Political and regulatory risks and opportunities
As a global company, we face political and regulatory changes in a large number of countries and markets.
Risk of more restrictive regulatory requirements regarding drug pricing and reimbursement
In the Healthcare business sector, the known trend towards increasingly restrictive requirements in terms of drug pricing, reimbursement, and the expansion of rebate groups is continuing. Specifically, in the United States, a pricing reform on prescription drugs is part of the agenda of the current administration. These requirements can negatively influence the profitability of our products, as can market referencing between countries, and the success of market launches. Foreseeable effects are considered as far as possible in the business sector’s plans. Close communication with health and regulatory authorities serves as a preventive measure to avert such risks.
Remaining risks beyond the current plans resulting from restrictive regulatory requirements are likely with a potential moderate to significant impact.
Risk of stricter regulations for the manufacturing, testing, and marketing of products
We must adhere to a multitude of regulatory requirements regarding the manufacturing, testing, and marketing of many of our products. Specifically, in the European Union, we are subject to the EU chemicals regulation REACH. Similar regulations are emerging globally in relevant markets, particularly in Asia. These regulations demand comprehensive tests for chemicals. Moreover, the use of chemicals in production and final products could be restricted, which would negatively impact the ability to manufacture and market certain products. With the EU Chemicals Strategy for Sustainability, an initiative of the European Green Deal, we expect increasing demands concerning the substitution of specific hazardous substances. We are constantly pursuing research and development in substance characterization and the possible substitution of critical substances so as to mitigate this risk. Nevertheless, it is classified as a possible risk with a potential significant impact on the net assets, financial position, and results of operations.
Risk of negative political and macroeconomic developments
The ongoing general trend of de-globalization and reshoring critical supplies might further increase the establishment of trade barriers. Additionally, the increased threat from armed conflicts and the rising tensions between the United States and China could lead to further sanctions. These risks can have a negative impact on our supply chains and sales in certain countries and regions. Such risks are considered as much as possible in the business plans of the affected countries and regions, and are mitigated through product, industry, and regional diversification as well as measures to ensure resilience of supply chains and networks. In addition, strategic geopolitical risk management is in place at the Group and sector levels in order not to lose sight of the global context and to prepare the Group holistically for possible risks.
The rise in inflation in the course of 2022 across some of our major markets could negatively impact our business. The current inflation dynamics are driven by a combination of supply disruptions, hefty fiscal spending, and special factors. Persistently high inflation could increase our operating expenses (e.g., raw materials, utilities, and logistics) as well as capital expenditures and lead to an increase in central bank rates, which would affect our refinancing costs.
Potential negative macroeconomic developments can also impact our business. We see an increasing risk for a global recession driven by current economic and political developments. In addition, the spread of the corona virus is associated with risks in global developments, likewise with the potential for negative effects on our businesses. To minimize these impacts, corresponding measures have been initiated.
The net risk of negative geo-political and macroeconomic developments is seen as possible and might have significant to critical effects on the net assets, financial position, and results of operations.
Market risks and opportunities
We compete with numerous companies in the pharmaceutical, chemical, and life science sectors. Rising competitive pressure can have a significant impact on the quantities that can be sold and prices attainable for our products.
Opportunities presented by our fully integrated CDMO and Contract Testing Services
The newly formed business unit, Life Science Services, fully integrates our Contract Development and Manufacturing Organization (CDMO) and contract testing services, strengthening our portfolio offerings and value chain to better serve the evolving needs of our global customers. Our CDMO service business covers traditional modalities such as monoclonal antibodies (mAbs) and high-potency active pharmaceutical ingredients (HP-APIs) and novel modalities such as antibody drug conjugates (ADCs) and viral and gene therapies (VGTs). This also includes our mRNA offerings.
We continually invest in the expansion of our portfolio and production capabilities to provide highly- specialized solutions for manufacturing traditional and novel therapies. For example, we strengthened our viral vector manufacturing capabilities with the launch of the production platforms VirusExpress® Lentiviral in 2020 and VirusExpress® 293 Adeno-Associated Virus (AAV) in 2022. This makes us one of the first CDMOs and technology-developers to provide a full viral vector manufacturing offering. We are committed to accelerating the manufacture of cell and gene therapies with the goal of getting these lifesaving treatments to patients faster. These proven, scalable platforms increase dose yields and reduce process development times. More details on our capacity expansions are included in the following sections of this report.
We also expanded our manufacturing capabilities for HP-APIs and ADCs in the United States, positioning us as one of the largest single-digit nanogram occupational exposure limit CDMO providers in the world. This will allow the continuous manufacturing of increasingly potent agents at an industrial scale for therapies with the potential to treat cancer. ADCs are an emerging class of medicines designed for the high-specificity targeting and destruction of cancer cells, while preserving healthy cells. Only 13 ADCs are currently approved worldwide. The ADC industry is experiencing strong growth and is expected to reach € 13 billion market value by 2030. Additionally, we strengthened our CDMO services across the mRNA value chain with the acquisition of Exelead in 2022. Exelead specializes in complex injectable formulations, including Lipid Nanoparticle-based drug delivery technology, which is key in mRNA therapeutics for use in many other indications. We plan to invest more than € 500 million in the technology scale-up of Exelead over the next ten years. This will further enable us to capture the significant potential of the fast-growing market for mRNA therapies by providing leading CDMO services to our customers.
Opportunities in Bioprocessing
In Life Science, our bioprocessing business within the Process Solutions business sector is an important growth driver. In 2022, we advanced our bioprocessing capabilities with the acquisition of the MAST® (Modular Automated Sampling Technology) Platform. This leading automated, antiseptic bioreactor sampling system provides real-time process information and cuts process development time by half, improving efficiency and lowering costs. This makes us the first company to offer a fully integrated ecosystem for advanced process technologies. The technology, coupled with the software to analyze and manage data, allows us to offer unique and integrated solutions to help customers optimize their bioprocesses and moves us closer toward our vision of connected and continuous bioprocessing to increase speed and lower costs. The MAST® Platform is part of our BioContinuum™ Platform.
In addition, we announced a collaboration with Agilent Technologies to fill an industry gap in Process Analytical Technologies (PAT) for downstream processing. By combining our advanced bioprocess portfolio with Agilent’s leading analytical solutions, we are able to offer integrated capabilities for enhanced downstream process monitoring and control, bringing us one step closer to making the facility of the future a reality. Furthermore, in December 2022, we announced the acquisition of Massachusetts-based Erbi Biosystems, a developer of the two milliliter (mL) micro-bioreactor platform technology known as the Breez™. The deal strengthens our upstream portfolio in therapeutic proteins by enabling scalable cell-based perfusion bioreactor processes from 2 ml to 2,000 L with rapid lab-scale process development. At the same time it also offers future development opportunities in novel modality applications.
Opportunities from leveraging the e-commerce and distribution platform
In the Life Science business sector, our dedication to the customer experience extends from the lab to our primary e-commerce platform, sigmaaldrich.com, which connects scientists in nearly every country around the world with the products, publications, and technical expertise needed to advance their discovery, research, and development further and faster. Our efforts include innovative approaches across the globe, bolstering sigmaaldrich.com and our e-commerce expertise to continually improve the customer experience and leverage the platform as a scalable growth driver for the business.
Opportunities in the semiconductor industry
We have huge long-term growth opportunities in the semiconductor market due to the significantly accelerating global demand for innovative semiconductor materials. This demand is driven by exponential data growth and highly impactful technology trends such as the Internet of Things (IoT) and 5G. We are working on nearly all of these new technology inflection points of the semiconductor roadmap together with our customers. Our capacity investments are synchronized with our customers’ expansion plans, and we continue to tackle industry challenges as well as supply reliability. Our semiconductor business has a very broad and unique portfolio that is not dependent on a single product or technology. It consists of different, independent technologies: Thin Film, Patterning, Planarization, as well as Specialty Gases and Delivery System & Services (DS&S). With this portfolio, we supply products for all essential production steps of wafer processing to support our customers with their advanced needs integral to realizing next-generation chips: patterning, deposition, planarization, etching, cleaning, doping and packaging. Moreover, we are developing new dielectric platforms in cooperation with our key customers for 3D NAND applications. We also continue to see significant potential in our DS&S business to provide our largest customers with turnkey solutions for the delivery of bulk gases in the manufacturing process. As the electronics industry continues to announce major capacity expansions over the next few years, our DS&S business is well poised to benefit from this with their portfolio of gas and chemical cabinets.
Opportunities due to new technologies in the manufacturing of displays
We see opportunities in market growth of organic light-emitting diode (OLED) materials in high-quality display applications. We have been performing research and development in the area of OLED technology for more than 15 years and have become one of the leading material suppliers for OLEDs. Through our semiconductor and display knowledge, we will be able to contribute to the new generation of optimized sensors. Furthermore, we see opportunities in foldable displays, which require a broad set of materials ranging from encapsulation to the OLED stack.
Risks due to increased competition and customer technology changes
In the Healthcare business sector, both our biopharmaceutical products and classic pharmaceutical business are exposed to increased competition from other rival products (in the form of biosimilars and generics). In the Life Science and Electronics business sectors, risks are posed by not only cyclical business fluctuations but also changes in the technologies used or customer sourcing strategies. We use close customer relationships and in-house further developments as well as market proximity, including precise market analyses, as mitigating measures. Overall, the risks might have potential significant to critical impact.
Risks and opportunities of research and development
Innovation driven by research and development is a major element of the Group strategy, in particular in the Healthcare business sector. In regular portfolio management reviews, we continually evaluate and, if necessary, realign research areas and R&D pipeline projects to focus our investments in areas where patient needs are served best. Nevertheless, research and development projects can experience delays, expected budgets can be exceeded, or targets can remain unmet. In addition to inhouse research and development efforts, strategic alliances with external partners and the in- or out-licensing of programs also form part of the catalog of measures to develop innovative medicine and ensure the efficient allocation of resources.
In Healthcare, we are committed to drive the launches of Bavencio®, Tepmetko® and Mavenclad®. Bavencio® is a human anti-programmed death ligand-1 (PD-L1) antibody jointly developed under the strategic alliance concluded with Pfizer Inc. in 2014. It is currently approved for at least one indication for patients in more than 50 countries and targets different kinds and stages of carcinoma. Additional applications for Bavencio® have been submitted to regulatory authorities worldwide. Tepmetko® is a once-daily oral mesenchymal-epithelial transition (MET) inhibitor that inhibits the oncogenic MET receptor signaling caused by MET (gene) alterations. Discovered and developed by the Group in-house, Tepmetko® has a highly selective mechanism of action, with the potential to improve outcomes in aggressive tumors that have a poor prognosis and harbor these specific alterations. Tepmetko® (tepotinib) is available in a number of countries and under review by various other regulatory authorities globally. We are further investigating the potential role of tepotinib in treating patients with NSCLC and acquired resistance due to MET amplification in the Phase II INSIGHT 2 study. Mavenclad® (cladribine tablets) was approved by the European Commission in 2017 and is the first short-course oral treatment approved in Europe for the treatment of relapsing multiple sclerosis (RMS) in patients with high disease activity. It is now approved in more than 80 countries. New real-world data from the MSBase Registry demonstrate favorable efficacy outcomes for Mavenclad® versus other oral disease modifying therapies (DMTs) and lower occurrence of further relapses or disability progression.
In addition to marketing already approved medicines, we are pushing ahead with research projects in important therapeutic areas. We target the set-up of a new standard of care in squamous cell carcinoma of head and neck (LA SCCHN) through our potent oral inhibitor of apoptosis proteins (IAPi) antagonist xevinapant, which is currently being investigated in two randomized, double-blind, placebo-controlled Phase III clinical trials: the TrilynX study for patients with unresected LA SCCHN and the XRay Vision study for patients with resected LA SCCHN. Xevinapant is the only medicine in its class in late-stage clinical development and has the potential to be first-in-class. We have a worldwide in-licensing agreement with Debiopharm, Lausanne, Switzerland, for the development and commercialization of xevinapant. Furthermore, the development of our Bruton’s tyrosine kinase inhibitor (BTKi) evobrutinib with first-in-class potential in relapsing multiple sclerosis (RMS) is further progressing in the Phase III Evolution RMS clinical trial program. Evobrutinib is an oral, highly selective BTKi offering a novel dual mechanism of action that could address MS pathobiology in a fundamentally new way.
Sustainable long-term growth will be driven by new pipeline entrants in DNA damage biology, novel ADC and enpatoran (TLR 7/8) that underline an exciting and less risk-correlated approach in oncology and neuroinflammation. With enpatoran and M1231, a MUC1/EGFR bi-specific ADC, we have two additional assets in our portfolio with first-in-class potential. Enpatoran is a small molecule for targeted inhibition of the important lupus mediator TLR7/8, aiming for improved efficacy with low infection risk. For enpatoran, we are currently in a Phase II study in CLE (cutaneous lupus erythematosus) and SLE (systemic lupus erythematosus). M1231 is considered as next generation ADC for patients with solid tumors aiming for effective delivery of potent chemotherapy payload with reduced on- and off-target toxicity. In September 2022, we announced a collaboration agreement with licensing option with Nerviano Medical Sciences S.r.l. (NMS) for the next-generation highly selective and brain-penetrant PARP1 (poly (ADP-ribose) polymerase) inhibitor, NMS-293. NMS-293 is in early clinical development for the treatment of patients with breast cancer (BRCA)-mutated tumors as a single agent and in combination with temozolomide in recurrent glioblastoma. It has strong potential in combination with a wide variety of DNA-damaging agents, including systemic or targeted chemotherapy (ADCs) or with DNA damage response inhibitors, in numerous tumor types. In December 2022, we announced a research collaboration and commercial license agreement with Mersana Therapeutics, Inc to develop novel immunostimulatory ADC. The collaboration is focused on discovering novel STING-agonist ADCs for up to two targets leveraging Mersana’s proprietary Immunosynthen platform to conjugate proprietary antibodies from our company. The STING pathway is a fundamental means of generating innate immune response that can lead to anti-tumor activity and immunological memory.
Sometimes, development projects are discontinued after high levels of investment at a late phase of clinical development. Decisions – such as those relating to the transition to the next clinical phase – are taken with a view to minimizing risk. We are currently not aware of any risks beyond general development risks that could significantly affect the net assets, financial position, and results of operations. There is the risk that regulatory authorities either do not grant or delay approval or grant only restricted approval. The risk that undesirable side effects of a pharmaceutical product could remain undetected until after approval or registration could result in a restriction of approval or withdrawal from the market. Well-advanced programs in our pipeline and those of our partners result in potential new approvals. Missing targets in this area may have significant to critical effects on our financial position and operating result, for example due to lower net sales or the non-occurrence of milestone payments from collaboration agreements. These risks are evaluated with probabilities ranging from improbable to likely.
For more detailed description on our R&D activities worldwide, please refer to the section “Research and Development” in “Fundamental Information about the Group” in the annual report.
Opportunities presented by activities to boost innovative strength
We see the rise of bioconvergence, which we define as a multidisciplinary approach that harnesses the synergies across digital and material science, as well as biotechnology. It will improve the speed and impact of scientific discovery. Fostering innovation at the intersection of our business sectors will allow us to benefit from our unique positioning at the sweet spot of converging technologies, unlocking organic growth opportunities and enabling pioneering solutions for customers and patients. Examples of innovation at the intersection of our business sectors include an automated design-make-test-analyze platform powered with state-of-the-art AI and lab automation, new treatment possibilities via enhanced mRNA LNP delivery platforms, and the deployment of digital twins in smart manufacturing.
Digital technologies and data will enable the development of personalized solutions of the future, accelerate our R&D pipelines, and ultimately improve patient and customer outcomes. In this context, developing and adhering to rigorous ethical standards is of utmost importance for all our activities. Therefore, we created our Digital Ethics Advisory Panel to provide external guidance and expertise on complex ethical matters around data usage, algorithms, and new digital innovations, ensuring that the company develops new digital technologies responsibly. In addition, we established the Code of Digital Ethics, which serves as a basis for ethical risk assessment in existing ventures as well as the design of ethic checkpoints for nascent digital solutions throughout the company.
Risks and opportunities related to the quality and availability of products
Opportunities arising from capacity expansion
We make targeted investments worldwide to expand our regional capacities and drive sustainable growth in all our three business sectors, especially in the “Big 3” growth drivers: Process Solutions and Life Science Services in Life Science, new innovative Healthcare products, and Semiconductor Solutions in Electronics.
In Life Science, we opened a new commercial facility in Martillac, France, to expand our production capacity for mAbs and other recombinant proteins as part our global Millipore® Contract Testing, Development, and Manufacturing Organization (CTDMO) Services. Leveraging state-of-the-art technology and a proven quality system allows our clients to streamline and accelerate the commercialization process by eliminating the need for tech transfer and scale-up between clinical and commercial stages. Our Millipore® CTDMO Services network includes facilities throughout Europe, the United States and Asia covering pre-clinical to commercial phases, including testing. Investments into our global network also include the recently announced € 290 million investment in a new facility to support the increasing demand for biosafety testing and analytical development services at our site in Rockland, Maryland, USA. This is the largest testing investment in company history.
In addition, we opened a € 59 million facility in Verona, Wisconsin, USA, which positions us as one of the leading, global CDMOs of HP-APIs used in novel cancer therapies, including ADCs. We also opened a viral clearance lab as part of the first building phase of our new € 29 million biologics testing center in Shanghai, China.
We further invested more than € 230 million to strengthen our manufacturing capabilities for single-use assemblies critical to the manufacture of Covid-19 vaccines and other life-saving therapies at our sites in Molsheim, France, and Wuxi, China. In addition, we invested € 440 million in the production capacity expansion for single-use membranes and filtration at our site in Cork, Ireland. We also started construction of a lateral flow membrane production facility at our U.S. site in Sheboygan, Wisconsin, USA, supported by a € 121 million contract award from the U.S. Department of Defense, on behalf of the U.S. Department of Health and Human Services. Lateral flow membranes are a key component in rapid diagnostic test kits for a variety of applications, including Covid-19 testing.
In Electronics, we plan to invest nearly € 3 billion in innovation and capacities up to the end of 2025. We will continue to heavily invest in research and development (R&D) in leading-edge material solutions and plan to spend close to € 2 billion in long-term fixed assets (capital expenditures). Through our Level Up growth program, we aim to capture the growth opportunities that come along with the significantly accelerating global demand for innovative semiconductor and display materials and invest in smart localization of our footprint to further boost customer proximity and ensure supply stability. Furthermore, we recently completed the acquisition of the chemicals business of Mecaro, a Korean supplier to the semiconductor industry to expand our portfolio in the fast-growing Semiconductor Solutions business unit. Among other things, we will further leverage our data analytics capabilities and invest even further into the safety realm.
Risk of a temporary ban on products/production facilities or of non-registration of products due to non-compliance with quality standards
We are required to comply with the highest standards of quality in the manufacturing of pharmaceutical products (Good Manufacturing Practice or official pharmacopoeia). In this regard, we are subject to the supervision of the regulatory authorities. Conditions imposed by national regulatory authorities could result in a temporary ban on products/production facilities and possibly affect new registrations with the respective authority. We make the utmost effort to ensure compliance with regulations, regularly perform our own internal audits, and carry out external inspections. Thanks to these quality assurance processes, the occurrence of a risk with a significant impact is improbable to possible; however, it cannot be entirely ruled out. Depending on the product concerned and the severity of the objection, such a risk might have a negative impact on the net assets, financial position, and results of operations.
Risks of production availability
Further risks include operational failures due to fire or force majeure, for example natural disasters such as floods, droughts, or earthquakes, which could lead to a substantial interruption or restriction of business activities. Insofar as it is possible and economically viable, the Group limits its damage risks with insurance coverage, the nature and extent of which is constantly adapted to current requirements. Likewise, we are exposed to risks of production outages and the related supply bottlenecks that can be triggered by technical problems in production facilities with very high-capacity utilization. Furthermore, there are risks of supply bottlenecks due to a lack or disappearance of capacity. We work towards continual mitigation of such risks by making regular investments, setting up alternative sourcing options, and maintaining inventory levels.
Although the occurrence of these risks is considered – improbable, an individual event could have a critical negative effect on the net assets, financial position, and results of operations.
Risks of dependency on suppliers
In balanced markets, single-sourcing strategies may be chosen to bundle our company’s demand and achieve price reductions. However, this strategy might result in dependency on individual suppliers for a number of goods or services. Consequently, events like discontinued/curtailed production or supply disruptions could potentially result in unavailability of such goods or services and have a critical impact on the concerned businesses. The Covid-19 pandemic represented an additional force, highlighting the potential risks of the single-source strategies. The past few years an increasing number of events, from the Covid-19 pandemic to the war in Ukraine, have shaped the risks and opportunities around single source strategies. With long-term strategic alliances, qualification and validation of alternative sources, as well as second supplier development strategies, we are able to reduce the probability of occurrence of these risks and rate them as possible.
Risks due to product-related crime
As a leading global science and technology company and manufacturer of innovative products of the highest quality, we are exposed to various security- and crime-related risks. Due to the increasing complexity of international trade and global supply chains, our products are particularly at risk from being counterfeited, stolen, illegally diverted and misused. If left unaddressed, this would not only lead to financial loss, reputational damage, and business disruption but also impact patient and customer safety. Consequently, we have implemented technical, operational, and procedural measures aimed at protecting the integrity of our products and supply chains, while also ensuring new threats are identified and managed appropriately. Overall, the threat resulting from product-related crime is likely with a potential moderate impact.
Risks and opportunities from the use of social media
We and our employees are active on numerous social media platforms. The consistent and legally compliant use of such platforms and their content is important in terms of increasing awareness of our brand, among other things. We take all necessary precautions and have implemented processes to ensure awareness regarding the proper handling of social media as well as actively manage and control our publication and communication.
Nevertheless, reputational risks could result, for instance through public dialogues in social media. We thus rate this as a potentially significant risk.