Q3/2010: Merck KGaA Profit After Tax Jumps 45% to EUR 215 Million

Q3/2010: Merck KGaA Profit After Tax Jumps 45% to EUR 215 Million

  • Total revenues increase 25% to record EUR 2.4 billion
  • Operating result surges 64% to EUR 363 million, organic growth up 97%
  • Rebif® sales rise 6.8%; Erbitux® sales increase 17%
  • Liquid Crystals revenues climb 21% to EUR 255 million
  • 2010 Group core guidance for operating result lifted to 58%

Darmstadt, October 26, 2010 - Merck Group third-quarter total revenues increased 25% to a record EUR 2,438 million from EUR 1,950 million in the year-ago quarter, boosted by the EUR 5.1 billion acquisition of Millipore Corporation, Billerica, Massachusetts, USA, on July 14. The acquisition accounted for 16 percentage points, positive currency effects 5.3 percentage points and organic growth 3.5 percentage points of the increase.

 


Key Figures: Merck Group (EUR Million) Q3/2010 Q3/2009 (+/- %) 1-9/2010 1-9/2009 (+/- %)
Total Revenues  2,437.8 1,950.0 25.0 6,744.7 5,718.2 18.0
Operating Result 363.5 222.2 63.6 984.4 604.8 62.8
Exceptionals -- -- -- -1.2 -68.8 -98.3
EBIT 363.5 222.2 63.6 983.2 536.0 83.5
Profit After Tax 214.5 148.1 44.8 596.0 318.2 87.3
Net Profit* 210.8 144.4 46.0 585.6 309.5 89.2
EPS (EUR) 0.97 0.66 46.0 2.69 1.42 89.2
Core EPS (EUR)**  1.95 1.26 54.3 4.95 3.50 41.3


* Net Profit after non-controlling interests
** EPS excluding amortization of intangible assets and related tax effects for Merck Serono and Millipore, as well as integration costs for Millipore.


"We delivered another good quarter, with net profit especially giving reason to be pleased," said Dr. Karl-Ludwig Kley, Chairman of the Executive Board of Merck KGaA. "We are well on our way to an excellent 2010."

Cost of sales, which included a EUR 43 million write-off of the Millipore inventory step-up, increased at a lower rate than revenues. Therefore, the gross margin in the third quarter improved 27% to EUR 1,818 million from EUR 1,428 million in the year-ago quarter. Other operating expenses and income increased by 19% to EUR -91 million, which included Millipore integration costs of EUR 21 million.

Research and development costs increased 4.7% to EUR 349 million in the third quarter of 2010. R&D spending for the Chemicals divisions, including Merck Millipore, rose but decreased for the Merck Serono division.

Amortization of intangible assets increased by 35% to EUR 198 million. This amount includes for the first time amortization of intangible assets from the Millipore purchase price allocation amounting to EUR 48 million.

With total revenues and gross margin rising faster than expenses, the operating result increased substantially by 64% in the third quarter to EUR 363 million from EUR 222 million in the year-ago quarter. Organically, meaning excluding Millipore and currency effects, the Group operating result rose by 97%.

The Group return on sales (ROS: operating result/total revenues) increased to 14.9% in the third quarter of 2010 compared to 11.4% in the year-ago quarter, boosted by the strong operating result of the Merck Serono division. Group core ROS (operating result excluding Serono- and Millipore-related amortization of intangible assets/total revenues) in the third quarter of 2010 was 25.6% compared to 18.9% in the year-ago quarter.

There were no exceptional items in the third quarter of 2010 or in the corresponding quarter of 2009. Therefore, earnings before interest and tax (EBIT) in the third quarter of 2010 rose 64% to EUR 363 million compared to EUR 222 million in the year-ago quarter.

Due to interest on the financing for Millipore, Merck's financial result fell by more than 100% to EUR -74 million in the third quarter of 2010 compared to EUR -32 million in the year-ago quarter.

The Merck Group's third-quarter profit before tax increased 52% to EUR 289 million from EUR 190 million in the year-ago quarter. Merck's underlying tax rate rose to 25.8% for the third quarter of 2010 compared to very low 22.2% in the year-ago quarter. Profit after tax in the third quarter of 2010 increased 45% to EUR 215 million from EUR 148 million in the third quarter of 2009.

The free cash flow of the Merck Group in the third quarter of 2010 totaled EUR -4,383 million (Q3 2009: EUR 399 million). This includes payments of EUR 4,934 million in connection with the acquisition of Millipore. The purchase price of EUR 5,137 million was lowered by cash of EUR 300 million included in the acquisition. Additional transaction-related payments amounted to EUR 97 million. A final payment of EUR 6.6 million was made for the Suzhou Taizhu China Group, which was acquired in 2009. Adjusted for these effects, underlying free cash flow was EUR 561 million, exceeding the year-earlier period (EUR 429 million) by EUR 131 million or 31%.

Merck had 40,507 employees worldwide on September 30, 2010, an increase of 7,445 compared to 33,062 on December 31, 2009. Most of this gain can be attributed to the acquisition of Millipore.


Merck Divisions
Merck Serono's total revenues increased 5.7% to EUR 1,393 million in the third quarter of 2010 compared to EUR 1,319 million in the year-ago quarter, boosted by sales of Merck Serono's two leading products - the biological therapies Rebifand Erbitux - and a 4.1% positive currency effect. Regionally, sales rose significantly in Japan, Latin America and North America.

Global sales of Rebif for the treatment of relapsing-remitting forms of multiple sclerosis rose 6.8% to EUR 407 million in the third quarter. Sales of the targeted cancer treatment Erbitux continued to climb, increasing by 17% in the third quarter to EUR 207 million. Third-quarter sales of Gonal-f®, a recombinant hormone used in the treatment of infertility, increased by 3.9% to EUR 115 million. Sales of the recombinant growth hormone Saizen® for growth hormone deficiency rose by 17% to EUR 56 million in the third quarter. Quarterly sales results for Merck's primary care products: Concor® products, -19% to EUR 84 million; Glucophage® products, 3.3% to EUR 79 million; and thyroid medicines such as Euthyrox®, little changed at EUR 41 million.

Research and development spending by Merck Serono declined by 4.6% to EUR 280 million compared to EUR 293 million in the year-ago quarter. The division's R&D costs remain at about 20% of revenues due to the large number of expensive, late-stage clinical trials.

In July 2010, Russian health authorities granted marketing authorization for Cladribine Tablets for the treatment of relapsing-remitting multiple sclerosis. The Australian health authorities followed with a similar approval in September. Merck's New Drug Application (NDA) for Cladribine Tablets was accepted in July by the U.S. Food and Drug Administration (FDA) and granted a priority review. However, the Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) issued a negative opinion regarding the marketing authorization application for Cladribine Tablets in September due to what it perceived as an unfavorable benefit-risk ratio. Merck has announced its intention to appeal that decision.

The division's charge for amortization of intangible assets from the 2007 acquisition of Serono amounted to EUR 148 million in the third quarter of 2010, similar to previous quarters.

With an improved gross margin and lower R&D costs the division's third-quarter operating result jumped 70% to EUR 210 million from EUR 123 million in the year-ago quarter, which was affected by the EUR -45 million provision for potential currency losses on transactions in Venezuela. The core operating result, which excludes Serono-related amortization of intangible assets, was EUR 358 million compared to EUR 269 million in the third quarter of 2009.

The division's third-quarter ROS was 15.0% compared to 9.4% in the year-ago quarter. Core ROS, which excludes Serono-related amortization of intangible assets, was 25.7% in the third quarter of 2010 compared to 20.5% in the year-ago quarter.

The Consumer Health Care division increased total revenues by 1.7% to EUR 125 million in the third quarter with currency devaluations in Venezuela balanced by the stronger British pound and Indonesian rupiah. Despite higher production costs, the division's gross margin was steady at EUR 86 million in the third quarter. Marketing and selling costs, as well as research and development spending, rose again in the third quarter as the division continued to implement its strategy of focusing on strategic brands to drive growth.

The division's third-quarter operating result declined 24% to EUR 16 million from an atypical high of EUR 21 million in the year-ago quarter. The third-quarter ROS dropped to 13.0% compared to 17.4% in the year-ago quarter of 2009.

Chemicals
Merck's Chemicals business sector was reorganized during the third quarter due to the acquisition of the U.S.-based life-science company Millipore, which closed on July 14. The new acquisition was combined with most of the Performance & Life Science Chemicals division to form the Merck Millipore division. The second Chemicals division is Performance Materials, with two business units - Liquid Crystals and Pigments.

The Merck Millipore division's third-quarter total revenues rose to EUR 574 million. Of this sum, EUR 314 million is attributable to the new acquisition. Another 7.6% was due to positive currency effects and the remaining 6.6% stemmed from organic growth of the original Merck life science businesses. All three business units increased their total revenues, with sales in Japan and India rising significantly.

The Bioscience business unit supplies products to specialized life science research laboratories. It accounts for about 20% of the division's total revenues. Demand for instruments more than compensated for a slight softening in the antibodies business. Orders from the U.S. government and North American universities were above average during the quarter.

The Lab Solutions business unit supplies general laboratory applications to a variety of industries. It accounts for about 40% of the division's total revenues. Third-quarter sales improved for analytics for food and environmental testing as well as for microbiology and hygiene. Demand for reagents also grew.

The Process Solutions business unit supplies products used in the production of biopharmaceutical drugs. It accounts for about 40% of the division's revenues. Sales growth in the third quarter was driven by biotech production orders, especially from smaller biotech accounts in all regions of the world.

Despite a higher cost of sales of EUR 43 million for the inventory step-up from Millipore, the division's gross margin grew faster than revenues due to a favorable product mix and operational excellence, reaching EUR 296 million in the third quarter of 2010 from EUR 104 million in the year-ago quarter. The division also booked EUR 48 million for amortization of intangible assets in connection with the preliminary purchase price allocation for the Millipore acquisition.

This led to a third-quarter operating result of EUR 10 million compared to EUR 20 million in the year-ago period. Therefore, the division's third-quarter ROS amounted to 1.7% compared to 8.9% in the third quarter of last year. Core ROS (which excludes costs related to the integration and purchase price allocation of Millipore) was 21.2%.

The new Performance Materials division comprises Merck's materials businesses and activities, mainly Liquid Crystals and Pigments. Total revenues of the division rose 23% in the third quarter to EUR 346 million from EUR 282 million in the year-ago quarter. Positive currency effects accounted for 12% of the revenue increase with 11% stemming from organic growth.

Revenues from Liquid Crystals rose 21% to EUR 255 million. This represented organic growth of 8.3% and positive currency effects of 13% as much of the sales are generated in U.S. dollars or Asian currencies. In the third-quarter, liquid crystal revenues were lower than the EUR 284 million recorded in the second quarter. This is due to an inventory correction in the LCD market with panel makers reducing their production, as well as slightly less favorable currency exchange rates.

The increase in revenues was again driven by high demand for liquid crystals based on Merck's patented Polymer Stabilized Vertical Alignment (PS-VA) technology, which offers better moving-picture quality, faster switching times, higher contrast and brightness, and lower power consumption - qualities desired by manufacturers of the latest generation of LCD televisions.

Sales by the Pigments business were especially high during the third quarter compared to last year as demand in the automotive industry returned to, or even exceeded, levels prior to last year's economic crisis. This business also experienced a favorable currency tailwind. Production utilization was at a high level for both liquid crystals and pigments as the businesses have recovered from the slowdown in 2009. Research and development costs rose by 20% to EUR 33 million, or 9.4% of total revenues, in the third quarter.

With a gross margin that increased faster than expenses, the operating result of the Performance Materials division more than doubled to EUR 152 million in the third quarter compared to EUR 73 million in the year-ago quarter. The division's ROS was 43.9% compared to 25.8% the third quarter of 2009. The operating result for Liquid Crystals in the third quarter increased by 90% to EUR 137 million, leading to an ROS of 53.6% compared to 34.1% in the year-ago quarter.

Merck Group forecast for 2010 including Millipore
The Merck Group's total revenues and operating result continued to develop well in the third quarter of 2010. In fact, due to lower than previously anticipated research and development costs and cost of sales, the guidance for the core operating result of the Merck Serono division has been improved. Merck now expects the Merck Serono core operating result to rise by 26% rather than the previously forecast 12%.

On the other hand, late in the third quarter it became clear that Merck's Liquid Crystals business, which operates in the very dynamic electronic display industry, was slowing slightly. Display manufacturers have begun reducing production due to lower demand and some over-stocking effects. This, coupled with anticipated negative currency effects due to the weaker U.S. dollar, has caused Merck to lower this business's previous full-year forecast. The company now expects Liquid Crystals' total revenues to increase by 35% rather than 50% and the operating result to improve by 126% instead of 160%. Thus, the full-year return on revenues (ROS) for this business is expected to be 52% rather than the 54% previously mentioned.

The decline in the sales and operating result growth rates for the Merck Millipore division is primarily due to anticipated negative currency effects.

Merck Group forecast for 2010 including Millipore

- Growth in Total Revenues Growth in Operating Result
- New From Q2 New From Q2
Merck Serono 7.2% 7.5% 56% 60%
Merck Serono, Core1 - - 26% 12%
Consumer Health Care 3% 5% -60% -20%
Merck Millipore 80% 84% -63% -
Merck Millipore, Core2 - - 167% 190%
Performance Materials 34% 43% 162% 194%
Corporate and Other - - -28% -22%
Merck Group 19% 21% 70% 90%
Merck Group, Core1,2 - - 58% 55%

1 Excludes costs related to the purchase of Serono (amortization of intangible assets)
2 Excludes costs related to the purchase of Millipore (write-offs of step-up inventories, amortization of intangible assets, EUR 66 million transaction and integration costs during 2010)

Mainly due to the revised forecasts for the Merck Serono division and the Liquid Crystals business, plus a detailed examination of Millipore after its July 14 acquisition, Merck now expects the Group full-year operating result to increase by 70% rather than the previous guidance of 90%. The Group core operating result should increase by 58% compared to the previously stated 55%.

Notes to Editors:
The complete online version of the Q3-2010 Report, as well as the related presentations, is available at: Merck Q3-2010-English


Merck KGaA stock symbols:
Reuters: MRCG, Bloomberg: MRK GY, Dow Jones: MRK.XE
Frankfurt Stock Exchange: ISIN: DE 000 659 9905 - WKN: 659 990


Note regarding forward-looking statements
The information in this document contains "forward-looking statements." Forward-looking statements may be identified by words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "will" or words of similar meaning and include, but are not limited to, statements about the expected future outcome or timing of the transactions described above. These statements are based on the current expectations of management of Merck KGaA and E. Merck KG, and are inherently subject to uncertainties and changes in circumstances. Among the factors that could cause actual results to differ materially from those described in the forward-looking statements are factors relating to changes in global, political, economic, business, competitive, market and regulatory forces. Merck KGaA and E. Merck KG do not undertake any obligation to update the forward-looking statements to reflect actual results, or any change in events, conditions, assumptions or other factors.

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Merck is a global pharmaceutical and chemical company with total revenues of € 7.7 billion in 2009, a history that began in 1668, and a future shaped by approximately 40,000 (including Merck Millipore) employees in 64 countries. Its success is characterized by innovations from entrepreneurial employees. Merck's operating activities come under the umbrella of Merck KGaA, in which the Merck family holds an approximately 70% interest and free shareholders own the remaining approximately 30%. In 1917 the U.S. subsidiary Merck & Co. was expropriated and has been an independent company ever since.DOWNLOAD BOX
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