Political and regulatory risks and opportunities
As a global company, we face political and regulatory changes in a large number of countries and markets.
Risk of more restrictive regulatory requirements regarding drug pricing and reimbursement
In the Healthcare business sector, the known trend toward increasingly restrictive requirements in terms of drug pricing, reimbursement, and the expansion of high-rebate groups is continuing. These requirements can negatively influence the profitability of our products, as can market referencing between countries, and the success of market launches. Foreseeable effects are taken into account as far as possible in the business sector’s plans. Close communication with health and regulatory authorities serves as a preventive measure to avert risks.
Remaining risks beyond the current plans resulting from restrictive regulatory requirements are classified as a medium risk owing to the possible critical negative impact.
Risk of stricter regulations for the manufacturing, testing, and marketing of products
Likewise, in our Life Science and Performance Materials business sectors, we must adhere to a multitude of regulatory specifications regarding the manufacturing, testing, and marketing of many of our products. Specifically in the European Union, we are subject to the European chemicals regulation REACH. It demands comprehensive tests for chemical products. Moreover, the use of chemicals in production could be restricted, which would make it impossible to continue manufacturing certain products. We are constantly pursuing research and development in substance characterization and the possible substitution of critical substances so as to reduce the occurrence of this risk, and therefore view it as unlikely. Nevertheless, it is classified as a medium risk given its critical negative impact on the net assets, financial position, and results of operations.
Risk of negative political and macroeconomic developments
The destabilization of political systems, and the possible establishment of trade barriers, sanctions, and foreign exchange policy changes, can lead to declines in sales in certain countries and regions. These risks are taken into account as much as possible in the business plans of the affected countries and regions, and mitigated through product, industry, and regional diversification.
Potential negative macroeconomic developments can also impact our business. To minimize these impacts, corresponding measures pertaining to the sales strategy have been initiated in these countries.
The spread of the Corona virus since the beginning of 2020 is associated with risks in global macroeconomic developments, likewise with the potential for negative effects on our businesses. The opportunities in connection with combating the Covid-19 pandemic are described in the “Risks and opportunities of research and development” section.
The net risk of negative political and macroeconomic developments is seen as possible and has critical negative effects on the net assets, financial position, and results of operations. We thus rate this as a medium risk.
Market risks and opportunities
We compete with numerous companies in the pharmaceutical, chemical, and life science sectors. Rising competitive pressure can have a significant impact on the quantities that can be sold and prices attainable for our products.
Opportunities due to new technologies in the manufacturing of displays
We see major opportunities in significant market growth of organic light-emitting diode (OLED) materials in high-quality display applications. According to industry estimates, the overall market volume for OLED materials will exceed that for liquid crystal materials as of 2022. We have been performing research and development in the area of organic light-emitting diode (OLED) technology for more than 15 years and have become one of the leading material suppliers for OLEDs. We focus on the production of ultrapure, extremely stable materials that are precisely tailored to customer requirements. To this end, we acquired the OLED patent portfolio for display applications from Konica Minolta. Comprising over 700 patent families, the portfolio will allow us to further expand our market position and advance our development pipeline.
Opportunities in liquid crystal distribution
We are pursuing a strategy of leveraging our expertise as the global market leader in liquid crystals in order to develop new fields of application for innovative liquid crystal technologies. For instance, we are pressing ahead to capture the future markets for liquid crystal windows (LCWs) and mobile antennas. LCWs are creating new architectural possibilities and solar shading that can be managed while maintaining transparency and color-neutrality. In 2020, we entered into a strategic partnership with Guardian Glass, a leading international manufacturer of float, coated, and other glass products. We intend for this partnership to boost commission sales of dynamic liquid crystal windows from our eyrise® brand, which uses our Licrivision® technology. Mobile antennas can receive signals transmitted in the high frequency range. As a result, mobile data exchange could improve significantly in a wide variety of fields of application. Since novel liquid crystal materials for antennas are currently being developed, we expect liquid crystal antennas to reach market maturity in the coming years.
Opportunities in the semiconductor industry
We see huge opportunities arising from our innovative Directed Self Assembly (DSA) technique for advanced lithography processing in Semiconductor Solutions. As semiconductor manufacturers continue to advance their device technologies, the image processing steps are becoming increasingly complex and the production of high-performance products is becoming more cost intensive. Our novel DSA platform and recent material advancements enable improved wafer performance and reduce the cost of ownership (COO) for the customer. This has helped us to secure its leading position as the “process of record” (POR) with several key semiconductor customers. Adoption of this disruptive lithography platform is expected to completely change how semiconductor manufacturing is conducted and could lead to a market leadership position for advanced lithography over the next few years. Furthermore, we are developing new dielectric platforms in cooperation with our key customers for 3D NAND applications. There has been a change in 3D NAND device architecture and some of our customers are moving from floating gate to replacement gate technology. Therefore, we are currently working with those customers on this new device architecture.
Opportunities from leveraging the e-commerce and distribution platform
With the acquisition of Sigma-Aldrich in 2015, we gained access to the leading e-commerce platform in life science, www.sigmaaldrich.com. With this distribution platform, our customers continue to benefit from a portfolio of more than 300,000 products, including highly respected brands. We are further expanding this platform to continuously increase the number of products available through e-commerce. Increasing speed and convenience during our customers’ ordering processes as well as offering support through individualized product recommendations can lead to higher sales volumes and the winning of new customers. Consequently, this distribution channel can lead to an above-average development of sales in the medium term.
Risks and opportunities of research and development
For us, innovation is a major element of the Group strategy. Research and development projects can experience delays, expected budgets can be exceeded, or targets can remain unmet. Research and development activities are of special importance to the Healthcare business sector. In the course of portfolio management, we regularly evaluate and, if necessary, refocus research areas and all R&D pipeline projects. Alliances with external partners and the out-licensing of programs also form part of the catalog of measures for the efficient allocation of resources. The conclusion and continuation of these partnerships and externalizations plays an important role. A deviation from the strategic targets defined in this area could have a critical negative impact on net assets, financial position, and results of operations. The occurrence of a risk of this magnitude is considered unlikely, which means that this is a medium risk.
The global strategic alliance with GlaxoSmithKline plc., United Kingdom, (GSK) for the joint development and marketing of the bintrafusp alfa (M7824) immunotherapy developed by Merck KGaA, Darmstadt, Germany, is one example of an opportunity for research and development in the Healthcare business sector. This year, the Japanese Ministry of Health, Labor and Welfare granted fast-track status to bintrafusp alfa as a potential treatment for biliary tract cancer (BTC) as part of its SAKIGAKE strategy. In addition, we are currently exploring bintrafusp alfa in multiple non-correlated clinical studies. This innovative immunotherapy shows potential for new options for several hard-to-treat cancers. Despite the latest findings and the discontinuation of the INTR@PID Lung 037 study on the first-line treatment of patients with stage IV non-small cell lung cancer (NSCLC) that have high expression of PD-L1, we remain committed to investigating bintrafusp alfa in other indications. The findings from the INTR@PID Lung 037 study may be applied in other studies.
The strategic alliance concluded with Pfizer Inc. in 2014 enabled us to jointly develop Bavencio®. Following approvals for patients with metastatic Merkel cell carcinoma and those with locally advanced or metastatic urothelial carcinoma in 2017, the United States Food and Drug Administration (FDA) and the European Commission issued approvals for Bavencio® (avelumab) plus Inlyta® (axitinib) for the first-line treatment of patients with advanced renal cell carcinoma last year. This year, the FDA approved Bavencio® for the maintenance treatment of patients with locally advanced or metastatic urothelial carcinoma (UC) that has not progressed with first-line platinum-containing chemotherapy. After the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion, Bavencio® has been approved recently as monotherapy for the first-line maintenance treatment of adult patients with locally advanced or metastatic urothelial carcinoma (UC) who are progression-free following platinum-based chemotherapy. Additional applications for Bavencio® have been submitted to regulatory authorities worldwide.
Mavenclad® was approved by the European Commission in 2017. It is the first short-course oral treatment approved in Europe for the treatment of relapsing multiple sclerosis in patients with high disease activity. With the approvals in a number of additional countries in 2018 and 2019, including the United States and Switzerland, Mavenclad® is now approved in around 80 countries.
In March, the Japanese Ministry of Health, Labor and Welfare approved the oncology drug tepotinib for the treatment of patients with inoperable, advanced or recurrent non-small cell lung cancer (NSCLC) with METex14 skipping alterations. In addition, the FDA has accepted the filing of the application for tepotinib for the treatment of adult patients with metastatic NSCLC and granted priority review.
This year, Erbitux was approved by the National Medical Products Administration (NMPA) of China for the first-line treatment of patients with recurrent and/or metastatic squamous cell carcinoma of the head and neck in combination with platinum-based treatment with fluorouracil. This represents another step in our focus on acting as a global innovator for specialty products, including bringing innovative medicines to markets with high unmet medical needs.
In addition to marketing already approved medicines, we are pushing ahead with research projects in other important therapeutic areas. The portfolio of projects is evaluated on a regular basis. This may also lead to in-licensing or out-licensing, or further strategic alliances.
Investments made in 2020, e.g. to expand biotech development in Switzerland, are intended to accelerate scientific progress and the further development of our innovative clinical pipeline worldwide. The expenses currently being incurred, especially in our Healthcare research and development, are already reflected in the current plans. The same applies to sales of products for approved indications in the respective markets (e.g. Bavencio® and Mavenclad®). Further approvals may result in an increased sales potential.
Risks due to increased competition and customer technology changes
In the Healthcare business sector, both our biopharmaceutical products and classic pharmaceutical business are exposed to increased competition from rival products (in the form of biosimilars and generics). In the Life Science and Performance Materials business sectors, risks are posed by not only cyclical business fluctuations but also changes in the technologies used or customer sourcing strategies, particularly with respect to liquid crystals. We use close customer relationships and in-house further developments as well as market proximity, including precise market analyses, as mitigating measures. Overall, owing to its possible occurrence with a critical negative impact, the market risk is classified as a medium risk.
Opportunities presented by activities to boost innovative strength
With the M Lab™ Collaboration Center in Shanghai, we opened the doors to the largest of our nine centers worldwide to date. Encompassing non-GMP (Good Manufacturing Practice) laboratory space for pilot projects and process developments, it offers customizable solutions that are tailored to the Chinese life science community to advance drug development. Pharmaceutical and biopharmaceutical manufacturers can explore ideas, learn innovative techniques and work side-by-side with our scientists and engineers. The Collaboration Center is located in Pudong, at the heart of the biomedical sciences and research community in Shanghai, meaning we have our pulse right on the finger of Asia’s rapidly growing pharmaceutical market. Other M Lab™ Collaboration Centers are located in the United States, Singapore, Japan, Korea, India, France, and Brazil.
Digital technologies are becoming increasingly important for our markets and our world of work. In 2015, we launched several strategic digital initiatives geared toward improving the efficiency of our internal processes and toward evaluating the opportunities of digitalization for our products and customers. In this context, we set up a collaborative partnership with Siemens in 2020 in order to advance our modular production and to meet customer and market requirements quicker, more efficiently and more flexibly. Developing and adhering to rigorous ethical standards is of utmost importance for all our activities. Therefore, we created our Digital Ethics Advisory Panel to provide external guidance and expertise on complex ethical matters around data usage, algorithms and new digital innovations, ensuring that the company develops new digital technologies responsibly. We are also working on establishing new business outside our three business sectors, with a focus on digitalization and our innovation fields of Clean Meat, Liquid Biopsy, and Biosensing and Interfaces. In addition to collaborations with external partners such as the European Space Agency, the Accelerator program, which is being driven by our Innovation Center, is one component of our innovation strategy.
Cooperating with start-ups gives us extensive opportunities to drive innovative approaches and ideas. In 2020, we helped to advance numerous projects through various support models like our Innovation Labs and Centers and different investment programs, such as the China Seeds Fund. Among other things, we invested in SynSense, a neuromorphic computing start-up based in China and Switzerland whose AI (artificial intelligence) processors and sensors provide an unprecedented combination of ultra-low power consumption and low latency for a broad range of edge applications for smart home, smart security, autonomous driving, drones and robots. The Industry 4.0 start-up Feelit also launched its first commercial product on the market. RetroFeel™ combines a wireless edge computing device with a printed nanotechnology sticker sensor that detects structural changes in mechanical parts and systems and is able to predict upcoming failures (predictive maintenance). This sensor solution can be used in process industries such as pharmaceuticals, food and beverage, oil and gas, as well as in semiconductor manufacturing. We take an active role in our portfolio companies and focus our investments on the early stage and the foundation of companies or spin-offs with a view to utilizing their science and technology base.
In the Life Science business sector, we strengthened our viral vector manufacturing capabilities with the launch of the VirusExpress™ lentiviral production platform. We are committed to accelerating the manufacture of cell and gene therapies with the goal of getting these lifesaving treatments to patients faster. This proven, scalable platform increases dose yields and reduces process development times.
In Life Science, we also expanded our HPAPI and ADC manufacturing capabilities in the United States with the creation of one of the largest single-digit nanogram containment production facilities for high-potent pharmaceutical ingredients (HPAPI). This will allow the continuous manufacturing at an industrial scale of increasingly potent agents for therapies with the potential to treat cancer. Antibody drug conjugates (ADCs) are an emerging class of medicines designed for the high-specificity targeting and destruction of cancer cells while preserving healthy cells. Only nine ADCs are currently approved worldwide. The ADC industry is experiencing strong growth and is expected to reach € 13 billion by 2030.
We also opened a new research center for electronic applications on the campus at its headquarters in Darmstadt, Germany. The building offers space for additional research and development activities, especially for next-generation materials including display materials – such as innovative liquid crystals and quantum dot pixel color converters (QDPCC) – as well as semiconductor materials such as photoresist materials, dielectrics, and directional self-alignment materials (DSA).
Opportunities provided by the CRISPR technology
As a pioneer of genome-editing innovation for 15 years, we are leveraging CRISPR technology as a core competency of our business. Around the world, our Life Science business sector holds 28 CRISPR-related patents in methods and composition, including the fundamental technology of CRISPR Cas9 for gene editing and integration in mammalian cells and paired Cas9 nickases. Two of the CRISPR-Cas9-assisted genome-editing patents were approved in the United States in 2020. This gives us the opportunity to support US scientists and researchers in their work to advance and protect gene therapy development programs. In the reporting year, we also signed agreements licensing our CRISPR technology to two companies: panCELLa, a cell therapy company based in Toronto, Canada, and Takara Bio USA, Inc., a biotechnology company based in Mountain View, California, United States. The licenses are aimed at accelerating drug discovery leading to the development of new treatments.
CRISPR technologies open up promising new avenues for medical research and potential solutions to treat some of the most difficult diseases, including cancer as well as hereditary and rare diseases. The Group recognizes that the growing potential of genome-editing technologies is accompanied by scientific, legal and societal concerns. It supports research using genome editing under careful consideration of ethical and legal standards. Among other things, it has established an independent, external Bioethics Advisory Panel to provide guidance for its research.
Opportunities in connection with combating the Covid-19 pandemic
As a science and technology company, we have helped to combat the global challenges resulting from Covid-19 in various ways. In Life Science, we are working with more than 50 vaccine developers around the world and supporting more than 35 testing solutions and more than 20 projects involving monoclonal antibodies, plasma products, and antiviral drugs. We are collaborating with numerous researchers and institutions to assist them with process development of and the production process for potential Covid-19 vaccine candidates, as well as development and preparations for the mass production of SARS-CoV-2 diagnostic tests. To meet the unprecedented demand in our Life Science business sector, we expand our production capability with investments in the US, Singapore and Germany. These investments will strengthen our manufacturing footprint to meet demand for key-life saving products. Additionally, we acquired AmpTec, a leading Hamburg, Germany-based, mRNA contract development and manufacturing organization (CDMO) to strengthen our capabilities across the mRNA manufacturing chain. Combining our expertise in lipids manufacturing with AmpTec’s PCR-based technology will allow us to offer customers innovative technologies, products and services to help advance life-enhancing therapeutics and vaccines for Covid-19.
In the Healthcare business sector, the FDA cleared the investigational new drug application (IND) for M5049 for the treatment of patients with Covid-19 pneumonia. M5049 is a potentially first-in-class small molecule that blocks the activation of the toll-like receptors TLR7 and TLR8. A Phase II randomized, controlled clinical study evaluating the safety and efficacy of M5049 in this patient population began in late July. The results of the study are expected by the second quarter of 2021.
Opportunities arising from the further integration of Sustainability in the Corporate Strategy
In 2020, we integrated sustainability more strongly in the corporate strategy, setting three goals in the areas of science & technology, value chain and climate & environment. By considering the goals of the sustainability strategy when making business decisions, our company contributes to achieving the United Nations Sustainable Development Goals. Additionally, the company is planning to also link the long-term variable compensation of the Executive Board from 2022 onward with the progress made toward achieving the company’s sustainability goals.
Risks of discontinuing development projects and regulatory approval of developed medicines
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. We are currently not aware of any risks beyond general development risks that could significantly affect the net assets, financial position, and results of operations.
Furthermore, there is the risk that regulatory authorities either do not grant or delay approval or grant only restricted approval. Additionally, there is the risk 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. Well-advanced programs in our pipeline and those of our partners result in potential new approvals; on the other hand, missing targets in this area may have critical negative effects on our financial position and operating result, for example due to lower net sales or the non-occurrence of milestone payments from collaboration agreements. These risks are considered to be medium overall, with probabilities ranging from unlikely to possible.
Risks and opportunities related to the quality and availability of products
Risk of a temporary ban on products/production facilities or of non-registration of products due to non-compliance with quality standards
We are required to comply with the highest standards of quality in the manufacturing of pharmaceutical products (Good Manufacturing Practice or official pharmacopoeia). In this regard, we are 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. We make the utmost effort to ensure compliance with regulations, regularly perform our own internal inspections, and carry out external audits. Thanks to these quality assurance processes, the occurrence of a risk with a critical negative impact is unlikely; however, it cannot be entirely ruled out. Depending on the product concerned and the severity of the objection, such a risk can have a moderate negative impact on the net assets, financial position, and results of operations. Therefore, we rate this as a medium risk.
Risks of production availability
Further risks include operational failures due to fire or 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 economically viable, the Group limits its damage risks with insurance coverage, the nature and extent of which is constantly adapted to current requirements. Likewise, we are exposed to risks of production outages and the related supply bottlenecks that can be triggered by technical problems in production facilities with very high-capacity utilization. Furthermore, there are risks of supply bottlenecks due to a lack or disappearance of capacity. We are working to continuously mitigate the risks by making regular investments, setting up alternative sourcing options, and maintaining inventory levels.
Although the occurrence of these risks is considered unlikely, an individual event could have a critical negative effect on the net assets, financial position, and results of operations, and they are therefore classified as a medium risk.
Risks of dependency on suppliers
Quality controls along the entire value chain reduce the risks related to product quality and availability. This starts with the qualification of our suppliers. Quality controls also include comprehensive quality requirements for raw materials, purchased semi-finished products, and plants. We are dependent on individual suppliers for a number of precursor products, packaging materials, and finished goods. In the event that one of these suppliers curtails or discontinues production, or supply is disrupted, this could potentially have a critical impact on the business concerned. With long-term strategic alliances for precursor products critical to supply and price as well as alternative sourcing strategies, we reduce the probability of occurrence of these risks and rate them as unlikely. Overall, these are classified as medium risks.
Product liability risks
Companies in the chemical and pharmaceutical industries are particularly exposed to product liability risks. Product liability risks can lead to considerable claims for damages, loss of reputation, and costs to avert damages. We have 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 negative effect on the net assets, financial position, and results of operations. We therefore rate a potential product liability risk as a medium risk.
Risks due to product-related crime and espionage
Owing to our portfolio, we are exposed to a number of sector-specific crime risks. This relates primarily to products, including among other things, counterfeiting, illegal channeling, and misuse, as well as all types of property crime, including attempts at these crimes. Crime phenomena such as cybercrime and espionage could equally affect our innovations or innovation abilities as such.
To combat product-related crime, an internal coordination network covering all functions and businesses (“Anti-Counterfeiting Operational Network”) was set up several years ago. In addition, security measures are in use to protect products against counterfeiting. Innovative technical security solutions and defined preventive approaches are used to ward off dangers relating to cybercrime and espionage. Measures to prevent risks and to prosecute identified offenses are conducted in all the relevant crime areas in close and trustworthy cooperation with the responsible authorities. The impact of these risks on business operations depends on the respective individual case, product-specific factors, the value chain, and regional aspects in particular. Our Corporate Security department is responsible for the overall coordination of all measures in this area. Overall, the threat resulting from crime in general is seen as being possible and is classified as a medium risk.
Risks and opportunities from the use of social media
Our company and its employees are active on numerous social media channels. The consistent and legally compliant use of the channels and their content is important in terms of increasing awareness of our brand, among other things. Our company takes precautions and implements processes to ensure awareness of the proper handling of social media, controlling publication, and actively managing communication.
Nevertheless, reputational risks could result, for instance through public dialogues in social media.
Overall, we rate this as a low risk.