350 Annual Report 2017 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. 1668 Excerpt from the “Pharmacy Privilege” issued by the ruling court to the company founder FRIEDRICH JACOB MERCK: “ [He shall run the pharmacy] ensuring that it is properly stocked with good, freshly prepared medicinal products at all times so as to cure ailments and prevent ill health.” 2018 STEFAN OSCHMANN Chairman of the Executive Board and CEO of Merck KGaA, Darmstadt, Germany “ Scientific curiosity has been a major driver of our success for 350 years. It has enabled us to pioneer new technologies. And now we are helping to shape the digital revolution.” THOUGHTS ON THE FUTURE SIMON CLARK Six young researchers is a PhD student in climate physics at the University of Exeter. His YouTube videos also mainly address topics in physics. “ Things only improve if there are people who have crazy ideas and try out something new.” Do we drive fresh ideas? Find the answer on page 10. SAMUEL CUNHA is a Brazilian parasitologist who shares his passion for biology with numerous followers on YouTube. “ To stay passionate, we always have to think of the future,of the poten- tial result of our work.” What do we think of this principle? Find the answer on page 11. EVA AMSEN is a biochemist, writer and science communicator based in London. “ For scientists it is important to exchange ideas not only with their colleagues, but also with people from totally different fields – for example, with artists.” Do we practice interdisciplinary exchange? Find the answer on page 13. INÉS DAWSON is a biologist, a PhD student at Oxford and a popular YouTube blogger. “ Research and creativity should go hand in hand, as not all problems have a clear solution.” Do we promote creativity? Find the answer on page 14. JAKOB FUTORJANSKI is co-founder and CEO of NeuroNation, a Berlin-based start-up specialized in developing solutions for scientific mind mapping. “ Only if we know why we are doing something, can we master the great challenges of our time.” Does Jakob’s motto also apply at our company? Find the answer on page 12. SIMONE STREY is a graduate geographer and CEO of Peat, a start-up that is developing software solutions to make sustainable pest control in agriculture easier. The young company is working with our Innovation Center in Darmstadt. “ Handling our natural resources responsibly is becoming increasingly important.” Do we act responsibly? Find the answer on page 15. ALWAYS CURIOUS I AGINE THE NEXT 350 YEARS What does the future that we’re helping to shape look like? Our magazine delivers the answers and celebrates the innovative strength that we have been demonstrating for 350 years. Highlights of 2017 January 11 We build portfolio in DNA damage response (DDR) We enter into a licensing agreement with Vertex Pharmaceuticals for four promising R&D March 23 DDR programs. The addition of the DDR port­ folio in­licensed from Vertex to our own in­house FDA grants accelerated approval DDR platform has positioned us as one of the of Bavencio® in rare and aggressive key players in the DDR field. form of skin cancer The U.S. Food and Drug Administration (FDA) grants the first approval of an oncology treatment for metastatic Merkel cell carcinoma. January 12 Big Data partnership with Palantir We want to use the advanced data analytics capabilities of the U.S. company Palantir to more rapidly develop and deliver medicines May 9 and commercialize new products. This could also play a part in the development of en­ Bavencio® receives accelerated tirely new therapeutic options for patients in approval in the United States for the future. Initially, we will use Palantir’s bladder cancer technology in cancer treatment and patient Less than two months later, the FDA services. Later on it can be used in other grants the next approval for Bavencio® – areas of the company. for the treatment of patients with advanced or metastatic urothelial cancer. Highlights of 2017 August 25 European Commission gives the green light for Mavenclad® Mavenclad® (cladribine tablets) is approved for MS patients in the EU, and is the first oral short­course treatment for highly active relapsing multiple July 21 sclerosis. New Performance Materials application laboratory in Shanghai We open an applications laboratory in China through which we provide comprehensive, customized services for our quality products. This also effectively allows us to seek and foster creative collaboration with customers for new applications and formulations. August 31 We light up Seoul At the first Seoul Biennale of Architecture and Urbanism, together with our collaboration partners OLEDWorks, OPVIUS and Kolon, we present a new textile façade concept combining OPV (organic photovoltaics) and OLED (organic light­emitting diode) technologies. August 3 Patent for CRISPR technology September 1 The European Patent Office grants us the patent for our CRISPR technology used in a genomic inte­ We divest Biosimilars business gration method for eukaryotic cells. We were awarded The closing of the Biosimilars sale to Fresenius similar patents by the Australian, Canadian and announced on September 1 is in line with our Singapore patent offices over the course of 2017. strategy to focus our Healthcare business sector on the pipeline of innovative medicines in oncology, immuno­ oncology and immunology. We receive an upfront payment of € 156 million and are entitled to milestone payments of up to € 500 million, plus royalties on future product sales. September 21 EU approval of Bavencio® in Merkel cell carcinoma The European Commission approves our oncology medicine Bavencio® in this rare and aggressive form of skin cancer. September 5 We examine strategic options for Consumer Health We are currently preparing strategic options for Consumer Health. These include both a full or partial sale of the business as well as strategic partnerships. We are thus focusing on our innovation-­driven Biopharma pipeline and are initiating the next stage of the successful further development of the Consumer Health business. October 23 New Life Science Center in Burlington, Massachusetts We open a new Life Science Center in Burlington, north of Boston, to strengthen our presence in this key global science region. The new facility serves as a regional hub for scientific advances and customer collaboration. The Greater Boston area is a hotbed of life science innovation. November 30 Liquid crystal window modules facility in the Netherlands We open our new production facility for liquid crystal window modules in Veldhoven, a town near September 12 Eindhoven. With an investment of around € 15 million, we are continuing to build on our Debut at the International Motor expertise as the market and technology Show (IAA) in Frankfurt leader in liquid crystals for displays by moving We exhibit at Europe’s most important motor into other applications beyond televisions, show with our own stand for the first time. laptops, smartphones, and tablet PCs. Our presentation centers on high­tech materials for lighting, antennas, displays and surfaces. Key figures for 2017 GROUP Key figures Change € million 2017 2016 € million in % Net sales 15,327 15,024 303 2.0% Operating result (EBIT)1 2,525 2,481 44 1.8% Margin (% of net sales)1 16.5% 16.5% EBITDA1 4,282 4,415 – 133 – 3.0% Margin (% of net sales)1 27.9% 29.4% EBITDA pre1 4,414 4,490 – 76 – 1.7% Margin (% of net sales)1 28.8% 29.9% Profit after tax 2,610 1,633 977 59.9% Earnings per share (€) 5.98 3.75 2.23 59.5% Earnings per share pre (€)1 6.16 6.21 – 0.05 – 0.8% Business free cash flow1 3,318 3,318 – – 1 Not defined by International Financial Reporting Standards (IFRS). GROUP GROUP Net sales EBITDA pre1 € million € million 2017 15,327 2017 4,414 2016 15,024 2016 4,490 2015 12,845 2015 3,630 2014 11,363 2014 3,388 2013 10,735 2013 3,253 1 Not defined by International Financial Reporting Standards (IFRS). Business sectors Healthcare Life Science Performance Materials Table of contents MAGAZINE Curious minds 08 – 15 Young people as the source of impetus and ideas: They are experts in their respective fields, international aspiring young scientists, founders, unconventional thinkers. They succinctly and self-confidently outline their expectations of a better future and the Executive Board explains what our company is doing in this respect. An insatiable passion for research 16 – 27 At our company, patients are at the forefront. That’s REPORT why we invest substantial amounts in new therapies – for example to improve the treatment of cancer or multiple sclerosis (MS). At our research and development hubs in Darmstadt, Boston, Beijing, and Tokyo, around 3,000 employees work in global networks for the benefit To Our Shareholders of patients. 42 – 54 045 Letter from Stefan Oschmann New ways of 050 The Executive Board identifying disease 052 Our Shares 28 – 33 Working closely with the global scientific community, our Life Science business sector is developing numerous Combined innovative products and solutions for biotech and * pharmaceutical research. The new tools and processes Management Report that we offer are helping our customers to capture the 55 – 164 potential of genome medicine.