Annual Report 2014 Annual Report 2014

Letter from Karl-Ludwig Kley

Karl-Ludwig Kley Chairman of the Executive Board

Merck has completed another good year. We again achieved profitable growth. The “Fit for 2018” transformation program, with which we are shaping the future of Merck, is showing its effect. With the acquisition of AZ Electronic Materials (AZ), the offer to acquire Sigma-Aldrich and our alliance with Pfizer in immuno-oncology, we have laid the foundations for future growth.

In 2014, our sales rose by 5.5 % to € 11.3 billion. EBITDA pre one-time items, our most important earnings indicator, increased by 4.1 % to € 3.4 billion. Through solid organic growth and acquisition-releated increases, we were able to make up for negative foreign exchange effects. Profit after tax declined slightly by 3.7% to € 1.2 billion.

Business free cash flow decreased to € 2.6 billion, which was 12 .0% below the very high level of 2013. At the beginning of 2014, we completely eliminated our net financial debt. As a result of the acquisition of AZ Electronic Materials in May 2014, it had temporarily increased to € 2.2 billion as of June 30, 2014. Yet by year-end, we had already lowered it to below € 0.6 billion.

The capital market has recognized Merck’s positive development. The Merck share price soared by 20.4 % in 2014 – the largest increase in the DAX. On November 27, our shares even hit a new all-time high of € 80.40. We are pleased by this even though Merck doesn’t think just in quarters, but also in generations.

We want our shareholders to partake in the successful development of the company. Therefore, we will propose to the Annual General Meeting an increase in the dividend by € 0.05 to € 1.00 per share. The total dividend payment takes into account the 1:2 share split in 2014 and also takes into consideration the capital resources required for Merck’s further transformation steps.

Please allow me to address the key strategic steps taken in 2014:

  • The measures to improve our efficiency were successfully completed. Consequently, in 2014 we embarked on the next phase of “Fit for 2018”, sharpening our focus on growth.
  • The acquisition and integration of AZ Electronic Materials, a leading premium supplier of high-tech materials, were also completed. The portfolio includes process chemicals for the manufacture of integrated circuits, such as those used in smartphones, as well as photoresists used to manufacture flat-screen televisions. Our liquid crystals remain the gold standard in display technology. With AZ, they are complemented by specialty chemicals for the technology behind displays.
  • We will be working closely with the U.S. pharmaceutical company Pfizer on the development and global commercialization of our immuno-oncology anti-PD-L1 antibody. With this groundbreaking alliance, we are entering a highly promising growth market with a compound from our own pipeline.
  • In September, we announced our intention to acquire the U.S. life science company Sigma-Aldrich. This would be the largest acquisition in Merck’s almost 350-year history. Once we receive antitrust clearance of this acquisition, we will be able to offer our customers a much broader product portfolio as well as the industry’s leading e-commerce platform. At the same time, the acquisition would strengthen our global presence in the life science market, above all in North America and in the fast-growing markets of Asia.

These developments are the result of our long-term transformation and growth strategy. I have been reporting to you since 2007 on our progress: With the acquisitions of Serono, Millipore and AZ and the divestment of our Generics business, we have extensively rebuilt our portfolio. We have globalized our organization and filled key positions with the right people. We have modernized our processes and implemented extensive efficiency measures. Merck is thus well-placed to take the next growth steps from a position of strategic and financial strength.

Now that more and more pieces of the mosaic are coming together, the big picture is becoming visible. Merck is transforming into a highly specialized technology company with the goal of improving the lives of patients and customers.

The world is changing rapidly, and Merck is changing too. In 2014, the growth markets of Asia and Latin America for the first time accounted for the largest proportion of Group sales. Their contribution increased by 2 percentage points to 38 %. In order to further capture the potential of these markets for Merck, we need to be close to local customers. For instance in China, we opened our Liquid Crystals Center in Shanghai and laid the cornerstone for a major pharmaceutical manufacturing facility in Nantong.

Merck offers technologies and solutions that make a positive contribution to our rapidly changing times. Aging populations are a global challenge, as are the issue of broad access to health for everyone, and the digitization of our society. We are resolutely focusing on innovation in order to continue to offer good solutions to these challenges. The most visible sign is the Innovation Center, which is currently being built at the heart of our global headquarters in Darmstadt. It is to become a hub of creativity at Merck.

But as we develop the company further, we will not lose focus. We will continue to concentrate on fields in which we have the competencies and resources to make meaningful contributions. In the future, we will group them into three business sectors in our financial reporting:

  • Healthcare comprises the Merck Serono, Consumer Health, Allergopharma and Biosimilars businesses.
  • Life Science includes the Merck Millipore business and offers room for the planned acquisition of Sigma-Aldrich.
  • Performance Materials consists of liquid crystals, the AZ Electronic Materials business, pigments and new materials.

Customers and patients remain at the center of all our efforts. Innovation, efficiency, and a global presence are not an end in itself. The only way for us to achieve our own objectives is by meeting the needs of customers and patients with innovative products and the highest quality standards. We are aiming for long-term, sustainable growth in line with our six corporate values, namely courage, achievement, responsibility, respect, integrity, and transparency.

All this is made possible by our 39,000 employees around the world. Each and every day, they work on high-quality products, improved solutions for customers as well as on innovative approaches for a healthier as well as more comfortable and pleasant life. And through their work, they continue to write the Merck success story. I owe my thanks to every single one of our employees.

Merck is superbly positioned to shape its future further. I thank you for your trust and support. Please continue to accompany us into an exciting, successful and sustainable future.

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