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 rebate groups is continuing. Specifically, in the United States, a pricing reform on prescription drugs is part of the agenda of the current administration. 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 likely with a potential moderate to substantial impact.
Risk of stricter regulations for the manufacturing, testing, and marketing of products
We must adhere to a multitude of regulatory requirements regarding the manufacturing, testing, and marketing of many of our products. Specifically, in the European Union, we are subject to the EU chemicals regulation REACH. Similar regulations are emerging globally in relevant markets, in particular in Asia. These regulations demand comprehensive tests for chemicals. Moreover, the use of chemicals in production and final products could be restricted, which would negatively impact the ability to manufacture and market certain products. With the EU Chemicals Strategy for Sustainability, an initiative of the European Green Deal, we have to expect even increasing demands concerning the substitution of specific hazardous substances. We are constantly pursuing research and development in substance characterization and the possible substitution of critical substances so as to mitigate this risk. Nevertheless, it is classified as a possible risk with a potential substantial impact on the net assets, financial position, and results of operations.
Risk of negative political and macroeconomic developments
The ongoing general trend of de-globalization and reshoring critical supplies might initiate the (re‑)establishment of trade barriers, sanctions, and foreign exchange policy changes. Additionally, there is an increasing threat from armed conflicts. These risks can have a negative impact on our supply chains and can lead as well to declines in sales in certain countries and regions. They are taken into account as much as possible in the business plans of the affected countries and regions, and are mitigated through product, industry, and regional diversification as well as measures to ensure resilience of supply chains and networks.
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 coronavirus 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 “Market risks and opportunities” section.
The rise in inflation in the course of 2021 across some of our major markets could negatively impact our business. The current inflation dynamics are driven by a combination of base effects, supply disruptions, hefty fiscal spending, and special factors. Persistently high inflation could increase our operating expenses (e.g., raw materials, utilities, and logistics) as well as capital expenditures, and lead to an increase in central bank rates, which would affect our refinancing costs.
The net risk of negative geo-political and macroeconomic developments is seen as possible and might have substantial to critical effects on the net assets, financial position, and results of operations.
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 in connection with combating the Covid-19 pandemic
As a science and technology company, we are contributing to the global fight against Covid-19. In Life Science, we have been working with more than 80 vaccine developers around the world and have supported more than 35 testing solutions and more than 50 projects involving monoclonal antibodies, plasma products, and antiviral drugs. We are collaborating with numerous researchers and institutions to assist them with the process development of and the production process for marketed and potential Covid-19 vaccine candidates, as well as for the mass production of SARS-CoV-2 diagnostic tests.
Opportunities from leveraging the e-commerce and distribution platform
In the Life Science business sector, our dedication to the customer experience extends from the lab to our primary e-commerce platform, sigmaaldrich.com, which connects scientists in nearly every country around the world with the products, publications, and technical expertise needed to advance their discovery, research, and development further and faster.
Our efforts include innovative approaches across the globe, bolstering sigmaaldrich.com and our e-commerce expertise. To that end, this year we launched a new website architecture and user interface providing customers with an updated look and feel, enhanced mobile capabilities, and faster and more reliable website performance, as well as features like self-serve order status and product ratings and reviews. In alignment with our long-term e-commerce strategy to leverage sigmaaldrich.com as a scalable growth driver and the destination for our life science community, we are leveraging our new website architecture so that we may continue to improve the customer experience more rapidly and flexibly in the future.
Opportunities presented by viral vectors and HPAPIs/ADCs
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.
We also expanded our manufacturing capabilities of high-potent active pharmaceutical ingredients (HPAPI) and antibody drug conjugates (ADC) in the United States with the creation of one of the largest single-digit, nanogram containment production facilities for HPAPIs. This will allow the continuous manufacturing of increasingly potent agents at an industrial scale for therapies with the potential to treat cancer. 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.
Opportunities in the semiconductor industry
We have huge growth opportunities in the semiconductor market due to the significantly accelerating global demand for innovative semiconductor materials. This demand is driven by exponential data growth and highly impactful technology trends such as the Internet of Things (IoT) and 5G. We are working on nearly all of these new technology inflection points of the semiconductor roadmap together with our customers. Our capacity investments are synchronized to our customers’ expansion plans and we continue to tackle industry challenges as well as supply reliability. Our semiconductor business has a very broad and unique portfolio which is not dependent on a single product or technology. It consists of different, independent technologies: Thin Film, Patterning, Planarization, Specialty Gases and Delivery System & Services. There is a natural hedge due to our holistic capabilities. Furthermore, we supply products for all essential production steps of wafer processing: patterning, deposition, planarization, etching, cleaning, doping and packaging. For instance, this year we launched the new AZ® 910 Remover which offers an innovative, cost-effective solution to support our customers with their advanced cleaning needs integral to realizing next-generation chips.
Moreover, 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 these customers on this new device architecture.
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. 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. Through our semiconductor and display knowledge, we will be able to contribute to the new generation of optimized sensors. Furthermore, we see opportunities in foldable displays, which require a broad set of materials ranging from encapsulation to the OLED stack.
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. Beside the opportunities for displays e.g., for gaming applications, we are pressing ahead to capture the future markets for liquid crystal in windows (LCWs) and mobile antennas. With our smart antenna technology, we offer a unique technology that can be used for the data transfer to the growing number of LEO satellites, providing internet connection to remote areas worldwide. LCWs are creating new architectural possibilities for switchable solar shadings and – as introduced in 2021 – for creating private spaces in public and commercial venues.
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 Electronics business sectors, risks are posed by not only cyclical business fluctuations but also changes in the technologies used or customer sourcing strategies. We use close customer relationships and in-house further developments as well as market proximity, including precise market analyses, as mitigating measures. Overall, the risk is likely with a potential substantial to critical impact.
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.
The strategic alliance concluded with Pfizer Inc. in 2014 enabled us to jointly develop Bavencio® (avelumab). Following approvals for patients with metastatic Merkel cell carcinoma and those with locally advanced or metastatic urothelial carcinoma (UC) in 2017, the United States Food and Drug Administration (FDA) and the European Commission issued approvals for Bavencio® plus Inlyta® (axitinib) for the first-line treatment of patients with advanced renal cell carcinoma in 2019. Last year, the FDA approved Bavencio® for the maintenance treatment of patients with locally advanced or metastatic urothelial carcinoma that has not progressed with first-line platinum-containing chemotherapy. This year the European Commission (EC) and the Japanese Ministry of Health, Labour and Welfare (MHLW) approved Bavencio® as monotherapy for the first-line maintenance treatment of adult patients with locally advanced or metastatic urothelial carcinoma who are progression-free following platinum-based chemotherapy. Additional applications for Bavencio® have been submitted to regulatory authorities worldwide.
Mavenclad® (cladribine tablets) 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 (RMS) 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 more than 80 countries. This year, independent data has shown that Mavenclad®-treated patients receiving an mRNA Covid-19 vaccine mount a similar antibody response to that of the general population which is important since new strains of Covid-19 push the pandemic onward and guidance recommends booster vaccinations. New data presented at the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS) 2021 highlight improvement in measures of physical and mental health of patients with relapsing multiple sclerosis after one year of treatment with Mavenclad®. Late-breaking real-world data suggest the sustained benefit of Mavenclad® treatment on long-term mobility and disability status.
The oncology drug Tepmetko® (tepotinib) was the first oral MET inhibitor to receive regulatory approval anywhere in the world for the treatment of advanced non-small cell lung cancer (NSCLC) harboring mesenchymal-epithelial transition (MET) gene alterations, with its approval in Japan in March 2020. In February, the FDA approved Tepmetko® for the treatment of patients with metastatic non-small cell lung cancer harboring MET exon 14 skipping alterations. Tepmetko® is the first and only FDA approved MET inhibitor that offers once-daily oral dosing. This indication is approved under accelerated approval based on overall response rate and duration of response. The continued approval may be contingent upon verification and description of clinical benefit in confirmatory trials. In December 2021, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) adopted a positive opinion recommending the granting of a full marketing authorization for Tepmetko® as the first and only oral MET inhibitor for adult patients with advanced NSCLC harboring alterations leading to METex14 skipping. The CHMP positive opinion will now be reviewed by the European Commission, with a decision expected in the first quarter of 2022.
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.
The development of our Bruton’s tyrosine kinase (BTK) inhibitor Evobrutinib is further progressing. New data presented at the 37th Congress of the ECTRIMS show that Evobrutinib is the first BTK inhibitor to demonstrate a significant reduction in slowly expanding lesions (SEL) in patients with RMS. SELs are chronic, active, demyelinated multiple sclerosis (MS) lesions, which are thought to be an early indicator of disease progression in MS. Additionally, the enrolment in the Phase III Evolution RMS clinical trial program has been completed. It is evaluating the efficacy and safety of investigational BTK inhibitor Evobrutinib in patients with relapsing multiple sclerosis. Evobrutinib is an oral, highly selective inhibitor BTK and a potential innovation for people living with MS, as it may offer a novel dual mechanism of action that is thought to impact myeloid cells in addition to B-cells and thus could address MS pathobiology in a fundamentally new way. The data from a Phase II placebo-controlled randomized trial showed that the BTK inhibitor Evobrutinib significantly reduced blood neurofilament light chain levels, a key biomarker of neuronal damage and inflammation, in patients with multiple sclerosis.
In March, we announced a worldwide in-licensing agreement with Debiopharm, Lausanne, Switzerland, for the development and commercialization of Xevinapant (Debio 1143). Xevinapant, a potent oral Inhibitor of Apoptosis Proteins (IAP) antagonist, is the only medicine in its class in late-stage clinical development and has the potential to be first-in-class. Xevinapant is currently being investigated in the Phase III TrilynX study for previously untreated high-risk locally advanced squamous cell carcinoma of the head and neck (LA SCCHN), in combination with platinum-based chemotherapy and standard fractionation intensity-modulated radiotherapy.
In April, we announced key clinical advancements for berzosertib (M6620), an investigational, potent and selective ataxia telangiectasia and Rad3-related (ATR) inhibitor. Berzosertib is the leading asset in our DNA damage response (DDR) inhibitor program and one of the most advanced ATR inhibitors in oncology clinical development industry-wide. We are leading more than ten clinical trials across DNA Damage Response (DDR) pathways in various tumor types.
In December, we announced the strategically focused expansion of our neurology pipeline with the acquisition of the rights to develop cladribine for the treatment of generalized myasthenia gravis (gMG) and neuromyelitis optica spectrum disorder (NMOSD). We entered into an agreement to secure the global rights by acquiring Chord Therapeutics, a Swiss-based biotech company focused on rare neuroinflammatory diseases. We expect the transaction to be closed in early 2022 after satisfactory completion of customary closing conditions.
With Enpatoran and M1231 we have two additional assets in our portfolio with first-in-class potential. M1231 is a MUC1/ EGFR bi-specific Antibody-Drug Conjugate (ADC) that has an enhanced safety profile compared to existing ADC therapies. We consider this asset as next generation ADC for patients with solid tumors aiming for effective delivery of potent chemotherapy payload with reduced on- and off-target toxicity. Enpatoran is a small molecule for targeted inhibition of the important lupus mediator TLR7/8, aiming for improved efficacy with low infection risk. For Enpatoran, we plan to initiate a Phase II study in CLE (Cutaneous lupus erythematosus) and SLE (Systemic Lupus Erythematosus) in early 2022.
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 substantial to critical 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 evaluated with probabilities ranging from improbable to likely.
Opportunities presented by activities to boost innovative strength
Digital technologies and data are becoming increasingly important. They will enable the development of personalized solutions of the future, accelerate our R&D pipelines, and ultimately improve patient and customer outcomes. In this context, 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. In 2021, we established the Code of Digital Ethics, which serves as a basis for ethical risk assessment in existing ventures but is also utilized to design ethics checkpoints for nascent digital solutions throughout the company. To stay ahead of the curve, we are bringing innovation and digitalization closer together.
We look into transformative technologies and innovative (digital) business models beyond our core products and markets while keeping in strategic proximity to our business sectors. Examples for transformative technologies include our innovation fields Cultured Meat and Bioelectronics. We are cooperating with start-ups and companies in our and other industries to drive innovative approaches.
Opportunities provided by CRISPR technology
As a pioneer of genome-editing innovation for nearly two decades, we are leveraging CRISPR technology as a core competency of our business. Around the world, our Life Science business sector holds 40 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 are available in the United States, allowing us to support US scientists and researchers in their work to advance and protect gene-therapy development programs. In the reporting year, we signed an agreement licensing our CRISPR-Cas9 technology to Cellecta, Inc., a functional genomics products and services provider based in Mountain View, California, United States. Through the licensing of our innovative technology, we are paving the path for researchers and scientists to identify and accelerate next-generation treatments.
Risks and opportunities related to the quality and availability of products
Opportunities arising from capacity expansion
In Life Science, we opened our second Carlsbad, California-based facility in the United States, significantly expanding our global contract development and manufacturing organization (CDMO) footprint. The new € 100 million, 140,000-square foot facility will more than double the company’s existing capacity to support large-scale commercial and industrial manufacturing for viral gene therapy, in a market expected to grow to US$ 10 billion by 2026. This is the company’s second Carlsbad, California-based facility to serve cell and gene therapy customers driven by the industry’s rapid adoption of viral vector-based therapies. With the acquisition of Exelead and AmpTec we will further strengthen our CDMO offering for mRNA. Exelead specializes in complex injectable formulations, including Lipid Nanoparticle-based drug delivery technology which is key in mRNA therapeutics for use in Covid-19 and many other indications. AmpTec’s PCR-based technology combined with our expertise in lipides manufacturing allows us to offer customers innovative technologies, products and services to help advance life-enhancing therapeutics and vaccines for Covid-19. Additionally, our Life Science business sector has been awarded a € 121 million contract award for the construction of a lateral flow membrane production facility over a three-year period at our U.S. site in Sheboygan, Wisconsin, United States. The contract award from the U.S. Department of Defense, on behalf of the U.S. Department of Health and Human Services, is part of an effort to ensure secure local supply and production capacity for critical products for pandemic preparedness. We further broadened our manufacturing footprint with a combined € 40 million investment at our production facilities in Danvers, Massachusetts, and Jaffrey, New Hampshire, United States. These sites supply critical products to customers developing lifesaving therapies, including Covid-19 vaccines, as well as provide products and services for biopharmaceutical manufacturing. These expansions will significantly increase capacity and output at these facilities by 2022, respectively, and create nearly 700 new manufacturing positions. Furthermore, we announced the addition of a single-use assembly production unit at our site in Molsheim, France, the first site in Europe to produce this product critical to the manufacture of Covid-19 vaccines and other life-saving therapies.
In Electronics, we plan to invest more than € 3 billion in innovation and capacities up to the end of 2025. We will continue to heavily invest in research and development (R&D) in leading-edge material solutions and plan to spend more than € 2 billion in long-term fixed assets (capital expenditures). The investment is an essential part of the business sector’s Level Up growth program, as announced at our Capital Markets Day on September 9. Through Level Up, Electronics seeks to capture the growth opportunities that come along with the significantly accelerating global demand for innovative semiconductor and display materials. This demand is driven by exponential data growth and highly impactful technology trends such as the Internet of Things and 5G. Level Up will initiate or accelerate important internal initiatives under the Capabilities priority. Among other things, it will further leverage its data analytics capabilities and invest even further into the safety realm.
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 substantial impact is improbable; however, it cannot be entirely ruled out. Depending on the product concerned and the severity of the objection, such a risk might have a negative impact on the net assets, financial position, and results of operations.
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 highly improbable, an individual event could have a critical negative effect on the net assets, financial position, and results of operations.
Risks of dependency on suppliers
In balanced markets, single-sourcing strategies may be chosen to bundle our company’s demand and accelerate price reductions. This strategy might result in dependency on individual suppliers for a number of goods or services. Consequently, events like discontinued/curtailed production or supply disruptions could potentially result in unavailability of such goods or services and have a critical impact on the concerned businesses. The Covid-19 pandemic represented an additional force, driving the potential risks of the single-source strategies. With long-term strategic alliances, qualification and validation of alternative sources, and supplier development strategies, we are able to reduce the probability of occurrence of these risks and rate them as possible.
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 highly improbable, individual cases could still have a critical effect on the net assets, financial position, and results of operations.
Risks due to product-related crime
As a leading global science and technology company and manufacturer of products of the highest quality, we are exposed to various security- and crime-related risks. Due to the increasing complexity of global trade, our products are particularly at risk from counterfeiting, theft, illegal diversion, and misuse. If left unaddressed, this would not only lead to financial loss, reputational damage, and business disruption but also impact patient & customer safety. Consequently, we have implemented technical, operational, and procedural measures aimed at protecting the integrity of our products and supply chains, whilst also ensuring new threats are identified and addressed. Overall, the threat resulting from product-related crime is likely with a potential moderate impact.
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. We thus rate this as a moderate risk.