Merck Achieves 2018 Targets and Is Set for Profitable Growth

“2018 was a year of transition and investment for Merck. We achieved solid results in a dynamic market environment and achieved the financial targets we had set for ourselves. At the same time, we pressed further ahead with the strategic refocusing of Merck on innovation-driven businesses. In addition, by divesting Consumer Health we decreased our debt significantly. Our objective for 2019 is clear: We want to resume sustainable growth of our key indicators, namely net sales, EBITDA pre and EPS pre,” said Stefan Oschmann, Chairman of the Executive Board and CEO of Merck.

Group sales rose in 2018 by 2.2% to € 14.8 billion (2017: € 14.5 billion). All three business sectors and all regions contributed to the strong organic sales growth of 6.1%. This was amid negative exchange rate effects of -3.9%, primarily attributable to the weakening of the U.S. dollar against the euro as well as significant declines in the value of Latin American currencies.

The operating result (EBIT) fell sharply by -28.7% to € 1.7 billion (2017: € 2.4 billion); among other things, in the previous year the gain on the divestment of the Biosimilars business had a positive effect. EBITDA pre, the company’s most important earnings indicator, declined by -10.5% to € 3.8 billion (2017: € 4.2 billion). This decrease was attributable to negative foreign exchange effects of -8.9%. Organically, EBITDA pre declined by -1.6%. Net income surged by 29.5% to € 3.4 billion, particularly owing to the gain on the divestment of the Consumer Health business (2017: € 2.6 billion).

Earnings per share pre (EPS pre), which is decisive for the dividend to be paid by Merck, decreased in 2018 by –13.9% to € 5.10 (2017: € 5.92). Nevertheless, at the Annual General Meeting on April 26, 2019, the Executive Board will propose a dividend of € 1.25 per share and thus the same amount as in the previous year.

Merck achieved its targets for 2018 with respect to net sales, EBITDA pre and EPS pre.

Thanks to the gain on the divestment of Consumer Health and despite continued strong investment activity, Merck lowered its net financial debt as of December 31, 2018 by € ‑3.4 billion to € 6.7 billion (2017: € 10.1 billion). At year-end, net financial debt of the company was thus 1.8x EBITDA pre; consequently Merck met the target it had set for itself by lowering this ratio of net financial debt to EBITDA pre to less than 2 by the end of 2018.

Q4 2018: All three business sectors contribute to strong organic sales growth

In the fourth quarter of 2018, Group sales rose by 6.6% to € 3.9 billion (Q4 2017: € 3.6 billion). This was mainly attributable to strong organic growth of 7.2% driven by all three business sectors. Negative foreign exchange effects lowered sales by -0.7% in the fourth quarter. Group EBITDA pre declined slightly in the fourth quarter by -1.3% and amounted to € 950 million (Q4 2017: € 962 million). This was due to negative foreign exchange effects of -4.5%, which more than canceled out the organic growth of EBITDA pre of 3.2% in the fourth quarter. Earnings per share pre amounted to € 1.22 in the fourth quarter (Q4 2017: € 1.25), a decline of -2.4%.

Healthcare: Bavencio and Mavenclad contribute significantly to growth

The Healthcare business sector generated organic sales growth of 5.2% in 2018. Negative foreign exchange effects lowered sales by -4.3%. In 2018, reported sales increased by 0.9% to € 6.2 billion (2017: € 6.2 billion).

The two new medicines Mavenclad and Bavencio contributed significantly to organic growth. In 2018, sales of the immuno-oncology medicine Bavencio rose to € 69 million (2017: € 21 million). With Mavenclad for the oral short-course treatment of relapsing multiple sclerosis (MS) in patients with high disease activity, Merck generated sales of € 90 million in 2018 (2017: € 5 million). The product was approved in Europe in August 2017; currently the U.S. Food and Drug Administration (FDA) is reviewing an application for cladribine tablets as a potential treatment for patients with relapsing MS. A decision is expected in the first half of 2019.

Sales of Rebif, which is used to treat relapsing forms of MS, saw an organic sales decline of -6.5% in 2018. Including negative exchange rate effects of -4.1%, sales of € 1.4 billion were recorded (2017: € 1.6 billion). The organic sales development of the oncology drug Erbitux was stable. Including negative foreign exchange effects of -4.8%, sales decreased to € 816 million (2017: € 853 million). Gonal-f, the leading recombinant hormone used in the treatment of infertility, generated organic sales growth of 5.3% in 2018. Including negative foreign exchange effects of -4.8%, worldwide sales amounted to € 708 million (2017: € 704 million). The General Medicine & Endocrinology franchise, which commercializes medicines to treat cardiovascular diseases, thyroid disorders, diabetes and growth disorders, among other things, generated organic growth of 5.8%. Including foreign exchange effects of -4.4%, net sales amounted to € 2.3 billion (2017: € 2.3 billion).

After depreciation, amortization, impairments and reversals of impairment losses as well as other adjustments, EBITDA pre of Healthcare decreased by -12.2% to € 1.6 billion in 2018 (2017: € 1.8 billion). Negative exchange rate effects of -10.7% impacted this key performance indicator significantly. Organically, EBITDA pre of Healthcare declined by -1.6%; in the previous year, milestone payments for the approval of Bavencio as well as compensation for future license payments created a high comparative basis.

Life Science continues to grow faster than the market

The Life Science business sector generated organic sales growth of 8.8% in 2018. Including negative foreign exchange effects of -3.6%, net sales rose by 5.2% to € 6.2 billion (2017: € 5.9 billion). As in 2017, all three business units contributed positively to the organic growth of Life Science. As planned as of the end of 2018, Life Science had fully achieved the synergy targets from the acquisition of Sigma-Aldrich amounting to € 280 million annually.

The Process Solutions business unit, which markets products and services for the entire pharmaceutical production value chain, generated organic sales growth of 14.8% in 2018. Slightly lowered by negative exchange rate effects of -3.5%, the net sales of Process Solutions amounted to € 2.5 billion € (2017: € 2.2 billion). The Research Solutions business unit, which provides products and services to support life science research for pharmaceutical, biotechnological and academic research laboratories, generated moderate organic sales growth of 4.1%. However, this was nearly canceled out by negative exchange rate effects of -3.6%. Net sales of Research Solutions amounted to € 2.0 billion (2017: € 2.0 billion). With its broad range of products for researchers as well as scientific and industrial laboratories, Applied Solutions recorded strong organic growth of 6.3% amid negative foreign exchange effects of -3.8%. The business unit’s sales amounted to € 1.6 billion (2017: € 1.6 billion).

Life Science increased its EBITDA pre organically by 7.0% in 2018. Including negative exchange rate effects of –3.9%, the figure was € 1.8 billion in 2018 (2017: € 1.8 billion).

Performance Materials advances thanks to semiconductor and OLED materials

In 2018, Performance Materials generated organic sales growth of 1.7%, which was however canceled out by a negative foreign exchange impact of -3.4%. In 2018, net sales of the Performance Materials business sector declined by -1.7% to € 2.4 billion (2017: € 2.4 billion).

The Semiconductor Solutions business unit, which comprises the business with materials for the semiconductor industry, delivered strong organic sales growth in 2018 as expected. Reported for the full year for the first time, net sales of Semiconductor Solutions were € 596 million in 2018. Sales in the Surface Solutions business unit were below expectations and below the year-earlier value, among other things owing to declining demand for cars internationally; in 2018 sales amounted to € 476 million. The Display Solutions business unit posted a slightly positive organic sales performance due also to increasing demand for OLED materials. In addition, the liquid crystals business temporarily benefited, mainly in the second half of 2018, from projects by international panel makers in China to build up production capacities. Display Solutions reported sales of € 1.3 billion in 2018.

EBITDA pre of the business sector declined by -19.8% to € 786 million (2017: € 980 million). The negative foreign exchange impact of -6.9% lowered this key performance indicator.

Merck expects growth in sales and EBITDA pre in 2019

In 2019, Merck expects moderate organic growth of Group sales in comparison with 2018. Owing to exchange rate developments in multiple growth markets, a slightly negative exchange rate effect of -1% to -2% should result in comparison with the previous year. For EBITDA pre in 2019, Merck expects a pronounced organic percentage growth in the low teens range in comparison with 2018. The expected foreign exchange development is likely to lower EBITDA pre by between -3% and -4% compared with 2018.