Merck KGaA remains committed to pharmaceuticals and chemicals

One company, two directions

13 May 2008 18:24  [Source: ICB]

Germany's Merck KGaA remains committed to a dual structure, with chemical and pharmaceutical businesses

Dede Williams/Frankfurt

MOST ANALYSTS have stopped asking Merck KGaA when it plans to sell off its specialty chemical business and concentrate on pharmaceuticals, says Walter Zywottek.

"By now they have understood that this is not an option for us," says the executive board member with responsibility for the chemical segment.

As Zywottek explains, the Germany-based, family-owned pharmaceutical and chemical producer - not to be confused with the US pharmaceutical giant of the same name - sees itself as one company with two distinct focuses and has no plans for a split. "There really is no other company quite comparable to Merck," Zywottek asserts.

Certainly, the chemical segment, with sales of €2.2bn ($3.5bn) compared with €4.9bn for pharmaceuticals after to the 2006 acquisition of Swiss biologicals producer Serono, has no reason to hide behind pharmaceuticals.

"Look at the figures," Zywottek offers, clearly pleased. He points to bar charts outlining the performance of the two segments in 2007: they show that chemicals contributed 60% of total earnings, compared with 40% for pharmaceuticals.

The bigger of the two chemical divisions in terms of sales is Performance and Life Science Chemicals, with 2007 turnover of €1.2bn and an operating result of €144m. This groups together such diverse specialty products as reagents, solvents and ingredients for pharmaceuticals and cosmetics, as well as food additives and effect pigments for packaging, coatings and printing inks.

LCDS CRYSTALIZE PROFITS

However, the clear growth driver is liquid crystals (LCs), with 2007 sales revenue of €916m and an operating result of €487m, resulting in a return on sales of 53%. This business benefits from the continued boom in liquid crystal displays (LCDs) for flat-panel televisions and other consumer electronic applications.

Despite analysts' new perspective, Merck feels it needs to do somewhat more to polish the image of its chemical segment, after giving pharmaceuticals a booster shot with the Serono deal.

But rather than seeking a third major focus for chemicals - an "escape valve" considered a few years ago in the event that the white-hot liquid crystals market boils over and then cools - management has decided to take a different approach.

In a new business-to-business advertising campaign, the company is having a little fun playing on its public perception as a pharmaceutical producer to promote its diverse portfolio of 15,000 chemical products.

BUILDING ON PRIOR SUCCESS

The decision to bring together German chemical research and development (R&D) activities in a new €47m center at Darmstadt is an important element in Merck’s strategy. The aim, says chief chemical research manager Thomas Geelhaar, is to leverage the company’s vast technological know-how to open up profitable new applications in some of its existing fields.

To this end, the company is adding muscle through a number of bolt-on acquisitions. In 2007, Merck acquired the ten-year-old chromatography specialist SeQuant of Umea, Sweden, which specializes in manufacturing and marketing of silica gel or polymer-based sorbents for chromatography and ion chromatography. Merck is already a leader in the field of liquid chromatography, and this year it bought Cologne, Germany-based Solvent Innovation, a pioneer in ionic liquids.

But Zywottek, who will retire in July after more than 40 years with the company and assignments in Germany and the Americas, also does not exclude acquisitions of midsize companies. Here, too, he says the takeover targets will be customer-focused, technology-driven chemical companies that have an optimal fit with Merck’s existing product/technology portfolio and customer base.

One project that will be left to the new top chemicals executive, Bernd Reckmann, will be opening the new R&D center in late 2009. This will consolidate 340 research staffers from both the Liquid Crystals and Performance & Life Science Chemicals divisions, along with the Chemicals business development unit. It will complement an existing center at Southampton, England, which conducts more basic research, as well as liquid crystal R&D centers near customers in Japan, Taiwan and now Korea.

OWNERS SUPPORT R&D INVESTMENT

Merck’s Chemicals segment spends around €140m a year on R&D, a budget Geelhaar claims is one of the industry’s highest, proportionate to the company’s size. Management’s research plans are “explicitly encouraged” by the owner family, he says, and “our executive board consistently encourages us to do more.”
Most of Merck’s chemical R&D projects are application-oriented and “essentially driven by customers,” says the research chief. While the two divisions run the more mature projects separately, a common business development unit pursues new markets.
“We also are constantly trying to leverage our existing know-how to find new materials, to reply speedily to long-time customers’ demands for new applications,” Geelhaar remarks.
Around €80m, well over half the annual R&D spending budget, is earmarked for liquid crystals. Here, Merck traces its involvement to the early 1900s, when research pioneer Otto Lehmann noticed that the company produced ingredients needed for synthesis of the crystals.

PRESCIENT WITH PATENTS

However, it wasn’t until the 1960s when the industry began to take off – driven in part by the vision of flat panel TV screens that could be hung on the wall – that the Darmstadt firm began to stake a serious claim in the LC market, where it is now undisputed global leader. In the 1970s Merck began licensing or acquiring patents, in addition to patenting its own research efforts, and entering alliances with display manufacturers, a policy it continues.

Today, the specialty chemical producer claims more than 2,500 patents for liquid crystals, their mixtures and display applications, and updates its portfolio annually with about 100 new patents. Every year, it tests several hundred new compounds and more than 8,000 liquid crystalline mixtures for their suitability in displays, adding some 10 to 15 compounds a year for new LCD applications. Up to 30 different mixtures are needed per LCD.

As in any other high-tech application, the challenge in liquid crystals is how to speed research to keep pace with the dynamic market, says Geelhaar. As one application takes off, the next is waiting. “In the year 2000,” he recalls, “there were no LCD televisions. In 2008, more than 50% of all TVs sold worldwide have liquid crystal displays.”

When a new technology is launched, “consumers want it immediately.” This is why, Geelhaar says, it is important to buy in know-how – in part by acquiring small start-up companies – “parallel to further developing our own.” More than 90% of the company’s LCD research is done in-house, partly in cooperation with customers. In the newer nanotechnology field, the split is 50/50.

Merck is fast-forwarding its LC success story through succeeding generations of related technologies. The next potentially profitable niche market, Geelhaar believes, will be organic light-emitting diodes, or OLEDs. Here, Merck “intends to be a major materials supplier” to OLED manufacturers. Just this February, Sony unveiled a slimline 27-inch OLED television measuring just 10mm at its thickest point.

Alternative display and lighting technologies are other focuses, and Merck also is looking at automotive lighting – using white LEDs to replace xenon and halogen in car headlights, for example.

Another potentially interesting future market for Merck is photovoltaics. In a project backed in part by the German federal research ministry, Merck, chemical giant BASF, electronics company Bosch and glass maker Schott are trying to improve efficiency and economy of solar cells by finding suitable substitutes for silicon, which is in scarce supply.

In nanotechnology, Merck last year formed an alliance with North American codevelopment company Nano Terra. The aim is to improve physical properties of products already in Merck’s current portfolio so that new applications can be developed more cheaply. Commercialization rights will be shared.

Merck is also excited about its cooperation with start-up technology teams in Israel, which mainly pursue life science projects. “We are the only German firm allowed by the Israeli research ministry to apply for joint R&D projects with start-ups, and one of only about three or four companies worldwide with this privilege,” Geelhaar says.

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