Q3/2007: Merck Operating Result Rises 56% to EUR 292 Million

  • Q3 Total revenues jump 61% to EUR 1.7 billion
  • Q3 Sales of Erbitux up 36%, Rebif up 4.1%; Liquid Crystals revenue up 15%
  • FY-2007 Outlook: Organic sales growth of 7-9%; OR to improve by >20%
  • Merck Serono completes R&D portfolio review

DARMSTADT, Germany, October 24, 2007 – Merck Group total revenues in the third quarter rose 61% to EUR 1,741 million compared to EUR 1,085 million in the year-ago quarter. For the first nine months of 2007, Group revenues increased 59% to EUR 5,251 million.

Key Figures:

Merck Group (Mio EUR) Q3/2007 Q3/2006 (+/- %) 1-9/2007 1-9/2006 (+/- %)
Total Revenues 1,741.4 1,084.6 60.6 5,251.4 3,307.9 58.8
Sales 1,672.6 1,080.1 54.9 5,043.2 3,294.0 53.1
Operating Result 291.5 187.2 55.7 809.9 589.3 37.4
Exceptionals – 183.3 – 34.4 -- – 562.0 343.7 --
EBIT 108.2 152.8 – 29.2 247.9 933.0 – 73.4
Profit After Tax(1) 40.8 148.3 – 72.5 125.1 870.7 – 85.6
Net Profit After Minorities (1) 36.2 144.3 – 74.9 113.4 853.6 – 86.7
Earnings Per Share (EUR) (1) 0.17 0.74 – 77.0 0.53 4.40 – 88.0
Core EPS (EUR) (2) 1.41 0.96 46.9 3.94 2.84 38.6

Unless otherwise stated, all figures for 2006 and 2007 exclude Generics, which according to IAS, is classified as discontinued operations. The 2006 figures exclude Serono unless they are referred to as pro forma.
(1) Includes continuing and discontinued operations
(2) See further in text for definitions

“Merck’s solid results so far this year confirm our strategy to focus on innovative pharmaceuticals and chemicals. Even with the integration of Serono and the divestment of Generics, our underlying business continues to grow,” said Dr. Karl-Ludwig Kley, Chairman of the Executive Board of Merck. “We continue to expect an increase of more than 20 percent for the full-year operating result.”

Q3/2007: Merck Operating Result Rises 56% to EUR 292 Million Darmstadt, Germany, October 24, 2007 – Merck Group total revenues in the third quarter rose 61% to EUR 1,741 million compared to EUR 1,085 million in the year-ago quarter. For the first nine months of 2007, Group revenues increased 59% to EUR 5,251 million.

Third-quarter total revenues grew organically by 11%. Currency effects had a negative 2.9% impact on quarterly revenues. Acquisitions and divestments, mainly the purchase of Serono, raised Group total revenues by 52% in the third quarter. Using 2006 pro forma figures, i.e. including Serono, third-quarter Group total revenues increased 7.9%. Nine-month pro forma revenues rose 5.7% to EUR 5,251 million from EUR 4,970 million.

During the third quarter, Merck booked EUR –36 million for restructuring costs as well as EUR –140 million for amortization of intangible assets, mainly stemming from the Serono acquisition. Despite these expenses, the operating result rose 56% to EUR 292 million. The above mentioned amortization costs within the scope of the Serono purchase price allocation began in the first quarter of 2007 and are expected to continue for several years.

The Group’s return on sales (ROS) for the third quarter was 16.7% compared to 17.3% in the year-ago quarter. On a pro forma basis and excluding amortization and Merck Serono integration costs, Group ROS for the third quarter increased to 26.6% compared to 21.5% for the year-ago period.

Free cash flow (FCF) for the third quarter was EUR 176 million compared to EUR –293 million in the year-ago period. The latter figure reflects the EUR 455 million that Merck spent buying Serono shares on the open market during the third quarter of 2006. Adjusted for acquisitions and divestments, FCF was EUR 239 million during the third quarter of 2007 compared to EUR 171 million in the year-ago period.

Merck posted exceptional items totaling EUR –183 million in the third quarter. This sum mainly represents further purchase price allocations related to Serono inventories, which already began in the first quarter and will be completed this year. In the third quarter of 2006, Merck booked an exceptional item of EUR –34 million on an impairment in the Pigments business field.

As a result of the above exceptional items, earnings before interest and tax (EBIT) in the third quarter of 2007 fell 29% to EUR 108 million from EUR 153 million in the year-ago quarter.

Profit before tax fell to EUR 14 million in the third quarter from EUR 145 million in the year-ago quarter. Merck’s underlying tax rate from continuing operations and before exceptional items fell to 17.3% in the third quarter compared to 23.0% in the year-ago quarter. This low tax rate will not be the norm in future periods. Merck recorded a plus of EUR 18 million on the income tax line mainly due to the release of provisions and positive deferred taxes from the purchase price allocation and consolidations.

Profit after tax from continuing operations was EUR 33 million in the third quarter. Including profit after tax from discontinued operations, namely Generics, of EUR 8.2 million, the total Group profit after tax was EUR 41 million. For the first nine months of 2007, profit after tax was EUR 125 million compared to EUR 871 million in the year-ago period.

This quarter, Merck begins providing a Core EPS result, in order to demonstrate the performance of the underlying business. Core EPS is earnings per share from continuing operations excluding amortization of intangible assets, exceptionals, Merck Serono integration costs and related tax effects. Core EPS for the third quarter was EUR 1.41 compared to EUR 0.96 in last year's quarter and EUR 1.35 in the second quarter 2007. Core EPS for 2006 excludes exceptionals and includes Generics.

Merck had 30,962 employees worldwide on September 30, 2007 excluding the 4,641 people employed by the Generics business sold on October 2.

Merck Business Sectors
Pharmaceuticals total revenues increased to EUR 1,195 million in the third quarter compared to the year-ago amount of EUR 579 million, which did not include Serono. Using pro forma 2006 figures that include Serono results, Pharmaceuticals revenues rose 7.8% in the third quarter, driven primarily by Merck’s top-selling drugs. The Pharmaceuticals business sector generated about 70% of the Merck Group’s total revenues.

Total revenues for the Merck Serono division more than doubled to EUR 1,092 million in the third quarter of 2007 compared to EUR 476 million in the year-ago quarter, boosted by the January acquisition of Serono. Using pro forma 2006 figures, the division’s revenues rose 8.6% in the third quarter. The increase was mainly due to higher sales of three of Merck’s leading products – the multiple sclerosis treatment Rebif®, the beta-blocker bisoprolol and especially the targeted cancer therapy Erbitux®.

Worldwide sales of Rebif for the treatment of relapsing forms of multiple sclerosis increased 4.1% to EUR 306 million in the third quarter compared to the year-ago quarter. Sales of Erbitux continue to climb, jumping 36% in the third quarter to EUR 118 million. Erbitux has marketing authorization in 69 countries around the world as a treatment for colorectal cancer and squamous cell carcinoma of the head and neck.

Merck Serono Portfolio
“Following a thorough portfolio review, we see the Merck Serono division as a pharmaceuticals business with global reach delivering innovative therapies primarily in specialist indications,” said Elmar Schnee, Executive Board Member with responsibility for the Pharmaceuticals business sector. “The goals of our review were to create as much value as possible from our current compounds by better managing risk across the portfolio and directing resources to our most promising projects.”

To achieve these goals, Merck Serono will focus its research and development activities on oncology, neurodegenerative diseases, autoimmune and inflammatory diseases, fertility and, in development, on certain areas within endocrinology. As a consequence, Merck is considering not investing further into diabetes research and development but is investigating partnerships for its existing diabetes R&D projects.

With a clear focus now on these therapeutic areas, seven projects in pre-clinical development were advanced to clinical development, six projects were added to the clinical pipeline and 11 were de-prioritized or stopped. Thus, with the completion of the portfolio review, Merck’s consolidated pipeline has grown to 41 projects in clinical development between Phase I-III or submitted for regulatory approval. Among the late-stage projects added were two Erbitux studies – a Phase III for gastric cancer and a Phase II for breast cancer – and atacicept Phase II/III studies for lupus. For more details on the Merck Serono Portfolio, please see the Q3 presentation at:
http://www.merck.de/servlet/PB/menu/1753520/index.html

Merck Serono’s R&D investment during the third quarter jumped 82% to EUR 214 million with the acquisition of Serono. Merck announced in September that its Phase III trial for Erbitux, FLEX (First-Line Treatment for Patients with EGFR-EXpressing Advanced NSCLC), for patients with late-stage non-small cell lung cancer had met the primary endpoint of increasing overall survival compared with chemotherapy alone. Also during September, Merck submitted an application to the European Medicines Agency (EMEA) to extend the use of Erbitux as a first-line therapy for the treatment of metastatic colorectal cancer.

In August, EMEA granted marketing authorization for a new formulation of Rebif, which has been shown to improve injection tolerability while providing an improved immunogenicity profile. The commercial roll-out of the new formulation began in September.

Also during August, Merck announced 18-month safety and efficacy data from a Phase III trial of safinamide as an add-on treatment to dopamine agonist therapy in patients with early stage Parkinson’s disease. Additional Phase III studies are planned to further assess the efficacy of a 50-100 mg daily dose of safinamide.

Total revenues for the Consumer Health Care division increased slightly in the third quarter to EUR 103 million compared to the year-ago quarter. The division continued to record increases in sales for its strategic brands as well as improvements in its operating margin during 2007.

Chemicals
Total revenues for the Chemicals business sector increased 8.3% to EUR 539 million in the third quarter with increases reported by both the Liquid Crystals and Performance & Life Science Chemicals divisions. Organically, the Chemicals business sector’s third quarter revenues rose 15% but currency effects continue to have a strong negative impact, reducing the quarter’s revenues by 5.1%. This is due to the high proportion of Chemicals revenues generated in U.S. dollars and Asian currencies.

Total revenues for the Liquid Crystals division rose 15% to EUR 238 million in the third quarter of 2007, reflecting the market development for the Liquid Crystal Display (LCD) industry. A 26% organic growth rate for total revenues was seriously impacted by a negative currency effect of 8.4% as well as another 2.7% as a result of the divestment last year of the indium tin oxide (ITO) glass-coating and color filter activities in Taiwan. The division’s operating result rose 14% to EUR 119 million in the third quarter. ROS remained at 50.1%. Free cash flow improved to EUR 105 million from EUR 65 million in the year-ago period.

Revenues for the Performance & Life Science Chemicals division rose 3.9% in the third quarter to EUR 301 million compared to EUR 289 million in the year-ago quarter.

Discontinued Operations
Total revenues of Discontinued Operations, i.e. Generics, decreased slightly to EUR 455 million from EUR 457 million in the year-ago quarter. Merck announced on May 13 that it would sell its Generics business to Mylan of Canonsburg, Pennsylvania, for EUR 4.9 billion. The sale closed on October 2 and effects of the transaction will be reported in the fourth quarter of this year.

Outlook
As more than half of Merck’s sales are generated outside the euro zone, currency effects are having a major impact on results for 2007. Excluding currency effects, the company continues to see a 7-9% increase in sales for 2007 compared to 2006, including pro forma Serono sales. Due to the expected impact of negative currency exchange rates, Merck’s full-year sales are anticipated to increase nominally by 4-6%. Including the impact of the amortization related to the purchase price allocation but excluding Serono 2006 pro forma results, Merck continues to expect an increase of more than 20% for the full-year operating result. Proceeds from the sale of the Generics business for EUR 4.9 billion will be booked in the fourth quarter.

Notes to Editors:

· Please download the full Q3 Report in English and German as well as the Investor Relations Presentation, which includes information on the Merck Serono Portfolio, at:
http://www.merck.de/servlet/PB/menu/1753520/index.html

· The press conference at 9 a.m. CET in Darmstadt and the analysts conference at 4:30 p.m. CET in London will be available at: http://www.merck.de/servlet/PB/menu/1753520/index.html

· 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 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.

Posted: October 2007


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