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.
Political and regulatory risks
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.
Research and development risks
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 authorization application. Merck had appealed this decision. In January 2011, the European regulatory authorities issued a final negative opinion. Additionally, there is the danger that undesirable side effects of a pharmaceutical product could remain undetected until after approval or registration, which could result in a restriction of approval or withdrawal from the market.
Product quality and availability risks
Although Merck is exposed to product liability risks, these are minimized by means of quality controls along the entire value chain. This starts with the qualification of our suppliers. Comprehensive quality requirements for raw materials, purchased semifinished products and plants must be mentioned, as well as long-term strategic alliances in the case of supply- and price-critical precursor products. Overstocking and possible shelf-life risks associated with this are avoided by means of demand-driven production. This risk cannot be completely excluded because of production lead times, which are substantial in some cases. Total revenues and the operating result of the Merck Group depend on a large number of pharmaceutical and chemical products for various industries. This diversification lowers risk since the markets differ in their structure and economic cycles. This is also an expression of the Merck strategy to remain an integrated pharmaceutical and chemical company.