Merck FY2010 Profit After Tax Climbs 70% to EUR 642 Million

  • Total revenues increase 20% to record EUR 9.3 billion
  • Operating result jumps 72% to EUR 1.1 billion
  • Sales: Rebif® +8.6% (EUR 1,668 million); Erbitux® +18% (EUR 820 million)
  • Liquid Crystals revenues top EUR 1 billion, ROS 52.0%
  • Group 2011 Guidance: total revenues + 13-18%, Operating Result +35-45%
  • Merck proposes dividend of EUR 1.25 per share versus EUR 1.00 last year

Darmstadt, February 21, 2011 - The Merck Group’s total revenues for 2010 increased 20% to a record EUR 9,291 million from EUR 7,747 million in 2009, boosted by the EUR 5.1 billion acquisition of Millipore Corporation in July. Acquisitions, mainly Millipore, accounted for 8.4 percentage points of the increase, positive currency effects 3.7 percentage points and organic growth 7.9 percentage points of the increase. Fourth-quarter 2010 total revenues rose 26% to EUR 2,546 million from EUR 2,029 million in the year-ago quarter.

Key Figures:
Merck Group (EUR Million)
Q4/2010
Q4/2009
(+/- %)
FY2010
FY2009
(+/- %)
Total Revenues
2,545.9
2,028.8
25.5
9,290.6
7,747.0
19.9
Operating Result
129.1
44.1
192.7
1,113.5
648.9
71.6
Exceptionals
0.4
40.8
- 99.0
- 0.8
- 28.0
- 97.3
EBITDA
654.2
411.9
58.8
2,456.9
1,624.6
51.2
Profit After Tax
45.5
58.5
- 22.1
641.5
376.7
70.3
Net Profit*
46.5
56.7
- 18.1
632.1
366.3
72.6
EPS (EUR)
0.21
0.26
- 19.2
2.91
1.68
73.2
Core EPS (EUR)**
1.78
0.95
87.4
6.73
4.44
51.6


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

“The year 2010 was a transformational year for Merck with the acquisition of Millipore adding new capabilities, scale and innovative products, in line with our long-term strategy. Financially, 2010 exceeded expectations and raised our revenue and profitability profiles,” said Dr. Karl-Ludwig Kley, Chairman of the Executive Board of Merck KGaA. “With Millipore included for the full year, we expect Group 2011 revenues will grow 13% to 18% and the operating result will rise by 35% to 45%.”

Cost of sales increased by 18% in 2010. In the course of the purchase price allocation, the inventories from the Millipore acquisition were already recognized at fair value based on realizable sales revenues, and thus stepped up by EUR 86 million. This amount was fully expensed in cost of sales in the second half of 2010, and had a one-time negative impact on gross margin. Overall, the gross margin for 2010 rose by 21% to EUR 6,905 million. Full-year marketing and selling costs increased relatively sharply by 20% since the costs of the Millipore companies were included for six months compared to 2009. Excluding the impact of the acquisition and currency effects, the increase amounted to 7.9%. The marked 12% increase in administration expenses was due mainly to the first-time consolidation of the Millipore companies, as well as to currency effects. Excluding acquisition and currency effects, administration expenses rose by only 1.9% in 2010.

Research and development costs increased by 3.9% to EUR 1,397 million in 2010. Thus, the ratio of R&D expenses to total revenues was 15% compared to 17% in 2009. In the fourth quarter, R&D expenses rose 1.2% to 363 million.

Amortization of intangible assets, which previously related mainly to the Serono purchase price allocation, now also include amortization of the intangible assets identified within the scope of the purchase price allocation for Millipore. Consequently, depreciation and amortization rose significantly, totaling EUR 96 million for the Merck Millipore division. Due to a reassessment of the potential future sales for safinamide, Merck recorded an impairment of EUR 134 million to a residual value of EUR 63 million.

Thus, the operating result of the Merck Group for 2010 amounted to EUR 1,113 million, corresponding to an increase of 72% over 2009. For the fourth quarter, the Group operating result nearly tripled, rising to EUR 129 million from EUR 44 million in the year-ago quarter. The Group full-year core operating result (operating result excluding Serono- and Millipore-related amortization of intangible assets) was EUR 2,096 million compared to EUR 1,296 million in 2009. The core operating result in the fourth quarter of 2010 was EUR 538 million versus EUR 258 million in the year-ago quarter.

Key Performance Indicators
The Group return on sales (ROS: operating result/total revenues) increased to 12.0% in 2010 compared to 8.4% in 2009. This reflects the improvement in the overall business situation, which included a sharp increase in total revenues. Fourth-quarter 2010 ROS was 5.1% compared to 2.2% in the year-ago quarter. Group core ROS (operating result excluding Serono- and Millipore-related amortization of intangible assets/total revenues) for 2010 was 22.6% compared to 16.7% in 2009. For the fourth quarter, core ROS was 21.1% in 2010 and 12.7% in 2009.

FCR (underlying free cash flow divided by revenues) also developed positively in line with the good business development, increasing in 2010 to 18.0% from 11.0% in 2009. FCR in the fourth quarter of 2010 rose to 21.3% from 8.8% in the fourth quarter of 2009. Underlying free cash flow nearly doubled to EUR 1,670 million, allowing Merck to substantially reduce its financial debt by EUR 606 million in the second half of the year.

For EBITDA, as per the definition, depreciation and amortization of non-current assets are added back to earnings before interest and taxes (EBIT). Since the acquisition of Serono, amortization of intangible assets has been lowering the operating result. Owing to the Millipore acquisition, these amortization expenses increased further in 2010. When high impairment losses are also incurred, EBIT or the operating result alone does not reflect the actual earning power of the business. Full-year EBITDA increased by nearly 50% to EUR 2,457 million in 2010 from EUR 1,625 million in 2009 (Q4: +59% to EUR 654 million).

Exceptional items for 2010 totaled just EUR -0.8 million. The major items – both booked in the fourth quarter – were a gain of EUR 69 million on the sale of Théramex and additional expenses of EUR -67 million for the settlement reached with the U.S. Department of Justice for the former subsidiary Dey Inc., USA, which allegedly reported false price information.

The financial result for 2010 showed an expense balance of EUR 252 million compared to EUR 134 million in 2009. The marked increase was due mainly to interest expenses for the financing of the Millipore acquisition.

Adjusted for exceptional items, the 2010 tax rate was 25.3% compared to 21.6% in 2009. It should be noted that the capitalization of deferred tax assets on tax loss carry-forwards had favorable one-time effects on the tax rate in 2009. Full-year profit after tax amounted to EUR 642 million in 2010, which is 70% more than in 2009. For the fourth quarter, profit after tax declined 22% to EUR 46 million due to the above-mentioned deferred tax assets.

For 2010, Merck is proposing to the Annual General Meeting the payment of a dividend of EUR 1.25 per share.

Merck had 40,562 employees worldwide on December 31, 2010, an increase of 7,500 compared to 33,062 on December 31, 2009. Most of this gain can be attributed to the acquisition of Millipore.

Merck Divisions
In 2010, the Merck Serono division increased total revenues by 7.6% to EUR 5,754 million (Q4: +7.9% to EUR 1,503 million). Full-year sales increased by 8.3%, with positive currency effects accounting for 2.6% of the increase. This growth was due primarily to the success of the division’s biopharmaceuticals. Merck Serono generated EUR 3,288 million or 61% of sales with its five top-selling biopharmaceuticals Rebif ®, Erbitux ®, Saizen ®, Gonal-f ® and Serostim ®.

Rebif, a treatment for relapsing-remitting multiple sclerosis, was once again the top-selling product, with full-year sales increasing by 8.6% to EUR 1,668 million. Erbitux, the targeted cancer therapy, posted another annual double-digit increase in sales, which rose by 18% to EUR 820 million.

Full-year sales of Gonal-f, a recombinant hormone used in the treatment of infertility, increased by 3.7% to EUR 504 million. Sales of the recombinant growth hormone Saizen for growth hormone deficiency rose by 18% to EUR 226 million in 2010. Full-year sales results for Merck’s primary care products: Concor® products, -5.3% to EUR 373 million; Glucophage® products, 8.4% to EUR 316 million; and thyroid medicines such as Euthyrox®, rose 7.6% to EUR 170 million.

At EUR 1,167 million, the division’s full-year research and development spending was slightly lower (-1.4%) than in 2009. This decline is due on the one hand to project delays experienced with Stimuvax ® and Cladribine Tablets, and on the other hand to successful efforts to optimize cost structures through efficiency enhancement measures. Merck Serono invested around 20% of the division’s total revenues in R&D, which put it at an above-average level within the pharmaceutical industry. This is mainly the result of the large number of cost-intensive studies in the final phase of clinical development. The pipeline currently comprises nine projects in Phase III clinical trials, seven in Phase II, and seven in Phase I.

For example, Merck announced on January 5, 2011, that recruitment was completed for the international pivotal Phase III EXPAND clinical trial investigating the efficacy of Erbitux in treating patients with advanced gastric cancer. In November, the company announced that enrollment was completed for the international 617-patient Phase III ORACLE MS 1 clinical trial that is evaluating the therapeutic effects of Cladribine Tablets on the time to conversion to multiple sclerosis in people with a first clinical event suggestive of the disease.

Also in November, the U.S. Food and Drug Administration granted approval of Egrifta (tesamorelin for injection) to reduce excess abdominal fat in HIV-infected patients with lipodystrophy.

Merck’s Cladribine tablets, which were the first approved oral disease-modifying therapy for multiple sclerosis, have been available in Russia and Australia under the trade name Movectro® since the end of 2010. The Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) issued a final negative opinion regarding the marketing authorization of Cladribine Tablets in January 2011. Merck expects to have a decision on Cladribine Tablets from the U.S. Food and Drug Administration (FDA) review committee by February 28, 2011.

The Merck Serono division’s gross margin increased by 6.9% to EUR 4,793 million. Due to strong exchange-rate effects and investments in new products and emerging markets such as China, marketing and selling expenses were 10% higher in 2010 than in 2009. In total, non-recurring expenses were lower than in 2009. The largest single non-recurring item was the impairment loss for safinamide of EUR -134 million taken in the fourth quarter. Overall, the full-year operating result improved by 59% to EUR 565 million (Q4: EUR 14 million in 2010 vs. EUR -69 million in 2009). Return on sales (ROS) increased to 9.8% in 2010 from 6.6% in the previous year. Core ROS, which excludes Serono-related amortization of intangible assets, was 22.2% in 2010 and 18.7% in 2009. Underlying free cash flow grew by 51% in 2010 to EUR 1,308 million.

In 2010, total revenues of the Consumer Health Care division rose by 1.1% to EUR 472 million (Q4: -5.2% to EUR 126 million). Full-year total revenues grew organically by 2.6%. The cornerstones of the division’s strategy are strong brands and regional expansion. In China, the division undertook extensive restructuring in the third and fourth quarters because it expanded too quickly outside the four major cities and ended up with considerable stocks that were not being pulled through to consumers, especially the vitamin supplement Diabion®. Adjusted for the effects in China, the division posted organic full-year revenue growth of 5.2%.

In addition, the division had higher impairment losses in Mexico and incurred losses due to a fire in a warehouse in the United Kingdom. At EUR 25 million, research and development spending in 2010 was 28% higher than in 2009. Thus, the division’s operating result declined by 71% to EUR 14 million (Q4: -81% to EUR 1.7 million). Full-year ROS was 2.9% compared with 10.3% in 2009. Underlying free cash flow was EUR 45 million, which was 7% lower than in 2009.

The Merck Millipore division, which is a combination of the Millipore life science company that was acquired on July 14 and most of the former Performance & Life Science division, recorded total revenues of EUR 1,681 million in 2010, a growth of 81%. (Q4: EUR 595 million in 2010 versus EUR 234 million in 2009). The revenues and expenses of Millipore have been included since July 2010. Full-year organic growth of the division, meaning excluding acquisitions and currency effects, amounted to 5.6%.

The division’s operating result in 2010 was EUR 44 million, a decline of 59% compared to 2009. (Q4: EUR –1.2 million in 2010 versus EUR 32 million in 2009). The 2010 full-year operating result was lowered by transaction and integration costs of EUR 87 million. Moreover, cost of sales and consequently the gross margin were impacted by one-time expenses of EUR 86 million in connection with the purchase price allocation for acquired Millipore inventories. Additionally, the division bore the ongoing amortization expense for the acquired intangible assets recognized within the scope of the purchase price allocation. In total, full-year amortization of intangible assets was EUR 96 million and related almost exclusively to the second half of 2010.

The Merck Millipore division’s full-year ROS amounted to 2.6% compared to 11.5% in 2009. Core ROS for 2010 was 18.6% versus 11.5% in 2009. Underlying free cash flow was EUR 263 million compared to EUR 128 million in 2009.

The Performance Materials division consists of the Liquid Crystals, Pigments and cosmetics businesses. Production capacity utilization was at a high level for both liquid crystals and pigments during 2010, reflecting the recovery from the downturn in 2009. Full-year total revenues of the division rose by 38% to EUR 1,384 million from EUR 1,006 million in 2009. (Q4: +19% to EUR 322 million). Positive currency effects of 9.7% and organic growth of 27% contributed to the year’s increase.

In order to defend and expand its leadership position in display materials, among other fields, Merck continued to invest in research and development. R&D spending for the division rose to EUR 127 million from EUR 109 million in 2009. In September, the new Material Research Center was opened at the Darmstadt site. At EUR 50 million, this represents the largest single R&D investment in the Chemicals business sector to date.

At EUR 925 million, the Performance Material’s gross margin nearly doubled in 2010 compared to EUR 478 million in 2009. It also grew faster than expenses. Thus, the division’s operating result more than doubled, increasing to EUR 580 million from EUR 218 million in 2009. (Q4: + 41% to EUR 131 million) Full-year ROS rose to 41.9% from 21.7% in 2009. Underlying free cash flow amounted to EUR 549 million, compared to EUR 304 million in 2009.

As a result of the growing demand for high-tech liquid crystals from Merck, total revenues for this business increased in 2010 to EUR 1,013 million, 38% more than in 2009 (Q4: + 17% to EUR 235 million). The LC business accounts for more than 70% of the division’s total revenues. The Liquid Crystals operating result for 2010 was EUR 527 million, more than double the EUR 228 million recorded in the previous year. With an ROS of 52% for 2010, the LC margin is in line with pre-crisis levels.

Guidance
For 2011 and 2012, the Merck Executive Board assumes that the sales and the operating result of the Merck Group will show growth. Overall, the company expects business developments to be good. However, setbacks due to economic cycles in individual countries and negative effects as a result of high national debt levels cannot be ruled out. The higher financial liabilities of the Merck Group, which resulted from the Millipore acquisition, will steadily decrease over the next several years, also as a result of our high free cash flow. This will continue to lead to solid balance sheet ratios.

Against the background of expected overall economic development and based on total revenues of EUR 9,291 million in 2010, the Executive Board assumes an increase in total revenues between 13% and 18% in 2011, and further growth for 2012. Furthermore, the Executive Board expects the Group operating result of EUR 1,113 million in 2010 to likewise increase between 35% and 45% in 2011 and to increase as well in 2012. Profit after tax, irrespective of potential exceptional items, will likewise improve during this period.

The Merck Group 2011 Guidance

Merck Divisions
Total Revenues
Merck Serono
w/o cladribine FDA approval
+5% - 10%
+1% - 6%
Consumer Health Care
+7% - 12%
Merck Millipore*
+51% - 56%
Performance Materials*
+2% - 7%

* Adjusted to reflect that the Cosmetics Actives business was transferred to Performance Materials in 2011 from Merck Millipore.

Merck Group
Forecast 2011
Total Revenues
+13% - 18%
Operating Result
+35% - 45%
Core ROS**
22% - 23%

** Excludes costs related to the purchase of Serono (amortization of intangible assets) and costs related to the purchase of Millipore (amortization of intangible assets as well as transaction and integration costs during 2011)


Notes to Editors:
· The 2010 Annual Report, available in an interactive online format, can be found in the Internet. This site allows quick access to the annual report with better navigation, downloading of financial tables as Excel spreadsheets, intelligent searches and much more.

· The press conference at 10 a.m. CET and the analysts conference at 2 p.m. CET, as well as the charts used for the analysts conference, can be followed in the Internet.

· Merck KGaA stock symbols:
Reuters: MRCG, Bloomberg: MRK GY, Dow Jones: MRK.DE
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.

Posted: February 2011


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