Merck Achieves Profitable Organic Growth

“Merck got off to a solid start in 2014. We increased our organic sales, which means we sold more. In addition, we earned more on what we sold. Especially in view of the challenging market environment that we expect to face in 2014, our cost control and targeted growth initiatives are paying off across all our divisions,” said Karl-Ludwig Kley, Chairman of the Executive Board.

“For the further course of business in 2014, we assume our well-balanced business model will enable us to cushion the risks and seize opportunities. However, we will still face negative exchange rate effects. In addition, compared with the previous year, declining royalty license and commission income will lower our EBITDA pre one-time items. Therefore, we remain cautious. In view of the successful acquisition of AZ Electronic Materials, we nevertheless expect a moderate increase in sales and EBITDA pre one-time items in 2014,” Kley said.

In the first quarter of 2014, total revenues of the Merck Group grew organically by 1.8%, which was outweighed by negative foreign exchange effects of 5.3%. Overall, total revenues of the Merck Group thus declined slightly by 3.5% to € 2.7 billion (Q1 2013: € 2.8 billion). Royalty, license and commission income, which is disclosed as part of total revenues, decreased by 49.1% to € 51 million (Q1 2013: € 100 million). This sharp drop was mainly due to the decline in royalty and license income in the Merck Serono division.

Nevertheless, Merck increased its operating result (EBIT) to € 468 million (Q1 2013: € 399 million). This was mainly due to the stable operating business, the lower level of one-time items compared with the year-earlier quarter, as well as the relentless implementation of efficiency improvement measures within the scope of the ”Fit for 2018“ transformation and growth program.

After adjusting for depreciation, amortization and one-time items, the key financial indicator used to steer operating business, EBITDA pre one-time items, grew slightly to € 807 million (Q1 2013: € 801 million), equivalent to an EBITDA margin pre one-time items of 30.9% (Q1 2013: 30.1%). Adjusted for one-time items, earnings per share increased by 9.5% to € 2.31 (Q1 2013: € 2.11).

Merck increased net income in the first three months of the year by 22.2% to € 325 million (Q1 2013: € 266 million), which led to earnings per share of € 1.50 (Q1 2013: € 1.22).

Business free cash flow of the Merck Group amounted to € 684 million in the first quarter of 2014 (Q1 2013: € 593 million), increasing by € 91 million or 15.4%.

Whereas Merck had net financial debt of € 307 million at the end of 2013, the company reported a net cash position of € 7 million at the end of the first quarter of 2014 and thus was debt-free.

Organic sales growth in all regions

In the first quarter of 2014, Merck recorded organic sales growth in all regions (Europe, North America, Emerging Markets, Rest of World). This was mainly due to dynamic business performance in the Emerging Markets region, which encompasses Latin America and Asia excluding Japan. The very strong organic growth of 5.6% posted in that region was primarily driven by the Merck Serono and Merck Millipore divisions. Including currency headwinds of 9.5%, Group sales in the Emerging Markets region totaled € 888 million (Q1 2013: € 924 million).

All four divisions contribute to organic sales growth

All four divisions of the Merck Group posted good organic sales increases coupled with negative exchange rate effects in the first quarter of 2014. Achieving an organic sales increase of 4.2%, the Merck Serono division made the largest absolute contribution to organic sales growth, followed by Merck Millipore with organic sales growth of 3.7%, and Performance Materials with 1.1%. The Consumer Health division reported organic sales growth of 5.7%.

Merck Serono benefits from good sales of Rebif and Gonal-f

Despite solid organic growth of 4.2%, sales by the Merck Serono division declined by 1.0% to € 1,375 million (Q1 2013: € 1,389 million), since the strong euro led to negative foreign exchange effects of 5.2%. All therapeutic areas contributed to the organic sales growth of the division.

Rebif, which is used to treat relapsing forms of multiple sclerosis, achieved organic growth of 5.3% in the first quarter of 2014 despite the increasingly difficult competitive situation. Including negative foreign exchange effects of 4.1%, Rebif sales increased overall by 1.2% to € 459 million (Q1 2013: € 454 million). In the first quarter of 2014, sales of the oncology drug Erbitux showed slight organic growth of 0.5%. As a result of negative foreign exchange effects of 6.1%, sales decreased overall to € 209 million (Q1 2013: € 222 million). The portfolio for the treatment of thyroid disorders as well as Gonal-f, the leading recombinant hormone used in the treatment of infertility, performed strongly in the first quarter of 2014.

Royalty, license and commission income fell sharply by 50.4% to € 46 million (Q1 2013: € 93 million). Adjusted for one-time items, Merck Serono’s EBITDA pre one-time items of € 438 million was at the previous year’s level. The EBITDA margin pre one-time items increased slightly to 31.9% (Q1 2013: 31.5%).

“Within the Merck Serono division, we want to further expand our business with existing medicines, both in Emerging Markets, which have a large number of patients with unmet medical needs, and in the United States, which remains the world’s largest pharmaceutical market,” said Kley. “For Merck Serono, inorganic growth through partnerships and acquisitions will also be possible in 2014.”

Consumer Health strengthened by transferred product groups

In the first quarter of 2014, the Consumer Health division generated sales of € 180 million (Q1 2013: € 182 million). The slight 0.8% decline in sales was primarily attributable to currency headwinds of 6.5%. Solid organic sales growth amounted to 5.7% in the first quarter of 2014. This was also driven by Neurobion, a vitamin B product, and Floratil, a probiotic anti-diarrheal, two former Merck Serono brands that were transferred to the Consumer Health division on January 1, 2014. The mild winter season in Europe led to weaker demand for the cold treatment Nasivin and the food supplement Bion, which was offset by strong sales of Femibion and local brands in Germany. Adjusted for one-time effects from restructuring measures, EBITDA pre one-time items rose by 5.0% to € 41 million (Q1 2013: € 39 million). The EBITDA margin pre one-time items increased by more than one percentage point to 22.9% (Q1 2013: 21.6%).

“In Consumer Health, a stronger focus will again be placed on profitable growth this year. We want to expand our market share in each of our main markets to at least three percent. And in each of these countries, we want to achieve a leading position with at least three of our brands,” said Kley. “We also have inorganic growth through bolt-on national or regional acquisitions in our sights.”

Performance Materials increases organic sales

In the first quarter of 2014, the Performance Materials division achieved a slight 1.1% organic increase in sales, despite a strong year-earlier quarter. However, considerable currency headwinds of 5.6% lowered divisional sales by a total of 4.5% to € 402 million (Q1 2013: € 421 million). The Liquid Crystals business unit, which generates more than 70% of divisional sales, once again defended its market leadership position in liquid crystal materials in the first quarter of 2014. The Pigments & Cosmetics business unit generated slight organic sales growth in the first three months of 2014.

EBITDA pre one-time items of the Performance Materials Division amounted to € 186 million (Q1 2013: € 207 million), which corresponded to a decline of around 10%. The EBITDA margin pre one-time items declined to 46.3% of sales (Q1 2013: 49.2%) and was thus around three percentage points lower than the record margin achieved in the year-earlier quarter.

On May 2, 2014, Merck announced the completion of the acquisition of AZ Electronic Materials. In December 2013, Merck had reached an agreement with the Board of Directors of AZ concerning a cash offer amounting to around € 1.9 billion. Merck will now start the process of delisting AZ shares from the London Stock Exchange, which is expected to take place in early June. Merck will quickly begin with the integration of AZ and its workforce of approximately 1,150 people worldwide. All important integration activities are to be completed by the end of 2014. AZ is an important partner to the leading global electronic manufacturers. They use chemical technologies provided by the company in integrated circuits, flat-panel displays and light-emitting diodes.

“In the liquid crystals business, we are already the uncontested market leader today. With the acquisition of AZ, we are now in a better position than ever to offer our customers solutions that will also make the devices of tomorrow faster, more intelligent and more attractive. Merck will then not only be inside smartphone displays, but also inside the electronics behind the display. This calls for expertise not only in chemistry, but increasingly also in physics,” said Karl-Ludwig Kley.

Merck Millipore lifts earnings thanks to solid demand and cost control

The Merck Millipore division increased its sales organically by 3.7% in the first quarter of 2014. The organic increase was countered by a negative foreign exchange impact of 5.5%. Including these effects, divisional sales decreased by € 12 million, or 1.8%, to € 657 million. The division’s two top-selling business units both contributed to organic sales growth in the first quarter of 2014. At 6.6%, the Process Solutions business unit, which markets products used to manufacture medicines of chemical and biotechnological origin, generated the highest organic sales growth within the Merck Millipore division. Lab Solutions posted organic sales growth of 2.9% with its broad range of products for researchers and scientific laboratories in a wide range of industries. The Bioscience business unit, which primarily markets products and services for academic and pharmaceutical research laboratories, felt the effects of the U.S. budget sequester and thus saw organic sales decline by 2.5%.

Thanks to strict cost control and solid demand, among others, Merck Millipore’s EBITDA pre one-time items increased by 4.8% to € 170 million (Q1 2013: € 162 million). Consequently, the EBITDA margin pre one-time items rose in the first quarter of 2014 to 25.8% (Q1 2013: 24.2%).

“Merck Millipore has launched numerous highly innovative products in recent years. We want to follow up these successes with new product developments. For instance, we want to build on our strong position in filtration technology,” Kley stated.

Merck expects a moderate increase in sales and earnings in 2014 as a result of the positive impact of the AZ acquisition

Merck continues to expect slight organic sales growth in 2014, which will be cancelled out by negative foreign exchange effects. Due to the successful acquisition of AZ Electronic Materials and the related portfolio effect, Merck assumes that sales will increase to between around € 10.9 billion and € 11.1 billion. It will be possible for planned efficiency increases to offset the effects of the decline in royalty, license and commission income as well as negative exchange rate movements. Merck thus expects EBITDA pre one-time items to grow moderately in comparison with the previous year notably due to the acquisition of AZ Electronic Materials. Based on the number of shares prior to the share split, which was approved by the Annual General Meeting on May 9, 2014, earnings per share pre one-time items are expected to be in a range between € 9.00 and € 9.50. Business free cash flow is forecast to decrease slightly due to investments in growth projects.

For the Merck Serono division,Merck expects stable organic sales. It can be expected that the well-balanced product portfolio as well as organic growth in the Emerging Markets region will offset the declines in sales of Rebif in the United States and Europe. EBITDA pre one-time items of Merck Serono should decrease slightly in 2014 as forecast, particularly as a result of the expected decline in royalty and license income, which will have a net effect of more than € 100 million versus 2013. For the Consumer Health division, Merck forecasts moderate organic sales growth in 2014. EBITDA pre one-time items of the division should increase moderately in 2014 within the framework of sales developments. Through the acquisition of AZ Electronic Materials, which will be fully integrated into the Performance Materials division, Merck expects a substantial increase in divisional sales, EBITDA pre one-time items and business free cash flow. For Merck Millipore, Merck expects to again report moderate organic sales growth in 2014, which, however, will be partly offset by foreign exchange effects. Based on sales growth, Merck expects EBITDA pre one-time items of the Merck Millipore division to increase slightly in 2014.