Interview with Karl-Ludwig Kley published in "Euro am Sonntag" "We would be an attractive target" Merck» CEO Karl-Ludwig Kley discusses the logic behind the conglomerate, the realignment of the pharmaceutical business and the acquisition race in the sector BY S. BAUER UND J. GROSS During a visit to the editorial offices of "€uro am Sonntag", Merck CEO Karl-Ludwig Kley is both cheerful and flexible. Before tough topics such as the future of the pharmaceutical business are dealt with, Kley chooses a necktie to wear for the photos. Then the CEO of the Darmstadt-based German blue-chip company refers in detail to the tasks that the company has to tackle and talks about the Group's realignment, acquisitions and future prospects. €URO AM SONNTAG: Merck has been in existence for nearly 350 years. You have repositioned the company. What was the greatest challenge? KARL-LUDWIG KLEY: Hard to say as I don't keep a top-ten list. In 2006 and 2007 we analyzed whether the company had future viability. This was followed by a whole series of measures, with acquisitions like Serono and Millipore, and divestments such as that of our Generics business being the most visible externally. The nice thing is that we have now reached the point we wanted to get to with our three business sectors. The realignment of the portfolio has been completed. Where do the synergies between pharmaceuticals, laboratory supplies and specialty chemicals lie? What do liquid crystals for televisions have to do with oncology medicines? All of our businesses follow a certain logic. They involve innovation; knowledge of chemistry, physics, biology and medicine is required. The synergies also lie in this expertise. Here's an example: Life Science and Performance Materials are working hand in hand on fuel cells. Moreover, all our businesses are characterized by high margins; in nearly all areas we are active in niche markets, and our end-user business is rather limited. Is the family's need for security one of the reasons for the conglomerate structure? I do not see Merck as a conglomerate. Our businesses are unified by the fact that they serve two megatrends. Everything we do has something to do with either health or communication, and with networking. It's true that the family, which holds a 70% interest, wants to pass on a company with sustainable operations to the next generation. We are therefore shaping a portfolio that will still be viable 30 years from now. And without the family, we probably wouldn't even exist anymore. The Group would have been broken up? Merck would be an attractive takeover target. The family provides for stability and allows the company to develop sustainably. Yet we also have shareholders who own our free float and have their eye on short-term performance. This combination is the best thing that could happen to a company. Merck has also been acquiring heavily, most recently you announced plans to purchase U.S. laboratory supplier Sigma-Aldrich for US$ 17 billion. When the deal closes this summer, your debt will rise abruptly. Do you still have money for acquisitions? With the closing of the acquisition, our debt will increase from zero to around € 13 billion. In the coming years, we will first have to eliminate our debt. Thanks to our good cash flow, we are very capable of repaying our debt. There will be no capital measures. In the future, smaller acquisitions here or there will indeed remain part of the business model. Yet the most important topic in the coming years will be organic growth. The past ten years were unique in Merck's history and are likely to remain an exception. How strongly will Merck grow? Not by ten percent a year, but definitely in the mid-single-digit range. In Performance Materials, we will continue to grow as in recent years. In Life Science, the focus is on completing the acquisition of Sigma-Aldrich and integrating the business. That will initially take up all our resources. Our pharmaceutical pipeline is decisive for a higher rate of organic growth. It is to become the driver. Shareholders are just waiting for that. When we kicked off our restructuring project in Pharmaceuticals in 2011, we said that we aimed to reap the fruits in the form of marketable products in five to seven years' time. We are now in year four. Our pipeline looks good. However, in light of our history I am somewhat reluctant to state anything more specific. For decades, Merck did not successfully develop any new medicines itself. Why are you holding onto the business? If you play in the second league, does that mean you should remain there and not strive to move up into the premier league? No, that isn't a perspective for a soccer fan. Even for the Supervisory Board Chairman of the professional German football club 1. FC Köln it's a Herculean task. That's precisely what makes it so much fun. Since 2007, we have been closely analyzing what we lack in Pharmaceuticals in order to succeed. Several things work well: We have an excellent market presence. In each of the past few years, we grew either in line with or faster than the market without having launched any new products. Our early-stage research is also good. However, we haven't been good in Development, when the efficacy of a medicine needs to be demonstrated for the first time. And what we fundamentally lacked was a presence in the United States, a mainstay of biotechnology. We achieved all of this with the acquisition of Serono. That did not rectify the mishaps in Development. That is why we started to completely reorganize the pharmaceutical business in 2011. Since then, we have replaced four-fifths of the top management level. We have become better in designing clinical trials and managing our pipeline. This also includes terminating projects with a resoluteness that previously did not exist. We are on the right track. The deal with Pfizer in the new field of immuno-oncology (Editor's note: to co-develop the oncology drug avelumab) is the largest of its kind to date. That was a clear sign of external recognition. The EBIT margin of your pharmaceutical business lies below the average for the industry. When are things going to improve here? My colleague from Pfizer once jokingly said Pfizer earns 130% of its profit in the United States. We generate one-fifth of our sales in North America. If you do 30% to 40% of your business there, then your profitability will be far higher. And when it comes to returns, you cannot compare a company that mainly sells older products with one that develops something new every two to three years, such as Roche. Investors can choose between Merck and Roche. If I correctly understand investors, then for many of them our pharmaceutical pipeline hasn't played a decisive role recently. Expanding the Performance Materials business and building up the Life Science unit were more important to them. Our pharmaceutical restructuring is now being added to that. Your share price has risen sharply recently, also owing to the Sigma deal. Do you see a risk in the imminent integration? I think we have proven that we are capable of integrating our acquisitions without any side effects. I have no worries here. Does the expansion of the laboratory supply business with its strong cash flow also serve to finance the development costs in your pharmaceutical business? At most temporarily. In recent years, the good cash flow from the pharmaceutical business has helped to finance the acquisitions in the two other business sectors. Our long-term objective is for each business to finance itself. At a good 1%, the dividend yield is not exactly lavish, which is also the result of the sharp rise in your share price. Will you paying a higher dividend in the future? Each year, we pay a dividend that is at least at the previous year's level. That will remain the case. MERCK KGAA Driving acquisitions The high level of research spending in the pharmaceutical business is becoming noticeable. In the first quarter, the operating result of € 853 million did not meet expectations. Revenues from one of the top-selling products, the multiple sclerosis treatment Rebif, fell surprisingly sharply. Sales grew by 16% to around € 3 billion, also due to the acquisition of the specialty chemicals supplier AZ Electronic Materials in 2014. The specific annual forecast: Earnings are to rise to between € 3.45 and € 3.55 billion, an increase of 2% to 5% over the previous year. The Sigma-Aldrich will propel sales and earnings. There's still potential. VITA Karl- Ludwig Kley (63) In 2007, Kley, who is a lawyer, became CEO of the Darmstadt-based family-owned company, which was founded back in 1668. Prior to that, Kley was Chief Financial Officer of Lufthansa and a senior executive at Bayer. Kley is also Chairman of the Supervisory Board of the professional football club 1. FC Cologne.