies from the acquisition will total 280 million instead of 260 million. Thirdly, we want to establish new pillars of growth for Life Science. For this, we have launched strategic initiatives. I d like to briefly introduce one of them to you: our single-use solutions for biopharma customers. What are they for? In the past, huge stainless steel bioreactors were needed for the production of medicinal antibodies. This technology has proved its worth. Yet in many cases, this massive equipment is no longer needed since we can produce a lot more antibodies per liter today than we could just a few years ago. Additionally, the bioreactors are very complex to operate, especially when changes are made to the production unit or cleaning is necessary. Today, in a lot of cases biopharmaceutical production is easier and more efficient, thanks to our single-use solutions. The time spent cleaning has dropped from up to five days to less than three hours. The core element of the product is a replaceable plastic container, in which the actual production process takes place. Or, as our colleagues say, the world s most complex plastic bag.

5 8 9 We are convinced of this technology s potential. After all, new precision medicines require efficient production processes for small batches. And that s exactly what we offer. Plus, production units based on single-use solutions can be set up quickly nearly anywhere in the world. And they re a good way to avoid lengthy supply chains, especially in the event of serious epidemics. Performance Materials Performance Materials, our specialty chemicals business, is also working on the technologies of the future. The business sector comprises four business units: Display Materials is the global market and technology leader in liquid crystals. Integrated Circuit Materials manufactures materials for faster microchips, among other things. Pigments & Functional Materials focuses mainly on decorative effect pigments. And Advanced Technologies develops highly promising products such as OLED materials. Or to put it in a nutshell: Performance Materials is developing materials for the technologies of the future. In 2016, our Performance Materials sales decreased by 1.8%, primarily as a result of declining demand in the Display Materials business. By contrast, sales in Integrated Circuit Materials, Pigments & Functional Materials and Advanced Technologies grew organically. In combination, these three business units are meanwhile almost as large as our Display Materials business. Overall, EBITDA pre exceptionals of Performance Materials amounted to 1.1 billion. We are working to sustainably secure our market and technological leadership in liquid crystals and to resume growth. To this end we are developing new technologies. One example is our SA-VA technology for largearea displays. It is environmentally friendly, saves resources and is efficient. And its market launch is expected this year. Moreover, with our LC2021 program, we are entering into new fields of application for instance liquid crystal windows, which regulate incident light or switch to opague at the push of a button. We are currently investing 15 million in the construction of a new production plant for liquid crystal window modules in Veldhoven, the Netherlands. Liquid crystals are and will remain a pillar of our business. But we are also investing in new, high-potential technologies. For instance in organic light-emitting diodes or OLEDs for short. OLEDs offer entirely new possibilities for displays and lighting. In contrast to coventional lamps that generate light through filaments or gas discharge, OLEDs consist of flat, very thin organic layers. These layers are applied to glass or plastic, they are flexible and illuminate as a uniform surface. This will create entirely new possibilities, for example luminous wallpaper or bendable displays. For us it is clear that we want to become the leading supplier of OLED materials. The opening of our new production unit in Darmstadt in September was an important step on our journey towards this goal. Performance Materials is developing materials for the technologies of the future. Let me give you a further example of what this specifically means. May I present to you the Merck Concept Car. Please don t misunderstand me, we are not going to start building cars. We developed the Concept Car in order to illustrate the Merck technologies that could be used in the cars of tomorrow. For instance, liquid crystal antennas with particularly high data transmission speeds a prerequisite for autonomous driving. Or materials for chips and intelligent sensors. Or OLED materials that transform surfaces into a brilliant displays with just one swipe. Or organic solar cells on the roof to support energy supply. Automotive technology is currently developing rapidly. Around the world, scientists and engineers are working to make mobility safer, more efficient and eco-friendlier. And we are working on the materials that will enable these ideas and approaches to become reality. I recommend you to experience our Concept Car yourself. Take a seat inside it by putting on a pair of virtual reality glasses outside in the exhibition area. Corporate Responsibility In terms of business performance, 2016 was a successful year for Merck. We generated record results and launched new technologies. Yet we are also paying attention to more than just the immediate needs of our business. After all, our nearly 350 years of history as a company have taught us that sustainable business success is always based on responsible actions. That is why we are committed to supporting society in three core areas, namely health, the environment, and culture & education. A main focus of our engagement in the health area is the fight against schistosomiasis. This is an insidious worm disease that around 260 million people suffer from worldwide. Since 2007, we have been donating praziquantel tablets to the World Health Organization to treat the disease. Last October, we donated our 500 millionth tablet. To date, we have made the treatment of nearly 100 million patients, primarily school children, possible. And ten days ago, we entered into an agreement with the Australian Institute of Tropical Health and Medicine and the Baylor College of Medicine in the United States. Together, we want to develop new diagnostic tools in order to better identify patients in need of treatment for schistosomiasis. We are proud of our engagement in the health area also because it has been recognized by independent third parties. For example, the Access to Medicine Foundation. In its latest index, which assesses the efforts of pharmaceutical companies to improve global access to medicine, we ranked fourth, thus moving up two places since the last survey was conducted in You will find more in-depth

6 10 11 information on our social commitment in our new CR Report, which we published today. Outlook for 2017 Ladies and gentlemen, I would now like to discuss the outlook for the current fiscal year with you. Economic forecasts are by nature always subject to uncertainty and that applies especially to The direction of the new administration in Washington, D.C. is still unclear. In France, voters will soon elect their new president possibly with a significant impact on the future of the European Union. And in many countries, we are seeing efforts to erect new trade barriers. Last year, free trade was repeatedly the subject of debate in Germany as well. All of this is very worrying to me. The belief that trade restrictions can protect or even create economic prosperity is a dangerous illusion. Our world, our economies, our value chains are far too highly integrated. Our liquid crystals are a good example. When a customer in Brazil switches on his or her smartphone for the first time, the display materials have already completed a long journey. That s because we conduct research and development mainly in Darmstadt. This is also where we manufacture the individual chemical compounds. We then produce in Asia the specific material mixtures for our customers. This is also where the displays and the corresponding devices are made before being shipped around the world. What would new trade barriers mean for this value chain and many others? What would they mean for the affected companies and ultimately for the affected employees? Ladies and gentlemen, Those who build walls and impose tariffs may indeed make short-term profits. But in the long term, they will achieve exactly the opposite. We need open markets. After all, free trade and the international division of labor permit growth. And growth is essential, especially in times of political uncertainty. What does all of this mean for Merck? First of all: Merck is well-positioned. The opportunities and risks of our business portfolio are balanced. Our sales split is evenly balanced across all the world s key economic regions. And we are working on promising future technologies. We can therefore look to the future with confidence. Today I will give you a qualitative forecast for the current year. We will publish concrete guidance with the results of the first quarter on May 18. For 2017, we expect slight to moderate organic sales growth. We do not expect foreign exchange to have any notable impact on our sales. EBITDA pre exceptionals should remain at the level of Our business priorities are clear. In Healthcare, we will advance the development of new medicines. The approval of avelumab for the treatment of Merkel cell carcinoma in the United States was a key initial breakthrough. This year we expect further decisions in the United States and Europe. Yet we also know that we will only be able to realize the full potential of our research and development program in the coming years. That s why we will be investing substantially in the further development of our projects. We are convinced that these investments will pay off in the coming years. In Life Science, we re focusing on our threepillar strategy of further expanding the core business, continuing the integration of Sigma- Aldrich, and entering new growth areas. Above all, the seamless integration of Sigma- Aldrich has the highest priority. We still have lot to do, for instance in the harmonization of our IT platform. In Performance Materials, we intend to defend our position as the market and technology leader in display materials. The recovery in the display market, which became visible towards the end of 2016, should have a positive effect on the Liquid Crystals business. We know, however, that our market shares in recent years were very high. At the present time we cannot rule out a further normalization. We will therefore forge ahead with new technologies in all four business units, for instance OLED. Digital technology Merck is and remains a company driven by a passion for research and discovery. We are rising to the greatest scientific challenges in healthcare, life science and performance materials. And that means we are driving digital technology forward in all our businesses. Digital transformation is changing the requirements of our customers. Regardless of whether they are scientists or industry customers all will demand from us the convenience and the benefit that they enjoy with digital products and services in their personal lives. At the same time, our competitive situation is also changing. The number of companies competing with us is growing. Of course, we must continue to benchmark ourselves against the largest players in the industry. But that is no longer enough. Agile start-ups and high-tech companies from other sectors are now also competitors that must be taken seriously. In addition, the speed of change is also far greater. We are accustomed to thinking in linear terms. Linear means changes take place at a steady, calculable speed. But that no longer holds true today. New technologies are developing at lightning speed and, if successful, can penetrate the market within no time. Just making good products is no longer enough in a digital environment. The accompanying software and services are no less important, because they provide access to data. And that is what counts. Data are the oil of the digital economy. They permit a deeper

7 12 13 understanding of customer needs. They are the basis for improving existing and developing new businesses. And that is precisely what we want to do. Digital transformation is a big opportunity for us to improve our products and services, to make our processes more efficient and to set up new business models. Our development processes in oncology research are a good example. I ve already mentioned the fact that some patients respond to immunotherapies while others do not. We do not know why this is the case. To do so, we have to understand the interactions between the immune system of the respective patient and his/her tumor. This is an extremely complex problem. We have to evaluate massive amounts of data. That is why we are building a high-performance data and analysis platform. This is essential in order to develop new therapies that will help even more people. We are working on new digital technologies in all of our business sectors. Yet we also know that digital transformation involves more than just changes in technology. It means we also need to adapt our working style. We need better cooperation across organizational boundaries as we do not want corporate group structures to cause promising ideas to fail. Scientific curiosity and a passion for research sometimes need scope to unfold. That is what our Innovation Center is all about. It is our proverbial garage in which employees and external start-ups can tinker and realize their ideas. For instance the idea that Brian Gitta came up with. Brian is from Kampala, Uganda. As a student, he suddenly came down with symptoms of malaria. When diagnosed early, malaria can be treated with drugs. But this is precisely where the problem lies because the instruments needed for this are often not available in rural regions of Africa. Brian started to look for alternatives. His curiosity had been sparked. And he developed an idea to detect malaria infections with the help of light. Together with fellow students, Brian developed a finger scanner that uses infrared sensors to scan red blood cells for malaria protozoa. The diagnosis appears on the smartphone display after just a few minutes. This method is much faster, economical and accessible than the previous one. Brian and his team recognized the potential of this technology. The team named the finger scanner Matibabu, which means medical clinic in Swahili, and then founded the start-up thinkit. Last year, they took part in our Accelerator program at our Innovation Center. Together with Merck experts, they are fine-tuning their technology and working on their business model. By collaborating with start-ups such as thinkit, we are learning a great deal. A steep learning curve is important. However, we do not only want to learn. We also want to benefit economically from emerging tech companies. That is why we doubled the volume of our previous Biopharma Ventures Fund from 150 million to 300 million last year. And we expanded the investment spectrum. The new Merck Ventures Fund now invests both in young companies operating in the fields of our Healthcare, Life Science and Performance Materials businesses, as well as in further highly promising tech firms. Next year we will be celebrating the 350th anniversary of our company. Over the course of three and half centuries, a pharmacy in Darmstadt has developed into a science and technology company with more than 50,000 employees in 66 countries. This is an amazing entrepreneurial success story of the Merck family. It is the outcome of a tremendous research spirit and strong passion for discovery. We have technological possibilities today that no one dared to dream of just a few years ago. Whether in precision medicine, gene editing or OLEDs, we are at the threshold of a technological development whose potential we cannot even estimate yet. But I do know one thing: Scientific curiosity will remain our driving force. We at Merck are co-creating many technologies. We are driving the change forward. As we do so, I would be pleased if you would continue to support us as shareholders.

8 14

9 Merck Group Communications Darmstadt