Merck 2014 Annual Report Download - page 130

125GROUP MANAGEMENT REPORT → Report on Risks and Opportunities
BUSINESS-RELATED RISKS AND
OPPORTUNITIES
Political and regulatory risks and opportunities
As a global company, Merck KGaA, Darmstadt, Germany, faces
political and regulatory changes in a large number of countries
and markets.
Risk of more restrictive regulatory requirements regarding
drug pricing, reimbursement and approval
In the Healthcare business sector the familiar trend towards
increasingly restrictive requirements in terms of drug pricing, re-
imbursement and approval is continuing. These requirements can
negatively influence the profitability of the company’s products,
also through market referencing between countries, and jeopardize
the success of market launches and new approvals. Close commu-
nication with health and regulatory agencies serves as a preventive
measure to avert risks. An estimation of the risks is market- and
product-specific; overall the risk is seen as being likely for the
Group and could have a critical negative impact on the net assets,
financial position and result of operations. It is therefore classified
as a medium risk.
Risk of stricter regulations for the manufacture, testing and
marketing of products
Likewise, in its Life Science and Performance Materials business
sectors must adhere to a multitude of regulatory specifications
regarding the manufacture, testing and marketing of many of its
products. Specifically in the European Union, the Group is subject
to the European chemicals regulation REACH. It demands compre-
hensive tests for chemical products. Test procedures can be costly
and time-intensive, and lead to a rise in manufacturing costs.
Moreover, the use of chemicals in production could be restricted,
which would make it impossible to continue manufacturing cer-
tain products. The company is constantly pursuing research and
development in substance characterization, and in the possible
substitution of critical substances in order to reduce the occur-
rence of this risk and therefore views it as unlikely. Nevertheless,
it is still classified as a medium risk given its potential critical
negative impact on the net assets, financial position and results of
operations.
Risk of destabilization of political systems and the
establishment of trade barriers
The destabilization of political systems (as for example in Ukraine
and the Middle East) and the possible establishment of trade
barriers as well as foreign exchange policy changes can lead to
declines in sales in certain countries and regions. Diversification in
terms of products, industries and regions serves to mitigate poten-
tial negative effects. The effects of corresponding risks are taken
into account to the best of ability in the business plans for the
countries and regions concerned. In particular, our business can
furthermore be affected by macroeconomic developments in, for
example, Venezuela, Argentina, Russia, and Greece. Corresponding
sales strategy measures have been introduced in these countries to
minimize the impact on business.
Nevertheless, the residual net risk could have critical negative
effects on the net assets, financial position and results of opera-
tions and its occurrence is considered possible. The Group rates
this as a medium risk overall.
Market risks and opportunities
Merck KGaA, Darmstadt, Germany, competes with numerous com-
panies in the pharmaceutical, chemical and life science sectors.
Rising competitive pressure can have a significant impact on the
quantities sold and prices attainable for the Group’s products.
Opportunities due to the further development of the
Biosimilars business
The possibilities offered by the development and approval of
biosimilars represent opportunities for
Merck KGaA, Darmstadt,
Germany. F
or instance, over the past two and a half years, the
Group has moved forward with the development of it
s own
Biosimilars business unit and has entered into partnerships with
Dr. Reddy’s Laboratories Ltd., India, among others, to co-develop
a portfolio of biosimilars in oncology. Moreover, in April2014, a
Brazilian market partnership was established with Bionovis SA,
Brazil, (Bionovis SA) for a portfolio of biosimilars. Although a
significant contribution to sales is not
to be expected before
the medium to long term, the expenditure required for this has
already been taken into account
in the Group’s plann ing.
Opportunities due to a new technology in the manufacture
of OLED displays
The Group is building on more than ten years of experience in
manufacturing organic light-emitting diode (OLED) materials as
well as a strong portfolio of worldwide patents in order to develop
ultrapure and extremely stable materials that are precisely tailored
to customer requirements. The development in the OLED market
is being driven by the diversification of applications for OLED
displays. While OLED displays are mainly used today in small-area
displays, for example smartphones, more and more large-area dis-
plays could also be based on OLED technology in the future. In
order to overcome the technical and financial obstacles of the
mass production of large-area OLED displays, the Group has been
cooperating since the end of 2012 with Seiko Epson Corporation,
Japan (Seiko Epson). This cooperation has opened up new avenues
in the manufacture of OLED displays. The combination of durable
OLED materials from the company and inkjet printing technology
from Seiko Epson makes it possible to quickly and precisely pro-
duce high-resolution OLED displays using inkjet technology. The
inkjet printing of large OLED displays can resolve the productivity
problems of the conventional vapor-deposition processes. In addi-
tion, this technique deposits material only in the areas where