Merck KGaA: 2008 Operating Result Rises 16% to € 1,131 Million
• 2008 total revenues increase 7.1% to a record € 7.6 billion
• 2008 sales of Erbitux up 20%, Rebif up 9.3%; Liquid Crystals ROS at 44.6%
• Merck proposes dividend of € 1.50 per share
|Merck Group (Mio €)||Q4/2008||Q4/2007||(+/- %)||FY/2008||FY/2007||(+/- %)|
|Profit After Tax||–277.6||3,395.1||--||379.1||3,520.2||–89.2|
|Net Profit After Minorities||–279.5||3,386.7||--||367.1||3,500.1||–89.5|
|Earnings Per Share (€)||–1.29||15.58||--||1.69||16.21||–89.5|
|Core Earnings Per Share (€)*||0.97||1.21||–19.8||5.73||5.21||9.9|
* Core EPS: Based on net income less costs related to the purchase of Serono (amortization and impairments of intangible assets, and integration costs) and exceptionals, excluding Generics.
DARMSTADT, Germany, February 18, 2009 - “In spite of the recession that is gripping the global business community, Merck is pleased to report that we were able to meet the Group guidance for 2008 that we announced a year ago,” said Dr. Karl-Ludwig Kley, Chairman of the Executive Board of Merck. “These positive results in a difficult year – revenues increasing by 7% and an operating result up 16% – are a clear vindication of our business model that distributes risk across the two major business sectors of Pharmaceuticals and Chemicals.”
Merck: 2008 Operating Result Rises 16% to € 1,131 Million
Darmstadt, Germany, February 18, 2009 – Despite a rapidly deteriorating economic situation, total revenues of the Merck Group rose 7.1% to a record € 7,558 million in 2008 due to increased sales of Pharmaceuticals and a 26% increase in royalty income to € 356 million. On a currency-adjusted basis, annual revenues rose 11%. For the fourth quarter, Group revenues were up 5.4% to € 1,904 million. Merck made no major acquisitions or divestments during 2008.
Research and development costs rose 20% during 2008 to € 1,234 million, with the lion’s share spent by the research-driven Merck Serono division. However, other operating expenses and income declined to € –170 million in 2008 from € –340 million in 2007, which included high one-time integration and restructuring expenses due to the Serono acquisition. Amortization of intangible assets such as technologies and licenses, mainly stemming from the Serono acquisition in 2007, totaled € –573 million in 2008 compared to € –557 million in the previous year. Thus, Merck’s full-year operating result rose 16% to € 1,131 million. The fourth-quarter operating result fell by 15% to € 142 million, mainly due to a sharp decline in the Liquid Crystals division.
The Group’s 2008 core operating result, which excludes amortization of intangible assets and integration costs for Merck Serono from the operating result, was € 1,735 million, a decrease of 1.0% from 2007.
The Group’s return on sales (ROS) in 2008 improved to 15.0% compared to 13.8% in 2007 mainly due to a 7.1% increase in the gross margin. ROS for the fourth quarter of 2008 was 7.5% compared to 9.2% in the year ago quarter due to Liquid Crystals.
Free cash flow (FCF) for 2008, adjusted for acquisitions and disposals, amounted to € 601 million compared with € 978 million in 2007. This decline is due mainly to an increase of € 112 million in working capital. Besides a higher business volume, Merck had higher receivables because it quit selling its receivables in Italy and now discloses the financing on its balance sheet. In addition, the company increased spending property, plant and equipment by € 131 million. On the other hand, Merck booked about € 160 million during 2007 from one-time gains on the sale of financial assets.
Merck booked exceptional items of € –400 million in 2008 – all during the fourth quarter – mainly for the Merck Serono division. Due to sharply lower sales expectations for the psoriasis drug Raptiva®, product technology assets of € 195 million were written off in full. Licensing rights to Enbrel® for the treatment of rheumatoid arthritis and psoriasis were partially written down (€ 43 million) due to changes in the estimates of royalty income and timing. Merck completely wrote off goodwill of € 42 million for the former subsidiary Lexigen following termination of relevant research projects. The development of a high-dose recombinant human growth hormone for HIV-associated adipose redistribution syndrome (HARS) was discontinued and the associated intangible assets (€ 20 million) were written off. Merck booked write-downs of € 29 million on financial investments and the Merck Serono division incurred charges totaling € 26 million in connection with the restructuring of its sales force in various European countries. The Chemicals business sector restructured the Performance & Life Science Chemicals division at its sites in the United States and Brazil resulting in exceptional expenses of € 46 million.
In 2007, exceptional items totaled € –776 million and were related mainly to write-downs of inventories within the scope of the Serono purchase price allocation.
Merck’s full-year financial result was halved to just € –156 million in 2008 compared to € –311 million in 2007, which was burdened by interest payments in connection with financing the acquisition of Serono. Proceeds from the sale of the Generics business, which were booked in the fourth quarter of 2007, were used to repay debt.
Adjusted for exceptional items, the tax rate in 2008 was 25.8%, compared to 28.2% in 2007. Full-year profit after tax was € 379 million in 2008 compared to the prior year’s € 3,520 million, which included the € 3,471 million gain on the disposal of the Generics business as well as the earnings contribution of that business. Fourth-quarter profit after tax was € –278 million in 2008 due to the € –400 million in exceptional items mentioned above. During the fourth quarter of 2007, exceptional items totalled € –214 million while profit after tax was € 3,387 million.
Merck intends to propose to the Annual General Meeting on April 3 a dividend of € 1.50 per share. The regular dividend for 2007 was €1.20 per share plus a one-time bonus of € 2.00 per share from the sale of the Generics business.
Merck had 32,800 employees worldwide on December 31, 2008, a 5.9% increase compared to the 30,968 employees counted at the end of 2007.
Merck Business Sectors
Pharmaceuticals total revenues rose 11% in 2008 to € 5,428 million. The majority of this increase is due to higher sales of the drugs Rebif® and Erbitux®. Royalty income grew by 25% to € 339 million. Fourth-quarter revenues increased 15% to € 1,439 million. During 2008, the Pharmaceuticals business sector generated about 72% of the Merck Group’s revenues and 54% of the Group’s operating result, excluding the segment Corporate and Other.
Full-year revenues for the Merck Serono division rose 12% to € 4,987 million compared to € 4,458 million the year before due improved sales of all its major products, especially Rebif and Erbitux. Fourth-quarter revenues for the division were up 16% to € 1,327 million, which included € 36 million from the remaining Generics business. The 66% increase in the full-year operating result to € 594 million was due to the good development of business and to the absence of high, one-time restructuring and integration expenses for Serono in 2007. For the fourth quarter, the operating result rose to € 60 million in 2008 from € 13 million in the year-ago quarter due to increased sales and royalties.
Research and development costs for the division rose 22% during the year to slightly more than € 1 billion, as planned, as several drug candidates reached the more advanced, and thus more costly, stages of clinical development. Merck currently has more than 30 projects in clinical development.
The company received two approvals from the European Medicines Agency (EMEA) during the fourth quarter:
– The use of Erbitux was extended to include treatment of patients with recurrent and/or metastatic squamous cell carcinoma of the head and neck (SCCHN) in combination with platinum-based chemotherapy. Erbitux was previously approved in SCCHN for use in combination with radiotherapy for locally advanced disease.
– Kuvan® was granted marketing authorization for the treatment of hyperphenylalaninemia (HPA) in phenylketonuria (PKU) or BH4 deficient patients. Kuvan is the first drug approved in Europe for HPA due to PKU or BH4 deficiency.
For more details on the Merck Serono portfolio and pipeline, please see the FY-2008 presentation at: http://www.merck.de/financial_results
ROS for the Merck Serono division increased to 11.9% during 2008 compared to 8.0% in 2007. For the fourth quarter, ROS was 4.5% in 2008 compared to 1.1% in 2007.
Worldwide sales of Rebif for the treatment of relapsing forms of multiple sclerosis increased by 9.3% in 2008 to € 1,331 million and by 14% to € 360 million during the fourth quarter. Sales of Erbitux jumped 20% in 2008 to € 565 million and 11% to € 141 million in the quarter. Erbitux has marketing authorization in 76 countries around the world as a treatment for colorectal cancer and squamous cell carcinoma of the head and neck. Full-year sales of Gonal-f® fertility products rose 5.9% to € 460 million. Annual sales increases for Merck’s classical pharmaceuticals were: Concor® products, 14% to € 433 million; Glucophage® products, 9.0% to € 290 million; and Euthyrox® products, 12% to € 129 million. Sales of Raptiva, for the treatment of moderate-to-severe psoriasis, rose 22% to € 93 million in 2008.
Total revenues for the Consumer Health Care division increased by 5.2% in 2008 to € 442 million compared to the previous year. Organically, revenues grew 12%, more than double the estimated growth rate of the global OTC market. In the fourth quarter, revenues rose 3.7% to € 113 million. In order to strengthen strategic brands, the division increased investments in them during 2008 by almost 20%, partly financed by the proceeds from the € 11 million sale of the biManán® brand in Spain. The division’s full-year operating result rose by 2.9% to € 61 million. In December, the Belgian company Bio-Fyt was acquired for € 30 million. The division maintained its return on sales of 13.9% at nearly the previous year’s level of 14.2%.
Total revenues of the Chemicals business sector were € 2,123 million in 2008, corresponding to a decline of 1.3%. Negative currency effects due to the translation of weak currencies such as the U.S. dollar and the Korean won lowered the organic revenue growth rate of 4.7% by 6.0 percentage points. Particularly in the fourth quarter, the economic downturn affected sales in the Chemicals business sector, with deliveries to manufacturers of consumer goods and the automotive industry declining. Fourth-quarter total revenues declined by 15% to € 464 million. At € 558 million, the operating result was 12% lower than in 2007. For the fourth quarter, the decline was 43% to € 88 million compared to the year-ago quarter. The Chemicals business sector accounted for 46% of the Group operating result compared with 60% in 2007, excluding the segment Corporate and Other. Annual ROS was 26.3% compared with 29.3% in 2007. Research and development expenses rose by 4.4% to € 143 million during 2008.
Negative currency effects and decreasing demand strongly impacted total revenues of the Liquid Crystals division. Revenues declined by 4.2% to € 877 million in the year and by 33% to € 166 million in the quarter. On a currency-adjusted basis the annual growth rate was 5.6%. Since Merck produces the basic materials in Darmstadt, but generates sales with customers in Asia and bills in local currencies, unfavorable currency relationships directly impact the operating result. In addition, the economic downturn led to a sharp decline in sales during the fourth quarter. At € 391 million, the full-year operating result was therefore 20% lower than in 2007. For the fourth quarter, the operating result dropped 60% to € 52 million. The annual return on sales declined to 44.6% compared to 53.1% in 2007.
The Performance & Life Science Chemicals division suffered from negative currency effects and, although the economic downturn impacted sales of pigments to the automotive industry, the division’s balanced portfolio contributed to its stable business development. As a result, total revenues in 2008 were up by 0.9% to € 1,246 million, buoyed by demand for raw materials for the pharmaceutical and biotech industries and double-digit growth in China and India. On a currency-adjusted basis, revenues grew by 4.0%. Compared to the fourth quarter of 2007, total revenues rose 1% to € 298 million. The full-year operating result was up 15% to € 167 million. This is primarily due to the low level of 2007, which included one-time expenses for write-downs and restructuring measures. At 13.4%, return on sales was markedly higher than 2007, when it amounted to 11.7%.
Background on Discontinued Operations
Merck completed the sale of its Generics business to Mylan Inc., United States, for € 4.9 billion on October 2, 2007, and proceeds from the divestiture were booked in the fourth quarter. The after-tax gain on the disposal amounted to € 3,471 million. These gains, along with the earnings contribution of the Generics division for the first nine months, were reported as “profit after tax discontinued operations.”
At the present time, the overall economic environment cannot be assessed due to the global financial and economic crisis. The dynamics of this situation, coupled with the complexity and interdependencies of the global financial and real economies, is without precedent. These special circumstances make it impossible for Merck to give any quantitative forecasts, or even qualitative statements concerning trends, for 2009.
Notes to Editors:
• The 2008 Annual Report, available in an interactive online format, can be found at: http://www.merck.de/annualreport2008. This site allows quick access to the annual report with better navigation, downloading of financial tables as Excel spreadsheets, intelligent searches and much more.
• To access the press conference at 10 a.m. CET, the analysts conference at 2 p.m. CET and the charts that will be used at the analysts conference, please use this link: http://www.merck.de/financial_results
• 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 of the Merck business. These statements are based on the current expectations of management of Merck KGaA and E. Merck OHG, 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 OHG 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 € 7.6 billion in 2008, a history that began in 1668, and a future shaped by 32,800 employees in 59 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.
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Posted: February 2009