Science ANNUAL REPORT 2018 … is at the heart of every- thing we do. € 2.2 BILLION invested in research and development in 2018. Around 52,000 hearts at Merck beat for science. Employees in 66 countries share a passion for pushing boundaries and making new discoveries. Since 1668, the name Merck has stood for the positive power of science. Online You can find out what else makes our research hearts beat faster at www.merckgroup.com/en/ annualreport/2018 “ We believe that scientific exploration and responsible entrepreneurship make techno- logical advantages possible that benefit us all.” STEFAN OSCHMANN Chairman of the Executive Board and CEO Key Figures for 2018 MERCK GROUP Key figures 1 Change € million 2018 2017 € million in % Net sales 14,836 14,517 319 2.2% Operating result (EBIT)2 1,727 2,423 – 696 – 28.7% Margin (% of net sales)2 11.6% 16.7% EBITDA2 3,528 4,164 – 636 – 15.3% Margin (% of net sales)2 23.8% 28.7% EBITDA pre2 3,800 4,246 – 446 – 10.5% Margin (% of net sales)2 25.6% 29.3% Profit after tax 3,396 2,615 781 29.9% Earnings per share (€) 7.76 5.99 1.77 29.5% Earnings per share pre (€)2 5.10 5.92 – 0.82 – 13.9% Business free cash flow2 2,508 3,193 – 685 – 21.4% 1 Fiscal 2017 has been adjusted, see Note (49) “Effects from new accounting standards and other presentation and measurement changes” in the Notes to the Consolidated Financial Statements. 2 Not defined by International Financial Reporting Standard IFRS( s). MERCK GROUP MERCK GROUP Net sales EBITDA pre2 € million € million 20181 14,836 20181 3,800 20171 14,517 20171 4,246 2016 15,024 2016 4,490 2015 12,845 2015 3,630 2014 11,363 2014 3,388 1 Excluding the Consumer Health business divested in fiscal 2018. 2 Not defined by International Financial Reporting Standards IFRS( s). Key figure for fiscal 2017 adjusted. Business Sectors Healthcare Life Science Performance Materials 4 HIGHLIGHTS OF 2018 HIGHLIGHTS OF 2018 Highlights of 2018 February 21 Life Science enhances presence in Asia In 2018, we invested in a cell culture facility in South Korea, a manufacturing and distribution center in India, and a facility to accelerate Mobius® single-use manufacturing in China. With these new locations, an investment of € 40 mil- lion, we are responding to growing demand from the biotech industry in Asia. April 19 Merck sells Consumer Health We reached an agreement to sell our Con- sumer Health business to Procter & Gamble for a cash purchase price of approximately € 3.4 billion. Consumer Health transferred to P&G on December 1. This is a further step in our strategic orientation toward innovation-driven businesses. May 3 350 years of Merck This year offered a good reason to celebrate in Darmstadt together with 900 guests from politics, business and industry. During this an- niversary year, we looked to the future as well as the past. For instance, we opened a new innovation center in Darmstadt that pro- vides more space for smart projects outside 350 of our existing business areas. Throughout 2018, we also held a number of other anniver- years of Merck sary events around the world. HIGHLIGHTS OF 2018 HIGHLIGHTS OF 2018 5 June 20 Partnership to accelerate our CRISPR initiative We announced a partnership with Tongji University in Shanghai. As a member of our CRISPR Core Partnership Program, we will 中国 provide the university exclusive access to our genome-editing technology and comprehensive technical support. June 20 Merck forms cooperation with Alibaba Health To significantly improve the lives of 40 million patients in China by 2025 is an ambitious goal. We have teamed up with Internet healthcare company Alibaba Health to meet this challenge. The collaboration aims to provide Chinese patients with improved access to healthcare ser- vices via a health platform that will start out by tracking drugs for patients with diabetes, thy- roid disorders and cardiovascular diseases. June 20 New OLED technology center in Shanghai We are complementing our OLED positions in Asia with a new OLED technology center in Shanghai – in addition to the existing ones in Korea and Taiwan. Working as a local partner with our customers, we intend to drive inno- vations forward for the display industry and bring them to market faster. 6 HIGHLIGHTS OF 2018 HIGHLIGHTS OF 2018 July 3 Transformation program for Performance Materials To secure the future prospects of Performance Materials, we have launched the transfor- mation program Bright Future with the aim of further expanding our position as a leading supplier of solutions for the electronics indus- try. After 2019, the average annual sales growth of Performance Materials is expected to be between 2% and 3% again, with Semiconductor Solutions as a significant driver of this growth. July 17 Research heroes wanted We are launching the “Future Insight Prize”, with an award of up to € 1 million annually for groundbreaking scientific work. Over the next 35 years, we’ll be awarding it to pro - mote innovations in the areas of health, nutri- tion and energy. July 30 FDA agrees to review request for approval of cladribine tablets The U.S. Food and Drug Administration (FDA) accepted for filing the New Drug Application for cladribine tablets as a potential treatment for patients with relapsing forms of multiple sclerosis. The FDA is examining whether cladribine tablets, a short-course oral treatment, can be used to treat patients in the United States. The proposed dosing is a maximum of 20 days of treatment over two years. HIGHLIGHTS OF 2018 HIGHLIGHTS OF 2018 7 September 11 Bavencio® in combination with INLY TA ® to combat kidney cancer The phase III JAVELIN Renal 101 study evaluat- ing Bavencio® and Pfizer’s Inlyta® compared with Sutent® as initial therapy for patients with advanced renal cell carcinoma yielded posi- tive top-line results. In February 2019 the FDA granted priority review to this therapy based on these interim results. October 17 From Darmstadt to 90 countries Since October 17, 2018, eight fully automated packaging lines and robotized logistics are up and running in the new packaging center, which covers a total area of 15,000 square meters. Here, medications from our current product portfolio are packaged and shipped to more than 90 countries. The new capacities help address rising patient demand for our primary products Glucophage®, Concor® and Euthyrox® in the therapeutic areas diabetes, cardiovascular diseases and thyroid disorders. Some € 63 million were invested in the con- struction of the new packaging center between 2015 and 2018. November 12 New innovation hub in Southern China We announced the plans to establish a new competence center for innovation in Guangzhou in Southern China scheduled to open September 2019. It will be located in the heart of a large biotechnology park where startups will conduct research in all three of our business sectors. To coincide with this, we will also start our three-month China Accelerator Program in 2019. 8 HIGHLIGHTS OF 2018 TABLE OF CONTENTS MAGAZINE November 19 Collaborate against cancer with Syntropy We want to advance cancer research. To that end, we intend to form a joint venture under the name Syntropy with software company Palantir Technologies. Syntropy will enable research cen- ters to have access to a collaborative techno l- ogy platform to drive forward cancer research, speed up scientific progress and improve peo- ple’s lives. November 20 Fourth place in the Access to Medicine Index This result means that we have maintained our ranking since the index was last published in 2016. We are proud of our efforts to improve access to medicine and thus the health of underserved populations. November 28 Recognized compensation system The European investors federation Better Finance recognized us as the company with the most shareholder-friendly board com- pensation system in the German DAX 30 stock index. We revised this system in the run-up to the 2018 Annual General Meeting. The estab- lishment of objective compensation criteria resulted in improved comprehensibility – now even with a seal of quality. HIGHLIGHTS OF 2018 TABLE OF CONTENTS MAGAZINE 9 Table of Contents Magazine 1. Heartbeats Why science? What fascinates us about it? We wanted to find out – so we followed the passion. Research drives us all 12–17 2. Vibrant China China is on the way to becoming a leading high-tech nation. We intend to take an active role in shaping this transformation with our China strategy. Big plans for China 20–22 The health platform for everyone 22–23 New partner 24–25 Semiconductors as a new driver of growth 26–27 3. Beyond tomorrow Can pandemics be predicted? How does smartphone glucose monitoring work? Where will our meat come from in the future? How can we better connect re­­searchers with each other? Whoever wants to actively shape the future, needs to ask the right questions. The needle-free sensor 30–31 A platform for the fight against cancer 32–33 Real meat without the side effects 34–35 New heroes wanted 36–37 10 HEARTBEATS HEARTBEATS 1 HEARTBEATS HEARTBEATS 11 Heart beats Why science? What fascinates us about it? Each of us has an answer to that. We wanted to find out what they were – so we followed the passion. 12 HEARTBEATS Research drives us all HEARTBEATS Research drives us all ANA LUISA CADORE Sales Expert, Life Science, São Paulo, Brazil MARC FEIGLIN Head of Alliance Management & Partnership, Yavne, Israel SHINJI OKITSU Group Leader Immunology, Healthcare, Billerica, United States FRANZISKA HÖLY Deputy Foreman, Performance Materials, Darmstadt, Germany SUNNY CHOI Talent and Development Manager, Seoul, Korea Get to know our Merck team from around the world at https://www.merckgroup.com/en/ annualreport/2018/magazine/heartbeats Research drives us all HEARTBEATS 13 “ It’s my job to give people the courage to explore new things that did not exist before.