Merck 2010 Annual Report Download - page 92

All of the structures and processes described are subject to constant review by Internal Audit-
ing based on an annual audit plan specified by the Executive Board. The results of these audits
are dealt with regularly in meetings of the Executive Board, the Supervisory Board and the
Finance Committee.
The internal control system at Merck makes it possible to lower the risk of materially false
accounting statements to a minimum. However, no internal control system – regardless of its
design – can prevent a residual risk.
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Merck has integrated its risk management system into the ongoing business planning processes.
Potential negative developments, for example changes in customer demand or new political
framework conditions, are described and evaluated in the risk report. We can, therefore, take
countermeasures in good time if any events lead to deviations from the business plan. Risks in
connection with investment decisions are minimized by the use of detailed guidelines.
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As a global company, Merck faces political and regulatory changes in many countries and
markets. In 2010, increasingly restrictive requirements were imposed in the pharmaceutical
environment in terms of pricing, reimbursement and approval. We assume that further changes
will follow in the future. These can negatively impact the profitability of our products and
jeopardize the success of market launches and new approvals. Close communication with
health and regulatory authorities is a preventive measure to avert risks. Together with monetary
policy changes, the destabilization of political systems and possible erection of trade barriers
can lead to declines in sales in certain countries and regions. Diversification in terms of products,
industries and regions serves to mitigate potential negative effects.
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For Merck, innovation is a major element of the strategies of its Pharmaceuticals and Chemicals
business sectors. Research and development projects can experience delays, expected budgets
can be exceeded or targets remain unmet. Research and development are of special importance
to the Pharmaceuticals business sector. Research and development projects are constantly
monitored by a portfolio management system. In the course of portfolio management, we
regularly evaluate and, if necessary, refocus research areas and all R&D pipeline projects.
Sometimes development projects are discontinued after high levels of investment at a late
phase of clinical development. Decisions – such as those relating to the transition to the next
clinical phase – are taken with a view to minimizing risk. Furthermore, there is a risk that
the regulatory authorities either do not grant approval or delay approval, which can have an
impact on earnings. For instance, our oral multiple sclerosis treatment is currently in the final
stage of the U.S. Food and Drug Administration’s regulatory review process. In September
2010, the European regulatory authorities issued a negative opinion regarding our marketing
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