From the Supply and Pharma Side: Merck KGaA's Transformation

By Patricia Van Arnum - DCAT Editorial Director

October 7, 2015

Merck KGaA is using internal investment, alliances, and mergers and acquisitions as a means to grow two of its major businesses: healthcare/pharmaceuticals and life science products and services. With its pending $17-billion acquisition of Sigma Aldrich slated to close later this year and a major push into immuno-oncology drug development, Merck KGaA is executing a growth strategy begun three years ago. So what is behind the new Merck KGaA? DCAT Value Chain Insights (VCI) takes an inside look.

Merck KGaA, announced its acquisition of Sigma Aldrich in September 2014 as part of its "Fit for 2018" transformation and growth strategy aimed at building three strong platforms for sustainable, profitable growth. Once completed, the acquisition will be the largest in Merck KGaA's almost 350-year history. On the pharma side, the company is focusing in key therapeutic areas in neurology, oncology, immuno-oncology, and immunology, where the company is partnered with Pfizer to develop up to 20 high priority immuno-oncology clinical development programs. Further supporting these efforts is an EUR 1 billion ($1.1 billion) multiyear investment at its headquarters in Darmstadt, Germany. Will these be elements of a winning strategy?

A look inside Merck KGaA
Merck KGaA is focused on three main business areas: healthcare, life sciences products and services, and performance materials. Based on its second quarter 2015 results, healthcare is the largest piece, representing 56% of the company's revenues followed by life sciences at 24% and performance materials at 20%. Healthcare includes the company's pharmaceutical and biopharmaceutical businesses, and life sciences include Merck Millipore/EMD Millipore, which provides products and services to the life sciences industry, including for biomanufacturing. Performance materials include specialty chemicals for applications in fields such as consumer electronics, lighting, coatings, printing technology, paints, plastics, and cosmetics

Inside the biopharmaceuticals business KGaA
Merck KGaA's healthcare segment consists of four businesses: biopharmaceuticals, consumer health, biosimilars, and Allergopharma, a Merck company specializing in allergen immunotherapy. Since January 1 of this year, Belén Garijo has been the member of the company's executive board responsible for the healthcare business sector of Merck. The present biopharmaceuticals business was formed in 2007 with the acquisition of the Swiss biopharmaceutical company Serono SA, which was integrated stepwise into the company's prescription drug business. Over the past four years, Merck KGaA has overhauled its healthcare business and is now focusing on executing its three-pronged strategy, namely driving key pipeline projects such as its investigational cancer immunotherapy avelumab; maximizing its existing portfolio with drugs such as Rebif (interferon beta 1a) for treating relapsing forms of multiple sclerosis and its oncology drug Erbitux (cetuximab), respectively the company's number one and two top-selling drugs; as well as expanding further in growth markets. The regions of Europe and North America generated 58% of the company net sales in its biopharmaceuticals business in the second quarter of 2015 with Asia-Pacific and Latin America regions accounting for 36% of sales

Key to Merck KGaA's growth strategy in biopharmaceuticals is the development of its immuno-oncology pipeline. In November 2014, the company formed a global strategic alliance with Pfizer to develop and commercialize avelumab, an investigational anti-PD-L1 antibody initially discovered by Merck KGaA and currently in development as a potential treatment for multiple tumor types. Earlier this year, the companies initiated a Phase III clinical trial for avelumab to treat non-small cell lung cancer. The two companies have also agreed to combine resources and expertise to advance Pfizer's preclinical-stage anti-PD-1 antibody into Phase I trials. The drug is part of the immunotherapy alliance under which the companies will collaborate on up to 20 high priority immuno-oncology clinical development programs, including combination trials. If successful, the companies expect the first potential commercial launch for avelumab in 2017, and are working toward at least one additional potential launch per year through 2022 as part of the alliance. Also, as part of the strategic alliance, Merck KGaA will co-promote Pfizer's anaplastic lymphoma kinase (ALK) inhibitor Xalkori (crizotinib), a medicine to treat ALK+ metastatic non-small cell lung cancer in the United States and several other key markets. In addition, Merck KGaA is developing its investigational molecule, M7824, a potential first-in-class bi-functional immunotherapy designed to simultaneously block two immuno-inhibitory pathways that are commonly used by cancer cells to evade the immune system, thereby controlling tumor growth by restoring and enhancing anti-tumor immune response, and an alternative therapy to anti-PD-1/anti-PD-L1 and other immunotherapies

The other pieces of Merck KGaA's biopharmaceutical portfolio include drugs to treat infertility, including recombinant versions of three hormones needed to treat infertility, as well as its general medicine franchise, which mainly includes brands to treat cardiometabolic diseases. No longer patent-protected, these products include Glucophage (metformin) for treating Type 2 diabetes and Concor (bisoprolol), a beta-blocker for chronic cardiovascular diseases such as hypertension, as well as Euthyrox (levothyroxine) for treating hypothyroidism. Part of the company's strategy is to position its general medicines portfolio in emerging markets, and to that end formed a collaboration with Lupin Ltd. of India to broaden its general medicine portfolio.

For its consumer health business, the company is pursuing what it calls the "3 x 3 Strategy." The aim is to invest in about 15–20 key countries to be present in each with at least three leading brands and to achieve a respective local market share of at least 3%. The company aims to achieve this by organic growth, geographic expansion and eventually smaller, tactical acquisitions of brands which fit into the strategy and ideally into the existing product categories.

In biosimilars, the company is developing a biosimilars portfolio focused on oncology and inflammatory disorders, through both in-house research and development expertise in biologics, and partnerships with other biosimilar players. The initiation of Phase III trials is planned for 2015/2016 onwards. The company has also established strategic alliances with Dr. Reddy's in India to co-develop several oncology compounds and with Bionovis in Brazil to supply the Brazilian market with biological products under the Product Development Partnership (PDP) policy of the Brazilian Ministry of Health.

Allergopharma of Merck KGaA specializes in allergen immunotherapy (AIT). AIT (hyposensitization, desensitization, specific immunotherapy) is a causal therapy for treating allergies to unavoidable allergens. AIT is primarily carried out by physicians who specialize in allergies, such as ENT doctors, dermatologists, pediatricians, and pulmonologists. Allergopharma provides individual allergen extracts on a named patient basis, which are needed to treat less frequent allergies. The products are manufactured in a facility in Reinbek near Hamburg, Germany and are provided to more than 20 markets. The company plans to expand production in 2016

Inside the life sciences business
Already positioned in the market for life sciences products and service through Merck Millipore/EMD Millipore, Merck KGaA is expanding through its pending $17 billion acquisition of Sigma-Aldrich, a deal that is expected to close later this year. The acquisition would provide Merck KGaA with combined revenues of its life science products and service businesses of approximately $6.1 billion.The combined company will serve the life-science industry with more than 300,000 products, which includes a range of products across laboratory chemicals, biologics, and reagents. In pharma and biopharma production, Sigma-Aldrich will complement Merck Millipore/EMD Millipore's existing products and capabilities with additions along the value chain of drug production and validation. Merck KGaA said it plans to maintain a significant presence in St. Louis, Missouri and in Billerica, Massachusetts following completion of the transaction, as well as in important Merck Millipore/EMD Millipore sites, such as Darmstadt, Germany and Molsheim, France.In April 2015, Merck KGaA, appointed Udit Batra, currently president and CEO of the Life Science business, to lead the combined life science business pending the successful completion of the acquisition of Sigma-Aldrich.

As part of regulatory clearance for the acquisition in the European Union, the companies have agreed to sell parts of Sigma-Aldrich's solvents and inorganics business in Europe. These include its manufacturing assets in Seelze, Germany, where most of the solvents and inorganics sold by Sigma-Aldrich in Europe are manufactured. In addition, the divestiture of solvents and inorganics sold by Sigma-Aldrich worldwide under the Fluka, Riedel- de-Haen and Hydranal brands as well as a temporary license to the Sigma-Aldrich brand for the supply of solvents and inorganics in the European Economic Area have been agreed. The commitments also include the transfer of customer information and a solution to ensure a temporary channel to the market.

Merck KGaA established its life sciences business in 2010 following the acquisition of the Millipore Corporation, a leading supplier of life science tools. The majority of sales from the life sciences business are generated by consumables. The life science business comprises three business areas: lab solutions, process solutions, and bioscience, as well as multiple specialized business fields.The lab solutions business area manufactures products for research as well as analytical and clinical laboratories for various industries. It supplies laboratory water equipment, laboratory chemicals and consumable as well as develops and markets test solutions to identify microbial contamination, including for the pharmaceutical industry. It also supplies ultrapure reagents, including salts, acids, caustic alkalis, and buffering agents, and reference materials for instrumental analysis and products for inorganic trace analysis.

The process solutions business comprises more than 400 chemicals for the synthesis of active pharmaceutical ingredients as well as drug delivery compounds.The offering in biotech production comprises products supporting cell growth and gene expression, a wide range of filtration systems, salts and sugars, and single-use bioprocessing systems/components.

The main product groups of the bioscience business area include tools and consumables for filtration and sample preparation, reagents and kits for cell biology experiments, as well as small tools and consumables for cell analysis.

Other investment
Over the next five years until 2020, Merck KGaA be investing a total of around EUR 1 billion ($1.13 billion) in its Darmstadt headquarter site. Of this amount, EUR 17 million ($19 million) is attributable to the present modular Innovation Center, which was opened earlier this month and EUR 69 million ($78 million) to a future Innovation Center. The company laid the cornerstone for the future Innovation Center, which will form the heart of the expanded global headquarters as of 2018.