Delivering on Efficiency to Create Value Stefan Oschmann Head of Pharmaceuticals London, September 20, 2012
Agenda 1. Overview Merck Group 2. Merck Serono strengths and revenue trends 3. Transforming Merck Serono 4. Conclusion and summary
Merck Group We have added scale while strengthening the attractiveness of assets in our portfolio 2002 Revenues 7.5 bn Transaction volume 2011 Revenues 10.3 bn Laboratory Distribution Divestments Millipore Merck Millipore Life Science Products Analytics & Reagents Electronic Chemicals Pigments Liquid Crystals CropBioscience 7 bn 16 bn Performance Materials Consumer Health Consumer Health Generics Acquisitions Serono Merck Serono Ethicals Theramex divested merged acquired 3
Agenda 1. Overview Merck Group 2. Merck Serono strengths and revenue trends 3. Transforming Merck Serono 4. Conclusion and summary
Merck Serono Merck Serono has many operational strengths Leadership positions and attractive franchises High exposure to biologic drugs Well-established products and brands in key areas and markets Global footprint - high percentage of revenues derived from emerging markets positively benefits overall growth profile ~2/3 of Merck Serono s drug portfolio are biologics 65% Biologics Neurodegenerative Diseases Oncology Fertility Endocrinology 35% High exposure to Biologics provides stability Small molecules Cardiometabolic Care Endocrinology 5
Merck Serono Lack of patent cliff provides resiliency to revenue streams Significantly less exposure to patent cliff compared to industry 25% 20% 15% 10% 5% 0% Sales lost to patent expiries as a % of 2010 group revenue Merck Big Pharma Key products protected for next three years - patent expiries: Rebif First formulation: EU 2015, US 2022 HSA-free* formulation: patent application pending; tentative expiry date 2024 (US, EU) Erbitux Data exclusivity: EU 2014, Japan 2016 (Post Marketing Surveillance) Gonal-f EU 2009, USA 2015 Strong brands such as Gonal-f provide additional protection 2010-2011 2010-2012 2010-2013 2010-2014 2010-2015 Source: Sell-side research on Merck KGaA, June 23, 2011; corporate reports; Big Pharma incl. AstraZeneca, Bristol-Myers Squibb, Eli Lilly, GlaxoSmithKline, Merck & Co., Pfizer, Roche, Sanofi *human serum albumin - free 6
Merck Serono - Rebif Growth in the United States drives overall sales [ m] 300 200 100 North America Price increase Price increase Price Volume Currency Global sales of 922 m in H1 2012 (+6 % organic) Strong performance in US Market shares stabilizing Sales in Europe slightly declining Trend 0 Q3 2011 Q4 2011 Q1 2012 Q2 2012 [ m] 200 Europe Q2 performance Pricing pressures partly off-set by volume increase Growth 2012E: ~3 % organic sales growth 150 100 Price Volume 50 0 Q3 2011 Q4 2011 Q1 2012 Q2 2012 7
Merck Serono - Erbitux Emerging Markets strong, European sales weaker due to scale-down in Southern EU [ m] 250,0 200,0 150,0 100,0 50,0 Q2 y-o-y organic growth +28.5% +15.9% -1.0% Global sales of 439 m in H1 2012 (+4 % organic) Patient shares above 50% in KRAS wt mcrc and SCCHN in key EU markets Growth 2012E: 1 4 % organic growth Filing for approval of Erbitux in head and neck cancer accepted for priority review in Japan 0,0 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 RoW Emerging Markets Europe 8
Merck Serono - Portfolio Over half of our portfolio is generating strong performance and will continue to grow 2011 Sales by business unit +3% organic growth +7% organic growth Key growth drivers ( m) Organic growth Gonal-f 526 +5 % Concor 397 +5 % 46% 54% Glucophage Endocrinology 346 342 +9 % +10 % Rebif & Erbitux All other Merck Serono products We have good assets that will continue to grow 9
Merck Serono H1 2012 Emerging Markets is an increasing share of our sales and will drive attractive growth Sales by geography, organic growth rates Emerging Markets, mainly driven by Fertility and CMC/GM franchises Europe 43 %* 1,267 1,302-3 % North America benefitting especially from price increases in US Emerging Markets North America 29 % 21 % 858 760 637 515 +10% +15 % More than off-setting ongoing price erosion in Europe, triggered by general austerity measures and tighter budget control RoW 7 % 201 163 +17 % H1 2012 H1 2011 Emerging Markets = Latin America + Asia (w/o Japan) ** ROW = Japan, Oceania, Australia, Africa 10 * Percentage of total sales
Merck Serono H1 2012 Good underlying business momentum [ m] H1 2012 H1 2011 Δ Sales 2,964 2,740 8% EBITDA 632 742-15% One-time items 201 26 EBITDA pre 833 768 8% % of sales 28.1% 28.0% Healthy organic sales growth (+5%) Reported EBITDA affected by restructuring costs EBITDA pre growth spurred by Tight control of marketing and selling spending Controlled spending in R&D Efficiency gains yet to come 11 EBITDA pre: EBITDA pre one-time items
Agenda 1. Overview Merck Group 2. Merck Serono strengths and revenue trends 3. Transforming Merck Serono 4. Conclusion and summary
Merck Serono Our ability to drive improved profitability is critical to ensure our future competitiveness bn Merck Serono revenues and profitability since 2007 6,0 5,754 5,920 5,5 5,0 4,5 4,480 5,014 5,345 2007-2011 Revenues: + 1,440m adj. OP: + 211m 1,0 1,125 1,197 1,002 1,279 1,336 0,5 0,0 2007 2008 2009 2010 2011 Revenue Adj. Operating profit (underlying Core OR) Lack of effective operating leverage despite good top-line growth 13
Merck Serono We have a sense of urgency to deliver on efficiency 2012 2013 2014 2012-2013 Stable revenue and healthy margins Attractive double-digit growth by Emerging Markets Defense of Rebif franchise 2014 and beyond Competitive landscape in multiple sclerosis potentially intensifying Potential new Erbitux competition Further maturing of other product lines Continued growth from Erbitux Solid performance from Endocrinology and Fertility franchises 14 We have a two year window to deliver on efficiency
Merck Serono Breakdown of Merck Serono net cost savings through 2014 2014E Net savings Merck Serono by cost type 300m 200m 120 R&D P&L line: R&D 90 50m 20 30 110 180 Commercial operations P&L line: SG&A 2012E 2013E 2014E 300 m of net cost savings by 2014 15
Merck Serono SG&A Commercial operations will drive ~60% of Merck Serono s net cost savings 2014E Net savings in SG&A split into: Cost savings in commercial operations: Headquarter related costs ~20% Trim headquarter costs Eliminate double functions across the whole organization Regional country costs ~80% Downsize resources in administration and marketing along with the globalization of the organization Ensure appropriate levels of customer facing contacts 180 m of cost savings from Commercial Operations by 2014 16
Merck Serono R&D We plan to deliver increased output with substantially fewer R&D personnel R&D Costs m 1 Distribution 2014E 2 928 ~ 120m 808 Fixed costs (mainly headcount related) Variable costs (mainly project related) ~45% ~55% 2011A 2014E 1 Excludes local R&D, TechOps and other, totaling 297m in 2011, leading to a total annual R&D spend of 1.225m 2 Excluding local R&D, TechOps and other spend Headcount decrease drives fixed cost base reduction 17
Restructuring update We have made significant progress in implementing efficiency measures 2012 2013 2014 2015 2016-18 Efficiency Restructuring targets for Merck Serono and Merck Group Geneva headquarters closure Restructuring targets for Consumer Health Organic growth & pipeline Refreshed strategy for Rebif and other brands Improved franchise management (fertility, endocrinology, Emerging Markets) First major pipeline review done In-licensing of ONO-4641, TH-302 and Sym004 Biosimilar collaboration with Dr. Reddy s Cultural & organizational change Globalized functions in R&D and global organization Introduction of new incentive schemes Hiring of key personnel in level 2 and 3 18
Merck Serono - Pipeline We have begun the process of rebuilding our pipeline also through partnering activities Phase I Phase II Phase III TH-302 (cancer) Pimasertib (cancer) Sym 004 (SSCHN) Renewed in-licensing activity following the arrival of new Merck Serono management Pimasertib/PI3K (cancer) MEK Inhibitor (cancer) c-met KI (cancer) NHS-IL 12 (cancer) PI-2301 (MS) Fc-IFNbeta (MS) Sym 004 (mcrc) TH-302 (PC) Pimasertib (PC) Cilengitide (NSCLC) DI17E6 (mcrc) DI17E6 (mcrpc) recently in-licensed existing portfolio TH-302 (STS) Interested in predominantly phase I/II projects, also niche indications that are less attractive to big pharma Merck Serono offers strong expertise, particular in neurology and oncology Flexible approach to collaboration details IFNbeta XR (MS) ATX-MS-1467 (MS) Sprifermin (OA) ONO-4641 (MS) Atacicept (SLE) Sprifermin (CIR) Stimuvax (NSCLC) Cilengitide (GBM) Kuvan (PKU ped.) Recent deals with Ono Pharmaceuticals, Threshold Pharmaceuticals and Symphogen Pipeline has further improved, but significant work remains 19
Merck Serono - Biosimilars Alliance with Dr. Reddy s: Merck enters growing biosimilars market Rationale: Biosimilars market is attractive Focus on monoclonal antibodies in oncology + Experience in biosimilars Strength in generics Co-development agreement of Merck Serono and Dr. Reddy s Co-promotion rights in US and global marketing rights ex-us Dr. Reddy s responsible for Phase I, Merck for Phase III in manufacturing Creation of a powerful biosimilars platform Merck s biopharma expertise and emerging market set-up combined with a strong generics player experienced in biosimilars 20
Future R&D Oncology immunotherapy: A four pronged strategy Immuno Oncology Strategy Therapeutic Cancer vaccines Immunomodulation Immune environment Cancer stem cells Tumor Vaccines Stimuvax Nanovacc Blockade of Inhibitory Signals Anti-PD-L1 Inhibition of Cancer Inflammation FERi Anti-CD47 Anti-Muc1 Activation of APCs and Expansion of T cells NHS-IL12 Selectikine T regs and Metabolic Effects TGFβRi GCN2 Combo with CTX Treatment of Chronic Disease Curative Aim 21
Agenda 1. Overview Merck Group 2. Merck Serono strengths and revenue trends 3. Transforming Merck Serono 4. Conclusion and summary
Merck Serono mid-term financial targets Sales ( m) EBITDA pre ( m) +2% - 6% +15% - 21% 5,700-5,900 1,800-1,900 5.564 1.569 Assumptions: No new product launches Austerity measures will continue to put pressure on developed markets Emerging Markets will continue to fuel growth Royalty income to be expected to decrease to 180m 200m in 2014 * % of sales 2011 2014E 2011 2014E 28.2%* 31% 32%* Exploit Cost market savings potential will outside fundamentally Europe, especially improve in profitability Emerging Markets 23
Merck Group We now focus on efficiency Transformation process 2012-2018 2012 2013 2014 2015 2016-18 Efficiency De-complex organization Optimize cost structure Increase R&D productivity Organic growth Exploit leading market positions Execute selected bolt-on acquisitions Portfolio No portfolio divestments until 2014 No transformational deals before 2014 Cultural change Fill key positions with best managers Foster performance culture 24
Conclusion 1 2 3 We are launching a major restructuring to improve our productivity We will deliver on our savings and profitability targets We are rebuilding our pipeline and we are off to a good start We will create value through efficiency and additional value could be 4 created from new product launches 25