Aquisition and transformation in the pharmaceutical … pipeline Significant expertise in biotech & classic pharma Additional therapeutic areas focused on specialist markets Strong

Swiss-American Chamber of Commerce Geneva, October 6th, 2010

Elmar Schnee

General Partner and Member of the Executive Board Merck KGaA

President Merck Serono

Aquisition and transformation in the pharmaceutical industry

Swiss-American Chamber of Commerce - E. Schnee October 6, 2010

2

Outline of the presentation

2 Integration of Serono

3 Strategy Merck Serono

1 Merck KGaA


3

1668 Friedrich Jacob Merck (1621-1678) buys the “Engel-Apotheke”

1827 Emanuel Merck (1794-1855) starts industrial-scale production

1880 Internationalization and expansion of product range; first finished pharmaceutical products (1904)

1904 First steps into liquid crystal business

1918 Loss of property after World War I, incl. Merck & Co in the U.S.

1991 Acquisition of Lipha

1994 Acquisition of Amerpharm (Merck Generics Group)

1995 IPO of Merck KGaA; Merck family is major shareholder

2001 Relaunch of operational activities in North America under the brand EMD (Emanuel Merck Darmstadt)

2007 Acquisition of Serono S.A.

Merck – More than 300 years of tradition


4

Portfolio evolution From 9 divisions to 4 divisions

Laboratory Distribution

Liquid Crystals

Pigments

Electronic Chemicals

Life Science Products

Analytics & Reagents Performance & Life Science Chemicals

CH

EMIC

ALS

Liquid Crystals

Generics

Consumer Health Care

Ethicals

PHA

RM

A

Merck Ethicals

Consumer Health CareDivestments

2003 2004 2005 20072006 2008 2009

Integration and Divestments

Merck Millipore

Performance Materials

Merck Serono

Consumer Health CareAcquisitions

Acquisitions

2010

2007

2010


5

Merck’s balanced business model proved successful in 2009Total revenues increased 2.1% to € 7.7 billion

Core operating result (OR) € 1,296 million (-25.3% due to difficult economic environment)

Return on sales (ROS) 8.4%

Research and development costs rose 8.9% during 2009 to € 1,345 million

Dividend for 2009: € 1 per share

Phar

ma

Che

mic

als

Performance & Life Science 1,202

Liquid Crystals 733

Merck Serono 5,345

Consumer Health Care 467

Total revenues by division in millions of euros

2009 revenues of Merck’s 4 divisions


6




1 Merck KGaA


7

Road to pharmaceutical acquisition of Merck

1986 last NCE launch

Dependence on Oncology for growth

No US-operations

No critical mass

Conservative behaviour

Desire of Merck family to innovate in pharma


8

Serono SA

First round not available (€ 18b in negotiations)

Negotiation from Serono failed

Exclusive negotiation

Due Diligence – signature 4 months

No Investment Bank

23 September 2006 signed

5 January 2007 closed


9

Merck Serono Based on a successful transformational acquisition

Acquisition Criteria for Pharmaceuticals Merck Serono Achieve competitive scale in R&D and leverage biotechnology know-how

Fixed the R&D engine

NBEs representing 60% of sizeable development pipeline

Significant expertise in biotech & classic pharma

Additional therapeutic areas focused on specialist markets

Strong or leadership position Fertility, Neurodegenerative diseases, Endocrinology and Oncology

Pipeline assets in Rheumatology

Excellence in Life Cycle Management and Devices

Strengthen Oncology Erbitux blockbuster potential, 21% growth in H1 2010

Expanded geographic reach with entry into US market

US revenues at EUR 870 for 2009

Expanded geographic reach with entry into Japanese market

Successful market entry in Oncology

Gonal-f market share tripled in 2009

http://www.clker.com/clipart-green-check-mark.html




10

Merck Serono in a snapshotDivision of Merck KGaA

Established: January 5, 2007

Business: Innovative Prescription Pharmaceuticals

Employees: 17,000

President: Elmar Schnee

Combined Sales: € 5,3 bn in 2009

Headquarters: Geneva, Switzerland

Key growth drivers:


11

Integration

Integration done with the spirit of a merger not an acquisition

« Take the best of both worlds »

Speed of the process as an essential component of the approach

« Speed in itself is a value ».

Karl-Ludwig Kley – Chairman of the Executive Board of Merck KGaA.


12

Communication is key

Integration Communications Team

Appointment of an Integration Communications Team to drive communications to all employees throughout the integration process

Members from both former Serono, Merck Ethicals and outside consultants

Dedicated communications tools

Internal newsletters

Integration intranet site

Integration events (videoconferences & webcasts)


13

Guidelines of the EMB leadership approach

Set clear objectives for managers and employees

Act with speed, simplicity and decisiveness

Tackle hard issues and confront conflicts

Represent the fact that Merck Serono is one organization

Be transparent and consistent with communications

Be market-driven in decision-making

EMB leadership approach


14

Merck Serono principles

Develop NCEs & NBEs

Focus on specialist physicians

De-risk our pipeline to guarantee product flow

Pipeline filled by internal and external research / collaboration

Focus on defined therapeutic areas

> € 1 billion in R&D investment or 20% of sales

No new products targeted at GPs, from HQ

Local GP infrastructure must be supported by profitable local activities


15

Organizational structure for the integration process

Integration Teams

Integration Steering Committee

Integration Office

Communication Human Resources Controlling

MerckSerono


16

Overview on integration timeline


17

Focused Innovation Portfolio fixed and R&D engine repaired

2007 - 2008

2008 - 2010

2010+

Establish Merck Serono & combine

pipelines

Consolidate R&D operations and drive

pipeline progress

Pipeline sustainability

TODAY

Perf

orm

ance

Time


18

Focused Innovation Leveraging a globally integrated R&D organization accelerating innovation

Set-up:

Sites consolidated into4 therapy area-focused hubs with 2,500 professionals

New Leadership team

Benefits:

Global organization allows for employing best talent worldwide

Span permits taking advantage of local opportunities including key scientific networks

Darmstadt HubGeneva Hub Beijing HubBoston Hub

Neurodegenerative DiseasesRheumatologyOncologyEndocrinologyFertility

RheumatologyOncology

Focus on drug development


19

Focused Innovation Unique R&D Organization established

Major differentiators:1. Proof-of-Concept R&D organization2. Portfolio Development independent from

R&D and Business Units 3. Research Development and Marketing

closely interlinked early on in TALTs

Phase 0 Phase I Phase II / POC* Phase III Regis-

tration

Product Development Committee

Executive Management Board

LaunchDiscovery

Discovery Review Committee

Therapeutic Area Leadership Teams (TALT)

* Proof-of-Concept

DR

BU PfD

TALT


20

Attractive Performance Top employer with top employees guarantee target achievementAn Environment where people succeed to realize their fullpotential when delivering the company goals

We have been ranked*:– Sixth place in 2009 among the best employers in the life sciences

industry

– Seventh place in 2008 among the best employers in the life sciences industry

We reached record employee engagement scores

People are “the” assets of Merck Serono

*Science Magazine, Oct 5 2009 and Bilan Magazine January 2010


21

Acquisition – the mirror imageGenerics – Divested to Focus on

Growth in Specialty Pharmaceuticals

Difficult to make two totally different business models co-exist

A group of our size does not have the capacity to invest in both areas

Priority given to innovation

Transaction signed with Mylan Inc., US in May 2007 for €4.9bn

- Transaction completed and closed within only five months

- Net profit: €3.5bn

- After one year: again debt free (€ -300m)


22




1 Merck KGaA


23

Vision

We focus our expertise on one enduring commitment: We want to transform medical science into breakthrough solutions that make a difference to people’s lives.

We will create an innovative, successful pharmaceuticals business with global reach, by leveraging our core strengths.

We want to build a company being recognized as “best pharma”.

Our success will benefit patients and reward employees and owners.


24

Oriented towards three strategic priorities

”Living Science, Transforming Lives”Driving Sustainable Growth, Innovation and Performance

Oncology and Multiple Sclerosis drive organic top line growth

Excellence in Life Cycle Management

Maximize growth in Emerging Markets

Continuous Growth

Lead in Multiple Sclerosis

Develop attractive pipeline assets

Re-balance pipeline, enhance partnerships

Maximize potential of reorganized R&D function

Focused Innovation

Deliver solid financial results

High performing organization, attractive place to work

No exposure to patent cliff

Attractive Performance

1 2 3


25

Oncology

Broad oncologypharmacology

NBE/NCE

Neurodeg.diseases

Neuro- immunology

neurobiology

A Clear Strategic Therapeutic Area Focus

Fertility & Endocrinology

Rheumatology

Emerging TA with focus on

Rheumatology

Merck Serono

Cross-fertilization through common

target mechanisms and R&D technologies

Futu

re g

row

th d

river

s:2

core

are

as fo

r gro

wth

Our

sol

idfo

unda

tion

CM Care & General Medicines

Local Specialties


26

Continuous growth Three important growth drivers

Sales growth for the next two years expected to be high single digit

Growth engines

Long term growth expected to outperform the Pharmaceuticalmarket growth

Drivers– Blockbuster status of Erbitux, leadership in Multiple Sclerosis

– Launch of new cancer therapies and entry into Oncology market in the US

– Entry into new therapeutic area with high unmeet needs i.e. Rheumatology

– Life Cycle Management excellence

MS – franchise EmergingMarkets


27

Continuous Growth Well positioned to deliver strong results in Emerging Markets

0%

3%

5%

8%

10%

13%

15%

18%

20%

0% 4% 8% 12% 16% 20% 24%

% of Business coming from Emerging Markets .

Sho

rt te

rm g

row

th (P

PG

200

8-09

)

Novo Nordisk

Daiichi Sankyo

BMS

Takeda

Amgen, Eisai

BI

Teva

BayerLillyAbbott / Solvay

J&J

RocheAZ

GSK

Sanofi-AventisNovartis

MSD/SP

Pfizer

Size of the bubble = 2009 Pharmerging Sales

Source: IMS Health MIDAS MAT December 2009. Rx-bound only

Otsuka

Merck Serono


28

Continuous Growth Excellence in Life Cycle Management

New Indications CMCare Devices

Expands indications and / or treatment options

Erbitux Gastric

Erbitux Adjuvant Colon Cancer

Rebif in CIS

Cladribine Tabletsin CIS

RebiSmart

cool.click™ needle-free device

one.click™ autoinjector

easypod

RebiJect II

Gonal-f


29

Attractive Performance Our Values

Courage opens the door to the futureAchievement makes our entrepreneurial success possibleResponsibility determines our entrepreneurial actionsRespect is the foundation of any partnershipIntegrity ensures our credibilityTransparency makes mutual trust possible


30

Thank you


31

in RegistrationPhase IIIPhase II

Merck Serono Portfolio July 29, 2010

OncologyNeurodegenerative DiseasesAutoimmune & Inflammatory DiseasesEndocrinology

*Sponsored and coordinated by the Fédération Francophone de Cancérologie Digestive (FFCD)

ARX 201, long acting GHGrowth hormone deficiencies

Anti-integrin mAb (DI17E6)Colorectal Cancer

TLR9 immunomodulator (IMO-2055)SCCHN

Adecatumumab, anti-EpCAM mAbColorectal Cancer

Erbitux® (cetuximab), anti-EGFR mABBreast cancer

Erbitux® (cetuximab), anti-EGFR mAb (PETACC-8*)Adj Colon Cancer

Erbitux® (cetuximab),anti-EGFR mAb (EXPAND)Gastric Cancer

Safinamide (MOTION)Early stage Parkinson’s

Atacicept, anti-Blys/anti-APRIL fusion protein (APRIL) Systemic Lupus Erythematosus

Cilengitide, integrin inhibitor (CENTRIC)Glioblastoma

Stimuvax®, therapeutic cancer vaccine (START, INSPIRE)NSCLC

Safinamide (SETTLE)Mid-to-late stage Parkinson’s

Rebif New Formulation in CIS (REFLEX)

Cladribine tablets Relapsing forms of MSEMA: Application submittedFDA: Application submitted

Phase I

TesamorelinExcess abdominal fat in HIV patients with lipodystrophyFDA: Application submitted

Rebif New Formulation Relapsing forms of MSFDA: Application submitted

Cladribine tablets in CIS (ORACLE MS)Cilengitide, integrin inhibitor

SCCHN

Cilengitide, integrin inhibitorNSCLC

Fibroblast Growth Factor 18Osteoarthritis

MEK inhibitor (AS703026)Solid tumors and hematological malignancies

c-Met kinase inhibitors (EMD 1214063, EMD 1204831)Solid tumors

Fibroblast Growth Factor 18Cartilage Injury Repair

ATX-MS-1467, immune tolerizing agentRelapsing Forms of MS


32

Focused Innovation Event-driven process to prioritize portfolio and support resource allocation

Generating Product ProfilesGenerating Product Profiles

R&D Risk AssessmentR&D Risk Assessment

Defining Market EnvironmentsDefining Market Environments

Sales ForecastingSales Forecasting

Decision Tree and NPV modelling Decision Tree and NPV modelling

Synthesis and SummarySynthesis and Summary

1

2

3

4

5

6

Documents

Aquisition and transformation in the pharmaceutical … pipeline Significant expertise in biotech & classic pharma Additional therapeutic areas focused on specialist markets Strong