Merck, based in Darmstadt, Germany, is a diversified science and technology company that discovers, develops, manufactures and commercializes pharmaceuticals, life science products and research equipment as well as performance materials such as specialty materials for the semiconductor industry. We also pursue innovation projects between and beyond our businesses, such as the data platform for cancer research that we are currently creating together with our partner, Palantir Technologies Inc.
The R&D activities of our biopharmaceutical business are focused on three therapeutic areas: immunology, oncology and immuno-oncology. This focus not only allows us to compete with much larger companies, it also enables us to perform very successfully both financially and in terms of R&D productivity. Over the past several years, we have entered into multiple strategic alliances with large partners, enhancing R&D outcomes and financial returns for our company while sharing the risks and costs.
While we are very satisfied with the organic development of our pipeline, inorganic moves by means of corporate venturing, in-licensing and M&A are also a very important pillar of our strategy. In the health care field, valuation multiples are higher for small biotechs than they are for big pharma and biotech companies. Our company therefore faces the following challenge: a biotech company with a single Phase II compound can easily have a valuation of US$5 billion to US$10 billion. However, the risk is that six months later, this valuation could be anywhere from zero to several times what it was originally. That just isn’t the kind of bet a company of our size can justify to its owners and shareholders.
As a result, we are always looking at smaller, earlier stage opportunities. Here, I believe our therapeutic expertise in the fields of oncology, immunology and immuno-oncology underscores our positioning as a trusted partner. Ten years ago, the prevailing wisdom was that companies should stop internal R&D and instead market compounds that were in-licensed. But without top-notch internal capabilities in discovery and clinical development, how can we really be an attractive partner and truly assess the value of a partnership ourselves?
Resilience in turbulent times
Not least because drug development is such a high-risk, high-reward endeavor, one of the Merck family’s key principles has proven very beneficial to our resilience. As our majority owner for 352 years now, the Merck family expects the company to combine different types of business under the same roof. The rationale behind this is to operate in highly innovative, high-margin businesses while at the same time mitigating risk through diversification. That was true long before COVID-19 emerged, along with this new level of turbulence. But now, in times of crisis, the robustness of our business model can be clearly seen. While the pandemic has temporarily affected some of our pharmaceutical products more strongly than others in the first three quarters of 2020, the impact on our oncology pipeline and our clinical trials has been modest. And at the same time, we were able to mitigate any temporary slowdowns in the pharmaceutical business thanks to growth in our life science business, which sells more than 300,000 different products. Our life science business proved to be a generator of stable cash flows and earnings, even in turbulent times.
While our three businesses are all very different, they also benefit from synergies. Our materials and life science businesses give us a unique perspective on what is required for the industrialization of research, which is important for future value creation. More and more, the way we manage innovation is common across these different businesses: in fields like neuromorphic computing or quantum computing, the business model increasingly resembles that of biotech in terms of stage development or collaboration with start-ups, for example. Neuromorphic and DNA computing are even based on biological concepts. An added benefit of our business structure is our ability to move talent between these diversified businesses to offer attractive career opportunities and drive innovation. Our goal is to create synergy and cohesion between them to come up with cutting-edge solutions. This is something we drive systematically, also by means of a dedicated organization, with an in-house network of innovation hubs and incubators in places such as the Silicon Valley, Tel Aviv, Shanghai and Guangzhou.
The importance of purpose
During the pandemic, our immediate priorities have been to safeguard the health of our employees and their families and to ensure business continuity, especially in product manufacturing, logistics and in our R&D labs.
At the same time, our focus was and is to be an active player in providing solutions to the COVID-19 pandemic across all our businesses, from supporting the development and manufacturing of diagnostics and vaccines to finding new therapeutics and enabling digital applications for both R&D and personal life.
While we do not develop or manufacture vaccines of our own, we are harnessing our comprehensive expertise in immunology and oncology to find new treatments. Here, we also benefit from the fact that there is a clear overlap between these two research disciplines. Among other things, we are currently running a Phase II trial of an immunological compound that could mitigate the harmful “cytokine storm,” an intense reaction of the immune system that is often the reason why COVID-19 patients die. In support of the search for new therapies, we are also working with important partners such as the Bill and Melinda Gates Foundation, World Health Organization, the Innovative Medicines Initiative, among others.
Our high level of resilience is possible also because of the emphasis we place on purpose. The entire industry is currently experiencing that a new level of speed is possible if you really want to get something done. There is an enhanced awareness of threats to mankind and society, and of the need for biotech as well as scientific and technological innovation in general to meet significant future challenges. It greatly motivates people when they can make major contributions to society, such as in the fight against COVID-19.
I see this every day in our own organization. Making sure our company is a great place to work, especially for our nearly 8,000 R&D colleagues across the globe, is very important to us and to me personally.