(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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