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Report on Expected Developments

The following report provides a forecast for fiscal 2019 of the development of Merck KGaA, Darmstadt, Germany, and its three business sectors: Healthcare, Life Science and Performance Materials.

The sale of the Consumer Health business to Procter & Gamble (P&G) was completed as of December 1, 2018. The 2018 figures already reflect this sale. For this reason, the sale has not been recorded as a portfolio effect in the comparison of the forecast with the figures for fiscal 2018.

We define organic earnings growth as currency-adjusted and portfolio-adjusted growth. Accordingly, the effects resulting from the first-time application of the new accounting standard for leases (IFRS 16) are reflected in organic earnings growth.

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Forecast for the Group

€ million Actual results 2018 Forecast for 2019 Key assumptions
Net sales 14,836
  • Moderate organic growth
  • Slightly negative foreign exchange effect of – 1% to – 2%
  • Growth driven by Life Science and Healthcare, which more than offsets the decline of Performance Materials
  • Foreign exchange effect primarily resulting from several emerging market currencies
EBITDA pre 3,800
  • Pronounced organic percentage growth rate in the low teens range
  • Negative foreign exchange effect of between – 3%
    and – 4%
  • Growth driven by Healthcare and Life Science, which more than offsets the decline of Performance Materials
  • First-time application of IFRS 16 with a positive contribution of around € 130 million
  • Foreign exchange effect primarily resulting from several emerging market currencies
Business free cash flow 2,508
  • Moderate increase
  • Higher EBITDA pre and positive effects in working capital offset higher investments in property, plant and equipment as well as digitalization initiatives

Net sales

For the Group, in 2019 we expect moderate organic sales growth in comparison with the previous year. With regard to foreign currencies, we continue to expect a volatile environment due to political and macroeconomic developments. Our forecast for 2019 is based on an exchange rate of the euro against the U.S. dollar in the range of 1.15–1.20. This means that the foreign exchange effect from the development of the exchange rate between the euro and the U.S. dollar is likely to be neutral when compared with the prior year. All told, however, due to the unfavorable trend of exchange rates on several growth markets – Latin America, in particular – we expect a slightly negative foreign exchange effect of between – 1% and – 2% when compared with the previous year.

EBITDA pre

EBITDA pre is our key financial indicator to steer operating business. On an organic basis, we forecast an increase in EBITDA pre in the low double-digit percentage range for the Group in 2019 compared with the prior year. This includes effects from the first-time application of the accounting standard IFRS 16, which contains new provisions on reporting for leases. Based on the current accounting provisions with respect to leases, EBITDA pre will increase by around € 130 million compared with the prior year. Most of the effects will probably be accounted for by the Life Science and Healthcare business sectors, while the impact on Performance Materials as well as Corporate and Other will be less pronounced.

The projected trend of exchange rates will likely reduce EBITDA pre for the Group by between – 3% and – 4% compared with the prior year and will thus have a disproportionate effect compared with sales, particularly in the Healthcare business sector. While we expect the development of the euro against the U.S. dollar to be neutral for the Groups’ EBITDA pre, the negative trend of currencies on several growth markets will weigh on EBITDA pre. In the affected countries, the cost base is low relative to sales owing to our regional structures. In addition, due to high hedging costs, these emerging market currencies are not hedged. Therefore, a compensating effect from currency hedging cannot be expected.

Business Free Cash Flow

For business free cash flow of the Group, we expect a moderate rise in 2019 owing to higher EBITDA pre and positive effects from the management of working capital. Both effects combined will be able to more than offset the rising investments in property, plant and equipment as well as digitalization initiatives.

Forecast for the Healthcare business sector

€ million Actual results2018 Forecast for 2019 Key assumptions
Net sales 6,246
  • Moderate organic growth
  • Moderately negative foreign exchange effect
  • At least stable sales development of the base business in organic terms
  • Substantial growth contribution of our newly approved products, particularly Mavenclad®; expected market approval in the United States has been taken into account
  • Negative foreign exchange effect due to trend of exchange rates on several growth markets
EBITDA pre 1,556
  • Pronounced organic growth rate in the low-to-mid-twenties percentage range
  • Strongly negative foreign exchange effect
  • Expected substantial earnings contributions from our new products, especially Mavenclad®, more than offset negative mix effects associated with the projected decline of Rebif® sales
  • Moderate increase in research and development expenses due to the development of our pipeline, but down in relation to sales
  • Earnings contributions from the strategic alliance with GlaxoSmithKline plc of approximately € 100 million and owing to license payments for Erbitux® that were lower than expected
  • Negative foreign exchange effect due to trend of exchange rates on several growth markets
Business free cash flow 1,025
  • Increase in the low teens percentage range
  • Rise in EBITDA pre
  • Positive net working capital effects (including positive effects from the sale of the Consumer Health business)

Net sales

For the Healthcare business sector, we expect moderate organic sales growth in 2019. We project an at least stable sales trend for our base business. The persistently strong demand for our products in the General Medicine & Endocrinology business unit on the growth markets will make a major contribution to this trend, as will our business with products for the treatment of infertility. These positive effects should compensate for the expected decline in sales of Rebif® and the continuing price pressure on major markets in the Europe, Asia-Pacific, and Middle East and Africa regions. Moreover, we expect our new products, above all Mavenclad®, to make a significant contribution to growth. For 2019, we forecast Bavencio® sales totaling a euro figure in the high double-digit millions and Mavenclad® sales up to a figure in the mid-triple-digit millions. These forecasts include the expected market approval of Mavenclad® in the United States. In particular, the unfavorable currency trend on several growth markets should lead to a moderately negative foreign exchange effect on Healthcare sales.

EBITDA pre

For 2019, we forecast organic EBITDA pre of the Healthcare business sector to record strong growth in the low-to-mid-twenties percentage range compared with the previous year. Foreign exchange effects are expected to weigh heavily on EBITDA pre.

The negative earnings effects resulting from the projected decline of Rebif® sales should be more than offset by expected, substantial earnings contributions from our new products, particularly
Mavenclad® . The disappearance of one-time effects from fiscal 2018 totaling some € 180 million should be more than offset by expected earnings contributions from the active management of our pipeline assets and milestone payments. The conclusion of a global strategic alliance with GlaxoSmithKline plc (GSK) on February 5, 2019, for the joint development and marketing of M7824 (Bintrafusp alfa1) is an initial major contribution in this respect. For 2019, we expect an income effect from the upfront cash payment of around € 100 million in other operating income. License payments for Erbitux® that were lower than expected had the effect of enhancing earnings. Research and developments costs to develop our pipeline, especially in immunoncology, will continue to rise; based on current forecasts this trend is likely to weaken. This budgeted cost increase does, however, depend on the development of clinical data and on prioritization decisions. We also expect our marketing and selling costs to increase further, driven primarily by preparations for the launch of Mavenclad®, particularly in the United States. However, we expect research and development costs as well as marketing and selling costs to decline or at least remain stable in relation to sales.

1Bintrafusp alfa is the proposed International Nonproprietary Name (INN) for bifunctional immunotherapy M7824.
  Bintrafusp alfa is currently in clinical trials and not approved for any indication worldwide.

Business Free Cash Flow

In 2019, we expect business free cash flow of the Healthcare business sector to show an increase in the low twenties percentage range. The main drivers will be the expected rise in EBITDA pre and positive developments of net working capital (including positive effects from the sale of the Consumer Health business).

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Forecast for the Life Science business sector

 € million Actual results 2018 Forecast for 2019 Key assumptions
Net sales 6,185 – Organic growth slightly above medium-term market growth of 4% p.a.
– Slightly negative foreign exchange effect
– Process Solutions is expected to remain the main driver of growth, followed by Applied Solutions
– Research Solutions will also make a moderately positive contribution to the organic sales development
– No material portfolio effect as a result of the sale of the flow cytometry business
– Negative foreign exchange effect, particularly on account of the development of emerging market currencies
EBITDA pre 1,840 – Organic growth ranging from strong to a double-digit percentage rate
– Moderately negative foreign exchange effect
– Organic income growth on account of the expected sales growth and slight margin expansion
– In addition, positive contribution to organic income growth from the switch to IFRS 16
– Negative foreign exchange effect, particularly on account of the development of emerging market currencies
Business free cash flow 1,393 – Moderately below 2018 levels – Improved EBITDA pre
– Increase in investments in property, plant and equipment in strategic projects

Net sales

For the Life Science business sector in 2019, we project organic growth in net sales over the previous year that is slightly above medium-term market growth, which we put at around 4% per year. We expect all business units to make a positive contribution to organic growth. In 2019, the Process Solutions business unit is again likely to remain the strongest driver of organic growth, followed by Applied Solutions. The Research Solutions business unit should also make a moderate contribution to the sales development, albeit to a lesser extent than the other two business units. We sold the flow cytometry business at the end of 2018. The divestment will not have a material portfolio effect. Due to the development of currencies on various growth markets, we project a slightly negative foreign exchange effect.

EBITDA pre

In 2019, the Life Science business sector is expected to show a sharp increase in organic EBITDA pre totaling nearly double-digit growth rates compared with the previous year. The persistently dynamic demand trend, a further slight increase in the margin and the IFRS 16 effects will all contribute to the organic growth in income. Cost and sales synergies from the acquisition of Sigma-Aldrich were realized as planned in 2018. All told, these synergies came to € 280 million. No incremental synergies are expected for 2019.

In fiscal 2019, we forecast organic EBITDA pre growth of the Life Science business sector that will be reduced by a moderately negative foreign exchange effect, driven by the devaluation of several emerging market currencies.

Business Free Cash Flow

We expect business free cash flow of our Life Science business sector to be moderately below the prior-year level. Higher EBITDA pre will be more than offset by investments in strategic projects.

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Forecast for the Performance Materials business sector

€ million Actual results2018 Forecast for 2019 Key assumptions
Net sales 2,406
  • Organically moderate decline from the prior-year level
  • Foreign exchange effect roughly neutral
  • Strong growth momentum in the Semiconductor Solutions business unit
  • Continuing price decline in Liquid Crystals business, which is mitigated by a temporary rise in volume due to capacity expansions of customers in China
  • Neutral foreign exchange effect due to the development of the exchange rate of the euro against the U.S. dollar
EBITDA pre 786
  • Organic high single-digit to low double-digit percentage decline
  • Foreign exchange effect roughly neutral
  • Drop in liquid crystal prices cannot be offset by growth in other businesses and active cost management
  • Neutral foreign exchange effect due to the development of the exchange rate of the euro against the U.S. dollar
Business free cash flow 588
  • Decline in the low teens percentage range
  • Decline in EBITDA pre

Net sales

We forecast a moderate organic sales decline in the Performance Materials business sector in 2019 compared with the prior year. We also project a drop in sales and prices in the Liquid Crystals business in fiscal 2019. Despite selected capacity expansion projects by our customers, which benefited our Liquid Crystals business in recent months and which are expected to continue providing a benefit in the first half of 2019, we expect that the price pressure characteristic of this industry cannot be compensated for by corresponding volume growth in 2019 as a whole. This development can probably not be offset by good organic growth in other business areas either, for example our business with semiconductor materials or OLED. Due to the development of the euro against the U.S. dollar, we project a neutral foreign exchange effect for the Performance Materials business sector in 2019.

EBITDA pre

Our Performance Materials business sector will probably not be able to absorb the expected decline in sales of the highly profitable Liquid Crystals business in 2019, despite a good expected development in other business areas and strict cost discipline. Consequently, we expect that organic EBITDA pre will decline in the high single-digit to low teens percentage range in comparison with 2018. Due to the development of the euro against the U.S. dollar, we expect a neutral foreign exchange effect for the Performance Materials business sector.

Business Free Cash Flow

For the Performance Materials business sector we forecast a decline of business free cash flow in the low teens range, essentially as a result of the expected negative development of EBITDA pre.

Corporate and Other

The expenses for Corporate and Other will, in our opinion, show an increase in the low-to-mid-teens range on an organic basis in 2019. This increase will be based on a further expansion of our innovation and digitalization initiatives. A greater focus on the costs of the administrative functions and substantially reduced strain from foreign exchange effects are likely to partly offset the increase.