With a strong commitment to digitalization and specialization, Merck Healthcare is in a good position to thrive in a competitive healthcare market. There are many critical factors that drive success: Merck Healthcare has explored and implemented meaningful steps to transform the business with a focus on long-term growth and sustainable profits.

By Belén Garijo, Member of the Executive Board & CEO of Merck Healthcare

Merck –A science and technology leader with a focus on long-term growth

Merck Group, a DAX30-listed blue chip company, has successfully transformed from a classic chemical and pharmaceutical group into a leading science and technology company over the past years. The roots of our organization can be traced back to the year 1668, when Friedrich Jacob Merck acquired the Angel pharmacy in Darmstadt, Germany. Merck today is still predominantly owned by the Merck family. This allows us to develop and pursue strategies with a focus on long-term growth and sustainable profits. Although we share the same heritage, Merck is not affiliated with US-based Merck & Co. Our branch in the US is called EMD.

Merck Healthcare is the largest[1]of three business sectors and today comprises the four businesses Biopharma, Consumer Health, Biosimilars and Allergopharma. Within each business we specialize on key therapeutic areas and (sub-) indications, which is the core strength of Merck Healthcare and a key differentiator in the market.

Our ambition is to become a global specialty innovator

The healthcare landscape is changing faster than ever with a highly dynamic and competitive market: innovative technologies enable the entrance of new players, larger and fierce competitors are fighting over market share, increasing regulatory frameworks and cost pressure are very visible. What does that mean for a mid-size player such as Merck Healthcare?

To start, we took the decision to continue the emphasis on developing late and early stage specialty assets. This meant for us a specializationin the development of new biopharmaceuticals in the selected therapeutic areas of Oncology, Immuno-Oncology and Immunology. Data supports that highly specialized mid-sized pharma companies tend to outperform the market and deliver significantly higher returns than players with a lower degree of specialization. This is encouraging, given that the therapeutic areas we are active in, Oncology and Immunology, already are the largest specialty markets and promise to grow with average yearly rates of 11 and 6 percent respectively by 2025.

Equally important was the decision to reinforce our globalfootprint and drive select sources of growth with a tailored portfolio to address unmet medical needs across geographies. While developed markets are key strategic markets for our specialty innovation pillars, our growth markets will be driven by our mature specialty, late adoption biologics and broad general medicine portfolio. With a great extent of the predicted growth in our treatment areas expected to come from the United States, we plan to increase our sales in the United States significantly over the coming years.

Innovationis inevitably the key to delivering on the goal to become a leader in specialty pharma. Being an innovator is about developing first-to-market and best-in-disease assets, together with a depth of portfolio in each therapeutic area with the potential to organically replenish innovative molecules. We have considerably streamlined our R&D pipeline and upgraded our innovation capabilities with strong pipeline prospects. This is reflected in the increased value of our pharma pipeline, which has grown by a factor of six since 2011. We are also innovating beyond our pipeline products with our Medical Devices & Services unit, our Fertility technologies and Digitize Merck lighthouse projects, e.g. digital technologies to improve speed, safety and accuracy of drug design. In addition to innovation in the therapeutic approaches as well as in R&D, the way in which we engage with our customers will be vital.

Over the past years we transformed our Healthcare business: driving pipeline projects with the aim to bring new groundbreaking medicines to patients, maximizing our existing portfolio, expanding further in growth markets. A strong organic growth of 7.3% in the second quarter of 2016 is showing that we are on the right track.


Translating our ambition into better patient outcomes with four clear priorities

Our existing business provides us with a strong basis for sustainable growth; as such, making sure that we build on and maximize our corebusiness is success critical. To achieve this, ongoing investment is required and planned over the next years to secure top line stability. This includes establishing or defending market leadership in key markets through life cycle management and growth initiatives aimed at always better serving our patients and consumers. An example are our fertility products, where in order to maintain our market position in this business, we now offer additional technologies beyond drugs to improve treatment outcomes.

As our pipeline materializes, we also need to ensure that we are fully prepared for the delivery of the launchesof our new products. In order to ensure that these launches are successful, speedy and effective we are increasing our capability in Regulatory, Medical, Market Access and Pricing. We are also ensuring early on that we have the manufacturing capacity to meet potential demand. In the second half of 2016, we expect to file Avelumab, a new antibody we are developing in cooperation with Pfizer, for the treatment of Merkel cell carcinoma (MCC), a rare and aggressive form of skin cancer. Filing Avelumab in MCC will mark our first market entry into the burgeoning field of immuno-oncology, a strategic milestone for our Healthcare business. From 2017 on, we plan to bring on average one new drug or indication to market every year.

However, our success is not only determined by our products and launches. An important aspect is also how we operate as a company, our processes and structures. Improving our operations is thus our third priority. This includes integrated business planning to leverage the know-how and resources we have across the company. It means we need to clarify decision-making governance, drive organizational effectiveness and operational excellence. While the following is true for many of our businesses, our Consumer Health business especially operates in a very fast moving, flexible environment. We need to stay agile and focused. This is reflected in our streamlined regional structures allowing for more scale and efficiencies in building our strategic brands and redirecting resources from a regional infrastructure into our brands.

And last but not least, we need to mitigate the biological risk which is inherent to pharmaceutical development. In this context biological risk refers to the intrinsic risk a specific asset harbors. For example inadequate efficacy, safety issues, manufacturing challenges etc. It can be mitigated by increasing quality and quantity in the pipeline. As a result, we have raised “the innovation bar” to make sure we get the most out of our R&D capabilities and make the right investments. For instance, we implemented ambitious, predefined go-/no go-criteria at all decision points to ensure that only high-quality pipeline assets are moved ahead in the R&D process. Moreover, we are ensuring that our pipeline is adequately filled by more quality shots on goalthrough agnostic internal and external innovation.

Harnessing the potential of digitalization

In order to generate sustainable and long-term growth we also need to anticipate and – more importantly – proactively drive the trends that are shaping the pharmaceutical industry. Undoubtedly, the ever-increasing digitalization is one of the most impactful trends of our industry.

New and innovative technologies are leading to the entrance of new players and the fight over market share becomes fiercer. Of course, there are entry barriers for healthcare markets – R&D for example is cost-intensive and results are more difficult to reproduce compared to several other industries. However, we are observing new business models which are creating challenges and at the same time opportunities for incumbent players: large IT companies are starting subsidiaries in the healthcare business, leveraging their expertise in technology and data science. At the same time, startups are entering the field, equipped with a passion for change, agility and speed.

At Merck we combine a long tradition with the continuous ambition to pioneer and enable future technologies. These qualities put us in the position to innovate beyond the molecule and digitize our business. We have done this for the past 48 years – and we are convinced that we will be able to continue this track record.

As a first step, we articulated three guiding principles for the implementation of digital projects. First, inspire and growis about connecting the dots and seeking new digital business models for our different businesses. Second, empoweris about data and the potential that big data analysis offers. And third, digitalize the coreis about making all digital applications as user-friendly as possible.

Due to its nature, there is no blueprint for a successful digitalization. For this reason we have launched nine digital lighthouse projects, e.g. with digital technologies to improve speed, safety and accuracy of drug design. In the first place the initial objective of these projects is not to yield immediate positive returns in term of revenues – their main purpose is to provide us with the necessary experience in order to focus on areas which are most promising.

For us it was important to remain aware that digitalization is not only about technology. It is also about developing new ways to create a superior experience for patients, customers and employees.

Living up to our vision

Going forward, the pharmaceutical industry will be shaped by large, diversified companies and by medium-sized specialized players. Merck aims to be an innovation powerhouse in the latter group. Our streamlined and promising pipeline as well as our ambition to become a driver of digitalization in healthcare puts us in a good position to leverage the full potential of our business – 22 consecutive quarters of growth prove that we are moving in the right direction.

[1]In Q2 2016, Merck Healthcare generated 46% of Group sales and 45% of EBITDA pre exceptionals. http://www.merckgroup.com/company.merck.de/en/images/Report_Q2_2016_EN_tcm1612_