Pharmaceutical Sector

Two Recipes for Growth

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Even though Boehringer and Merck have different growth strategies, both rely on bringing new drugs successfully to the market.
  • Why it matters

    Why it matters

    • While Boehringer focuses on drugs and Merck invests in new businesses, the two family firms show how different strategies can be successful.
  • Facts


    • Merck’s incoming CEO, Stefan Oschmann, previously worked for the company’s American namesake, Merck & Co.
    • Hubertus von Baumbach is set to take over the Boehringer helm from Andreas Barner.
    • On Tuesday, Boehringer reported an 11-percent rise in revenues to $16.8 billion for last year, while Merck Group has annual sales of about $13 billion.
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Only about 50 kilometers (31 miles) of vineyards and vegetable fields separate the two largest family firms in Germany’s the pharmaceutical industry: Boehringer in Ingelheim and the Merck Group in Darmstadt, numbers two and three after Bayer.

Not only are Boehringer Ingelheim and the Merck Group located close to each other; they’re also facing big changes.

Both will receive new chief executives in the coming weeks. At Merck, Stefan Oschmann will succeed Karl-Ludwig Kley and at Boehringer, Hubertus von Baumbach will take over the helm from Andreas Barner, who has headed both the company and its research division.

Last year, two companies either carried out or agreed to the largest acquisition in their respective histories. Merck swallowed up Sigma-Aldrich, while Boehringer aims to take over the animal-medication division of Sanofi in exchange for its own unit making over-the-counter drugs.

Although both firms have struggled with problems in recent years, they have been able to establish lucrative alliances with large U.S. companies. Merck persuaded Pfizer to enter a partnership for its cancer-immunity ingredients. Boehringer now works with U.S.-based Abbvie in the ongoing development of its immunology projects.

The new head of Merck, Mr. Oschmann, must prove that his company can actually create its own innovations in the pharmaceutical industry, and Boehringer’s Mr. von Baumbach has to show that his firm can integrate large acquisitions.

Even key business figures are again proceeding almost in lockstep for the first time since the end of the 1990s. Back then, Boehringer and Merck entered the new millennium with about €5 billion ($5.7 billion) in revenues and some €650 million in operating profits.

On Tuesday, Boehringer reported an 11-percent rise in revenues to €14.8 billion for 2015, overcoming a two-year slump. Operating profits rose by 6 percent to nearly €2.3 billion. Merck lies somewhat behind but attains a similar order of magnitude if Sigma-Aldrich, acquired in November, is part of the calculations.

But the similarities are misleading.

Ingelheim and Darmstadt are worlds apart in structure and strategy. The two family firms are an example of how different paths can be pursued to the top but also how discrepancies can arise on the financial level.

The differences begin with portfolios.

While with its most recent transactions, Boehringer is focusing even more strongly on pharmaceuticals and research, Merck has used acquisitions to diversify its business further. In the future, it will derive more than half its revenues outside pharmaceuticals – as a life-science provider and a specialty-chemicals company.

But above all, their growth strategies have been fundamentally different up to now.

In the last 15 years, Merck spent about €40 billion in merger and acquisition transactions and replaced around two-thirds of its product portfolio through takeovers of such large companies as Serono, Millipore and Sigma-Aldrich.

In contrast, acquisitions have played almost no role at Boehringer in the last 15 years. The company reached its current size almost exclusively with products it developed itself. And even if the planned exchange transaction with Sanofi is included, Boehringer will not have been even half as active as Merck.

20 p16 Boehringer and Merck Key Figures 2015-01

These different strategies are mirrored in the balance sheets.

Merck started 2016 with almost €13 billion in net debts, while Boehringer had about €9 billion in surplus liquidity – the second-largest net cash position in the entire global pharmaceutical industry, and the largest in the Germany industry. Even after the Sanofi deal, Boehringer will still have more than €5 billion in reserves.

That means Merck operates with a more balanced and calculable commercial portfolio but takes bigger financial risks. Boehringer, on the other hand, counts on the pharmaceutical business, which tends to be more risky because it’s research-driven.

Each strategy fits the strengths of the respective companies. In the last two decades, Merck was able to develop only one successful drug – not enough to achieve Boehringer-like organic growth in the pharmaceutical business.

Since the end of the 1990s, Boehringer – guided by its chief executive Mr. Barner, who for many years was also in charge of research – has brought more than a dozen pharmaceutical products onto the market, including such blockbusters as the hypertension drug Micardis and Spiriva, a treatment against chronic obstructive pulmonary disease. With its new cancer and diabetes divisions, Boehringer seems set to continue to grow moderately at least.

From the standpoint of each company’s owners, the paths taken have paid off. The founding family of Merck and the external shareholders who own 30 percent of the company can be pleased with a six-fold increase in market capitalization since the end of the 1990s. The current figure is €34 billion.

Performance cannot be so easily evaluated at Boehringer, which is entirely in family hands. But overall, the Boehringer heirs seem to continue to be ahead by a nose-length, and not only because they own 100 percent of the company. On the basis of current valuations in the pharmaceutical industry, Boehringer would be valued at between €50 and €60 billion in the case of a listing or sale.

Up to now, the Boehringer family has received far more bountiful disbursements, about €11 billion within 15 years. Merck, on the other hand, paid out €5.7 billion in dividends over the same period, and it took in less than €3 billion in a 2007 increase of capital stock. Thus, on balance, the founding family received only about €2.5 billion in returns.

Thanks to its better financial structure, Boehringer enjoys greater strategic freedom – even if no signs exist from the family that, past the exchange with Sanofi, the firm intends to make serious use of this option.

Boehringer’s incoming chief executive, Mr. von Baumbach, a great-grandson of the company’s founder, instead defines this freedom of financial movement as the fundamental prerequisite for maintaining the independence of the enterprise.

“This basic principle is firmly anchored in our overall concept and entrepreneurial strategy,” said Mr. von Baumbach, who is the first family member to take over the management of Boehringer in a quarter century.

But if the Boehringer heirs were willing, similarly to Merck, to go public with a little less than a third of their holdings, as well as to incur debts in the double-digit billions, the company could theoretically mobilize another €40 billion for acquisitions with no trouble. In theory, Boehringer would thus be capable of taking over Merck without losing control. That would scarcely be possible in the other direction.

Even if such a link between the two traditional companies seems utterly unlikely, an exchange of experience would certainly make sense, because complementary qualities will be required at Merck and Boehringer going forward.

The new head of Merck, Mr. Oschmann, must prove that his company can actually create its own innovations in the pharmaceutical industry, and Boehringer’s Mr. von Baumbach has to show that his firm can integrate large acquisitions.


Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent. To contact the author:

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