Merck 2008 Annual Report Download - page 67

62 | Merck Annual Report 2008
The special risks of pharmaceutical development are constantly monitored by a portfolio
and project management system introduced in the Merck Group. In the course of
portfolio management, research areas and all R&D pipeline projects are regularly evalu-
ated and, if necessary, refocused. As a research-based pharmaceutical company, there
is the risk for Merck of development projects having to be discontinued – in some
cases only after substantial investment – at a late phase of clinical development. Deci-
sions – such as those relating to the transition to the next clinical phase – are taken
responsibly in order to minimize risk. Nevertheless, the danger still exists that undesir-
able side effects of a pharmaceutical product is not discovered until after approval or
registration, which could result in restrictions or a product recall.
Financial risks
Merck uses derivative financial instruments to minimize currency risks and financing
costs caused by exchange rate or interest rate fluctuations. Financing transactions in
foreign currencies are generally hedged. In certain cases, the company also hedges
anticipated sales and future costs for a period of up to three years. (More details are
available starting on page 126).
Material financial transactions involving credit risk are only entered into with banks
that have a good credit rating and a minimum rating of A- from Standard & Poor’s.
The rating of the commercial banks is constantly observed in order to quickly respond
to deterioration. From 2007, we have access to a € 2 billion syndicated multicurrency
credit facility with 19 banks, which have good credit ratings. Our long-term liquidity
is ensured by our positive operating cash flow, the centralized liquidity management
within the Group and an available credit facility with a remaining term of six years.
We do not see any threat to Merck of a credit bottleneck, even in connection with the
current financial crisis. Due to its broad customer base, Merck is likewise only exposed
to a low credit risk in its sales markets.
The carrying values of individual items in the balance sheet are exposed to the risk of
changing market and business circumstances and thus also to changes in fair values.
This can adversely impact profit and affect balance sheet ratios. This applies in particu-
lar to the adjustment of book values of acquired companies to the respective fair values.
In particular, the share of goodwill and other intangible assets in the consolidated
financial statements increased significantly as a result of the Serono acquisition in 2007.
(More details are available starting on page 102).
Merck has obligations in connection with pension commitments. The bulk of these
obligations is covered by the provisions disclosed in the balance sheet, while the smaller
remainder is externally funded. The obligations are regularly evaluated by preparing
annual actuarial valuations. Changes in the valuation parameters, for example in the
interest rate, salary increase rate or death probabilities, can negatively influence the
value of pension obligations and necessitate additional expenditure for pension plans.
As far as pension obligations are covered by plan assets consisting of interest-bearing
securities, shares, real estate and other financial assets, decreasing or negative returns
on these assets can adversely impact the value of the plan assets and thus result in
further additions.
Merck’s long-term liquidity
is ensured.