Risk of a temporary ban on products/production facilities or of non-registration of products due to non-compliance with quality standards
Merck is required to comply with the highest standards of quality in the manufacture of pharmaceutical products (Good Manufacturing Practice). In this regard Merck is subject to the supervision of the regulatory authorities.
Conditions imposed by national regulatory authorities could result in a temporary ban on products/production facilities, and possibly affect new registrations with the respective authority. Merck takes the utmost efforts to ensure compliance with regulations, regularly performs its own internal inspections and carries out external audits. Despite these quality assurance processes, the occurrence of a risk cannot be wholly ruled out, however it is considered unlikely. Depending on the product concerned and the severity of the objection, such a risk could have a critical negative impact on the net assets, financial position and results of operations. Therefore, Merck rates this as a medium risk.
Risk of an import ban on products to the United States due to an FDA warning letter
On December 15, 2011, Merck received a warning letter from the United States Food and Drug Administration (FDA) in connection with inspections of production facilities in Tiburtina (Italy) as well as Aubonne and Vevey (Switzerland). Rebif® and other products intended for sale in the United States are manufactured at these sites. Above all, the letter referred to various procedures in conjunction with the manufacture of Rebif® that, in the opinion of the FDA, were not fully in compliance with the standards of Good Manufacturing Practice. Over the past two years, Merck has worked closely with the FDA to eliminate these concerns. Corrective action was coordinated with the FDA and implemented in a timely manner. The FDA conducted follow-up inspections in 2013. The procedure had not yet been formally closed out by the FDA on the reporting date. However, in the successful follow-up inspections of all three production sites concerned, it was confirmed in writing that the action taken was considered adequate. Given the corrective action taken, the probability of occurrence of a possible import ban on the products concerned to the United States has been downgraded to unlikely. On the basis of the potentially damaging effect on the net assets, financial position and results of operations until the procedure is closed out by the FDA, Merck rates this as a medium risk.
Risks of dependency on suppliers
Quality controls along the entire value chain minimize the risks related to product quality and availability. This begins with the qualification of our suppliers and continues with comprehensive quality requirements for raw materials, purchased semi-finished goods and facilities as well as long-term strategic alliances for precursor products critical to supply and price. Merck is dependent on individual suppliers of precursor products for some of its main products. In the event that one of these suppliers curtails or discontinues production, or supply is disrupted, this would possibly have a critical impact on the Merck operations concerned. With long-term strategic alliances for precursor products critical to supply and price as well as alternative sourcing strategies, Merck minimizes the probability of occurrence of these risks and rates them as unlikely. Overall, these are classified as medium risks.
Damage and product liability risks
Further risks include the risk of operational failures due to force majeure, for example natural disasters such as floods or earthquakes, which could lead to a substantial interruption or restriction of business activities. Insofar as it is possible and economical to do so, the Group limits its damage risks with insurance coverage, the nature and extent of which is constantly adapted to current requirements. Although the occurrence of these risks is considered unlikely, an individual event could have a critical effect on the net assets, financial position and results of operations and is therefore classified as a medium risk.
Companies in the chemical and pharmaceutical industries are exposed to product liability risks in particular. Product liability risks can lead to considerable claims for damages and costs to avert damages. Merck has taken out the liability insurance that is standard in the industry for such risks. However, it could be that the insurance coverage available is insufficient for individual cases. Although the occurrence of product liability claims in excess of the existing insurance coverage is considered unlikely, individual cases could still have a critical effect on the net assets, financial position and results of operations. Merck therefore rates potential product liability risk as a medium risk.
Risks due to product-related crime and espionage
As a manufacturer and supplier of high-quality pharmaceuticals and chemicals, Merck – like other companies in the chemical and pharmaceutical industries – faces certain risks due to crime. These include, among others, theft, misuse and counterfeiting of products (including attempts at these crimes). This often goes hand in hand with an infringement of trademark rights. The professionalism and complexity of product-related crime has increased significantly in recent years. In the relevant cases, Merck works closely and trustfully with the competent prosecution authorities in the countries concerned. To combat product-related crime, several years ago Merck established an internal coordination network covering all functions and divisions (”Merck Anti-Counterfeiting Operational Network“) headed by Group Security, which provides a reliable interface to authorities, associations and partner companies. Particularly with regard to the unknown number of cases in the area of product-related crime, the material damage to Merck cannot be estimated. Its influence on business activities depends on the individual case in question as well as factors specific to regions and products. Product-related crime is therefore categorized as a medium risk at Merck.
At Merck, the undesirable loss of information by any possible form of offence is subsumed under the risk category “espionage”. Above all, particular importance is attached in this regard to the protection of sensitive business information, data protection and the protection of tangible and intangible expertise. On the one hand this intersects with risks resulting from digital data processing and communication, but it also covers threats that are not IT-based. With the aim of preventing unwanted diversion of information, a high-ranking Intellectual Property Management Committee (IPMC) was established in one division at Merck as a pilot scheme. Spearheaded by Group Security, it applies a holistic protection concept that, in addition to technical IT security, information and data protection measures, also comprises further targeted security measures. The risk of an unwanted loss of information due to espionage is classified as possible despite the measures taken and could significantly impact the net assets, financial position and result of operations.
Opportunities due to local presence in high-growth markets
In the coming years, Merck is still anticipating strong growth in the emerging markets in all divisions. In order to further enable this growth, Merck has initiated several investment projects, such as the construction of new production facilities for liquid crystals and the establishment of a new Merck Serono site in China. The greater local presence and customer proximity can lend Merck a key competitive edge and, in the medium to long term, offers the opportunity for significant additional growth in sales and EBITDA pre one-time items.
back
