Merck Announces Stable Results in Challeging Times

25-Oct-2002

The Merck Group third-quarter sales declined 5.4% to EUR 1,847 million from EUR 1,952 million in the year-ago quarter. Sales were burdened by a 6.1% negative currency effect and generic competition and over stocking in the U.S. for Merck's top-selling product, the oral anti-diabetic Glucophage. The group's organic sales growth rate was a positive 3.8%.

The operating result dropped 52% to EUR 143 million from EUR 295 million in the third quarter of last year - the best quarter in Merck's 334-year history. Compared to the second quarter of this year, which also had minimal sales of Glucophage by Merck, the third-quarter operating result improved slightly.

Profit after tax dropped 98% to EUR 5.9 million from EUR 364 million. As previously announced, Merck booked third-quarter exceptional items of minus EUR 58 million, mostly to cover risks associated with its vitamins business. In the year-ago quarter, the company posted an exceptional gain of EUR 234 million after taxes from the sale of the Pharmaceutical Resources stake. Net profit after minorities was down 99% to EUR 2.9 million, or EUR 0.02 per share, from EUR 351.3 million, or EUR 2.04 per share.

"The effect of exceptional items on this quarter's bottom line is extreme while the weak dollar took 6% off the top line," Merck CEO Bernhard Scheuble said. "In addition, this quarter - while reflecting a pattern of stable business in a difficult economy - suffers in comparison to the company's best-ever quarter last year."

After more than nine months of generic competition, the Glucophage franchise continues to maintain 46% of U.S. metformin prescriptions for the treatment of diabetes. Worldwide sales of Glucophage products rebounded to EUR 202 million in the third quarter from EUR 76 million in the second, indicating that overstocking at the wholesale level and at Merck's U.S. licensee Bristol-Myers Squibb appears to be diminishing.

"Of course, the real story is Merck's future products, such as our two leading oncology products, C225 and EMD 72000," Prof. Scheuble continued. "With months of negative news swirling around C225 and our U.S. partner, I want to emphasize that Merck remains fully committed to this drug. Our Phase II clinical trial remains on track and data analysis is expected in the first quarter. We plan to file our European application in the second quarter."

Merck also remains confident in its other products in Phase II and III of clinical development, Prof. Scheuble said. Research and development costs, mostly for Pharmaceuticals, rose 16% in the third quarter to EUR 149 million.

In order to fund R&D and other important items such as the new $54 million research campus near Boston, Merck has initiated or expanded projects to improve efficiency and reduce costs. During the third quarter, Merck began a program to save EUR 30 million by 2004 at its main German sites in Darmstadt and Gernsheim. The program includes reducing the headcount at these locations by a total of 300 without a general layoff. On a global level, Merck plans to further reduce investments, halting spending on projects such as administrative buildings. As previously announced, restructuring of the global pharmaceutical production network should save more than EUR 50 million annually while the Strategic Sourcing Program for global purchasing should save a further EUR 37 million a year.

Third-quarter earnings before interest and tax (EBIT) fell 87% to EUR 85 million and profit before tax declined 92% to EUR 50 million. Merck's tax rate of 88% resulted in taxes of EUR 44 million. For the third quarter of 2001, the company had a tax rate of 38% and taxes of EUR 219 million.

Merck achieved an ROS (return on sales) of 7.8% in the third quarter compared to 15.1% the year before, while ROCE (return on capital employed) was 8.5% compared to 17.1% last year. Effective asset management lifted the free cash flow to EUR 127 million in a quarter without divestitures. Accordingly, gearing was below the 100% level.

Geographically, third-quarter sales in Europe rose 8.6% to EUR 723 million or 39% of the total. North American sales fell 21% to EUR 685 million, or 37% of total sales, due to the weaker U.S. dollar and the decline in sales of Glucophage. Sales in Latin America dropped 21% to EUR 89 million, also mainly due to currency effects, while sales in Asia, Africa and Australia increased 14% to EUR 349 million with the improvements in the Chemicals sector.

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