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Annual Report 2019

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Annual Report 2019 Draft as of December 20. PDF version for illustrative purposes, report will be published online. ANNUAL REPORT DISCLAIMER Publication of Merck KGaA, Darmstadt, Germany. In the United States and Canada the subsidiaries of Merck KGaA, Darmstadt, Germany, operate as EMD Serono in Healthcare, MilliporeSigma in Life Science and EMD Performance Materials. To reflect such fact and to avoid any misconception of the reader of the publication certain logos, terms and names of businesses of the publication have been substituted or additional descriptions have been added. This version of the publication, therefore, slightly deviates from the otherwise identical version of the publication provided outside the United States and Canada. Owing to the altered expectations in terms of the impact of the Covid-19 pandemic, some chapters of this Annual Report were updated on May 12, 2020. The respective text passages are marked in magenta. 3 Key Figures for 2019 GROUP Key figures Change € million 2019 2018 € million % Net sales 16,152 14,836 1,315 8.9% Operating result (EBIT)1 2,120 1,727 393 22.8% Margin (% of net sales)1 13.1% 11.6% EBITDA1 4,066 3,528 539 15.3% Margin (% of net sales)1 25.2% 23.8% EBITDA pre1 4,385 3,800 585 15.4% Margin (% of net sales)1 27.1% 25.6% Profit after tax 1,324 3,396 -2,072 -61.0% Earnings per share (in €) 3.04 7.76 -4.72 -60.8% Earnings per share pre (€)1 5.56 5.10 0.46 9.0% Business free cash flow1 2,732 2,508 224 8.9% 1Not defined by International Financial Reporting Standards (IFRSs). GROUP GROUP Net sales EBITDA pre1 € million € million 1 Not defined y International Financial Reporting Standards (IFRSs). Table of Contents Annual Report To Our Shareholders Corporate Governance 6 Letter from Stefan Oschmann 134 Capital Structure and Corporate Bodies of Merck KGaA, Darmstadt, Germany 9 The Executive Board 135 Statement on Corporate Governance including 10 Our Shares Compensation Report 163 Report of the Supervisory Board 166 Objectives of the Supervisory Board with respect to Its Composition and Profile of Skills and Expertise Combined Consolidated Management Report Financial Statements 13 Fundamental Information about the 170 Consolidated Income Statement Group 171 Consolidated Statement of Comprehensive Income 13 The Group 172 Consolidated Balance Sheet 21 Strategy 173 Consolidated Cash Flow Statement 28 Internal Management System 174 Consolidated Statement of Changes in Net Equity 34 Corporate Responsibility 176 Notes 44 Research and Development 176 General Disclosures 56 People 180 Group Structure 64 Report on Economic Position 188 Performance Indicators 64 Macroeconomic and Sector-Specific 194 Operating Activities Environment 207 Operating Assets, Liabilities, and Contingent Liabilities 67 Review of Forecast against Actual Business Developments 230 Employees 75 Course of Business and Economic Position 238 Capital Structure, Investments, and Financing Activities 75 Group 273 Other Disclosures 86 Healthcare 280 Scope of Consolidation 92 Life Science 97 Performance Materials 102 Corporate and Other 103 Report on Risks and Opportunities 118 Report on Expected Developments 123 Report in accordance with Section 315a 293 Responsibility Statement (1) of the German Commercial Code 294 Independent Auditor´s Report (HGB) 125 Additional Information 301 Business Development 2015 – 2019 in accordance with the German Commercial Code (HGB) 302 Financial Calendar TO OUR SHAREHOLDERS 6 Letter from Stefan Oschmann 9 The Executive Board 10 Our Shares Letter from Stefan Oschmann Letter from Stefan Oschmann To our Shareholders ___ Letter from Stefan Oschmann 6 In this Annual Report, you will find all the relevant information about the company and its performance in fiscal 2019. For the first time, we are publishing our Annual Report exclusively online and have streamlined it in comparison with previous years. As you can see, we are focusing on the essentials here, too. From my perspective, the major topics of 2019 included the debate on the role of companies in society – in other words, their purpose. I am very pleased to note that while economic growth and profitability are and will always remain important and, of course, essential, more and more companies are realizing that these are not the only factors that matter. Companies must always create value for society as well. This is crucial to long-term success, and in my view, a pivotal element of good corporate citizenship. We are curious minds dedicated to human progress. That is our purpose, and what drives us. And not only since the latest debates on the role of companies in society. Everything at our company revolves around science. For 352 years, it has been at the heart of everything we do. Science enables us to develop new technologies needed, for instance, to treat serious diseases, to help researchers worldwide develop new therapies, and to shape the digital revolution. We have therefore clearly articulated our ambition in our Group strategy: We want to become the vibrant science and technology company. In other words, we want to rank among the scientific and technological leaders in all three of our business sectors. We also aim to outperform our competitors in terms of both sales growth and margin growth so as to continue to generate sustainable value for our owners. Our agenda is ambitious and challenging, but it is also feasible. In 2019, we reached many milestones, as the following examples show: By acquiring Versum Materials and Intermolecular, we are now well-positioned to become a leading supplier in the electronic materials market and to further drive future innovations in this field. It is clear that the global volume of data is going to grow exponentially in the coming years. In 2018, it amounted to around 33 zettabytes – in megabytes, that is a number with 15 zeros. By 2025, that figure could grow to 175 zettabytes. All these data must be generated, processed, transferred, and stored. This is a veritable technological challenge and a major opportunity for us: We produce leading-edge materials used in almost all the latest electronic devices. Our research results in Healthcare are very encouraging – and we have a promising pipeline. The U.S. Food and Drug Administration approved our medicine Mavenclad® in the United States for the treatment of certain forms of multiple sclerosis – a great achievement for us. Bavencio®, our immuno-oncology therapy, was approved in the United States, Europe, Japan and other markets for the treatment of patients with advanced renal cell carcinoma in combination with another drug. In addition, we formed a global strategic alliance with GlaxoSmithKline to further advance the development of our novel investigational therapy, bintrafusp alfa, in the fight against hard-to-treat forms of cancer. Moreover, we presented positive results for evobrutinib in relapsing multiple sclerosis (MS). We also made progress on our genome-editing technologies. Our portfolio for CRISPR (Clustered Regularly Interspaced Short Palindromic Repeats) genome scissors is used to understand the functions of individual genes and their interaction in a cell. Last year, we received further patents in this key area and now hold a total of 22 patents for CRISPR technology worldwide. In addition, we entered into an agreement with the Broad Institute of MIT and Harvard in the United States to offer non-exclusive licenses to CRISPR intellectual property under our respective control. Through this agreement, we are simplifying the path to licensing CRISPR technology in order to make it more widely available to the global research and discovery community. To our Shareholders ___ Letter from Stefan Oschmann 7 Stefan Oschmann, Chairman of the Executive Board and CEO As you can see, we made excellent progress in all three of our business sectors last year. And we grew profitably. At € 16.2 billion, Group sales rose by 8.9% in comparison with 2018. EBITDA pre, the most important financial indicator we use to steer our operating business, amounted to € 4.4 billion, a year-on-year increase of 15.4%. Earnings per share pre (EPS pre) increased by 9% to € 5.56. Our strong business development in 2019 was only possible thanks to the untiring engagement of our approximately 57,000 employees worldwide. On behalf of the entire Executive Board, I would like to warmly thank all our people for their tremendous commitment. As shareholders, you are benefiting from our good business performance in 2019. Last year, our share price rose by 17%. For fiscal 2019, we will propose to the Annual General Meeting the payment of a dividend of € 1.30 per share. In 2020, we plan to build on the good development achieved in 2019 and to continue to grow profitably. We will move forward with our strategy of profitable growth while focusing, as we always do, on reducing our debt, which rose significantly owing to our most recent major acquisition of Versum Materials. As of the end of 2019, our net financial debt totaled € 12.4 billion. That is why we will now be setting our sights on growing organically and generating high cash flow. At the same time, we will work to sustainably strengthen a culture of cost awareness throughout our company. In our Healthcare business sector, we will continue to deliver profitable growth in our core business, especially in emerging markets, with a special focus on China. We want to fully leverage the potential of our new medicines Mavenclad® and Bavencio® and to forge ahead with our promising pipeline projects. In Life Science, we are aiming to expand our leading positions in bioprocessing and e-commerce. In addition, we will continue to unlock new growth opportunities through our Promise Ventures in gene editing and novel modalities, end-to-end bioprocessing solutions, and connected labs. Within Performance Materials, we will work to further reap the benefits of Bright Future, our five-year transformation program, as well as to successfully integrate Versum Materials and Intermolecular.
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