(FROM THE WALL STREET JOURNAL 6/27/15) 
   By Christopher Alessi 

DARMSTADT, Germany -- The world's oldest pharmaceuticals company faces an identity crisis.

Germany's Merck KGaA has long grappled with its name in the crucial U.S. drug market, where unaffiliated pharmaceuticals group Merck & Co. holds rights to the Merck designation. But now it is facing a more existential predicament: Will it even be a pharmaceuticals company in coming years?

The "German Merck," as the smaller bearer of the name is often called, has struggled recently to bring successful and lucrative new drugs to the market. Its best-selling drug, multiple-sclerosis treatment Rebif, faces stiff competition from cheaper generic drugs.

The continued failure of its pipeline to deliver was one of the main reasons that Chief Executive Karl-Ludwig Kley diversified the company by investing in its life-science and specialty-chemicals divisions, while moving Merck away from its traditional pharmaceuticals business.

"We need diversification to balance our risk profile, which is important for a company that is being handed from generation to generation," Mr. Kley said in a recent interview, referencing the company's family-ownership structure.

Mr. Kley joined Merck in 2006 after stints at German giants Bayer AG and Deutsche Lufthansa AG, assuming the top job a year later. His biggest step away from pharmaceuticals came in September when he announced Merck's planned $17 billion acquisition of U.S.-based laboratory-equipment maker Sigma-Aldrich Corp.

The deal, the largest in Merck's history, cleared a major regulatory hurdle this month when European Union regulators approved the acquisition after the companies agreed to concessions. Merck aims by midyear to close on the deal, which still faces antitrust reviews in Brazil, Israel and South Korea.

Investors who were nervous over the company's drug prospects took heart from the acquisition despite its steep price. Merck's share price has risen over 60% since the deal was first announced, climbing to 111.25 euros ($126.14) in April, and is currently hovering around 93 euros.

By investing in a company like Sigma-Aldrich in the "tool space," as opposed to the more risky biopharmaceuticals sector, Merck will acquire a "very stable business," said Markus Manns, a portfolio manager at Germany's Union Investment, a Merck shareholder. "With Sigma-Aldrich, they know what they're buying and can easily manage what the business will be doing over the next 10 years," Mr. Manns added.

At the same time, investor sentiment matters somewhat less at Merck than at other DAX-listed firms. Only 30% of Merck's roughly 565 million euros in total capital is publicly listed and owned by shareholders. The other 70% is owned by the Merck family through the partnership E. Merck KG. The family's organization, which declined to comment for this article, is barred from managing business activities but still maintains an outsize influence because it is responsible for the overall direction and policy decisions for the group.

It all started in 1668 when Friedrich Jacob Merck bought a local pharmacy in Darmstadt, just south of Frankfurt, setting the stage for the development over the next 350 years of a global pharmaceuticals and chemicals business.

By 1890, the company had established a presence in the U.S. market through its then-subsidiary Merck & Co. But Merck's initial U.S. dreams were soon thwarted. During World War I the U.S. government took control of Merck & Co. and forced the two entities to separate. For decades, Merck KGaA didn't operate in the U.S. Today, the German Merck -- whose 2014 revenue of $12.61 billion was less than a third of that of its U.S. counterpart -- maintains the rights to the Merck name everywhere outside the U.S. and Canada; in those two countries it is known as the EMD Group.

But under the leadership of Mr. Kley, the German Merck has been making deep inroads in the U.S. "The U.S. will become the most important single market for us," said Mr. Kley.

Merck expects the Sigma-Aldrich acquisition to boost sales at the group and the life-sciences business by "double digit" growth rates. Additionally, the 1.9 billion euro acquisition last year of U.K.-listed AZ Electronic Materials, a producer of high-purity specialty chemicals for the electronics market, will allow Merck to double its specialty-chemicals footprint in the U.S., the company has said. That business, known as Performance Materials, has been driven by its global success in liquid crystals, which are used in display screens for televisions, smartphones and tablets.

A U.S. connection could also give Merck a final shot at saving its beleaguered pharmaceuticals division. The company is teaming up with Pfizer Inc. to develop and commercialize a new tumor treatment product, known as an anti-PD-L1 antibody.

As part of the deal, the U.S. drug company last year paid Merck $850 million upfront and could pay a further $2 billion in regulatory and commercial milestone payments, according to both companies. But even though the oncology product has strong potential, analysts note that competitors like Merck & Co., Roche Holding AG, Bristol-Myers Squibb and AstraZeneca PLC are much farther ahead in developing similar treatments.

The Merck-Pfizer anti-PD-L1 antibody won't come on the market until at least 2017 but "if it works, it would be game changing" for Merck's pharmaceutical business, said Mr. Manns of Union Investment.

Others are more skeptical. "We are still speaking about [just] one product," said Fabian Wenner, head of health-care research at Kepler Cheuvreux.

Mr. Wenner said Mr. Kley could create more value for Merck by following the precedent of larger German rival Bayer and many other global players that have been streamlining operations.

But Mr. Kley, who is expected to step down next year, takes his cues from the Merck family, Mr. Wenner added. And the family, he said, "is attached to the history of being a pharmaceutical company."

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