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Merck Group Raises Outlook

Published on 2004-07-28. Author : SpecialChem

 

Darmstadt, Germany -- The Merck Group's second-quarter profit after tax rose to EUR 364 million from EUR 84 million with the divestment of its laboratory distribution business, VWR International Inc., and its joint venture Biomet-Merck. Group sales, excluding VWR, rose 9.0% to EUR 1.4 billion, again led by Liquid Crystals, where sales shot up 71%.

Merck booked gains of EUR 293 million from the divestment of VWR and EUR 47 million from the sale of the Biomet-Merck joint venture. Net profit after minority interests rose to EUR 363 million or EUR 1.91 per share compared to EUR 81 million or EUR 0.47 per share in the second quarter of 2003. In addition to this outstanding bottom line, Merck also is debt free.

"This quarter brought many positive changes for Merck as we exited the laboratory distribution business, won EU approval for Erbitux, our first cancer drug, and saw the higher sales trend solidify for Liquid Crystals,"

Merck Chairman and CEO Bernhard Scheuble said. "These factors, and the general soundness of the company, make me confident that Merck's full-year profit after tax should increase by at least 150%."

The operating result, excluding VWR, increased 2.1% to EUR 177 million in the second quarter. Earnings before interest and tax (EBIT), including exceptional items, jumped to EUR 513 million in the second quarter from EUR 175 million in the year-ago quarter.

The return on sales (ROS) declined to 12.9% from 13.8% while return on capital employed (ROCE) increased to 14.5% from 13.8% in the year-ago period. These ratios exclude VWR.

Merck improved its financial results by 29% as it retired debt. In addition, the underlying tax rate dropped to 38.8% from 42.4% in the year-ago quarter.

Total taxes, including EUR 70 million on the gain from VWR, amounted to EUR 130 million compared to EUR 64 million in the second quarter of 2003.

Merck sales (all figures exclude VWR) in North America declined 10% to EUR 207 million, while sales rose 6.5% to EUR 622 million in Europe, 4.8% to EUR 99 million in Latin America and 27% to EUR 436 million in Asia, Africa and Australia.

The divestment of VWR, which posts about two-thirds of its sales in the United States, dramatically changed Merck's regional sales ratios. North America accounted for 15% of total Merck sales in the second quarter of2004 compared to 34% in the year-ago quarter. Europe's percentage increased to 46% from 41%; Latin America increased to 7.3% from 5.4%; Asia, Africa and Australia rose to 32% from 19%.

Research and development costs declined 4.1% to EUR 153 million in the quarter. Of that amount 83%, or EUR 126 million, was allocated to Pharmaceuticals. A large share of that was used for the advancement of Merck's drug pipeline, including clinical trials to test Erbitux on various types of cancer.

Business sectors

Pharmaceuticals sales in the second quarter rose 2.1% to EUR 861 million, boosted by excellent results from Generics and Consumer Health Care. The Pharmaceuticals operating result fell 41% to EUR 64 million in the second quarter compared to EUR 108 million in the year-ago quarter as payments basically ended from both Bristol-Myers Squibb for Glucophage® diabetes products and Schwarz Pharma on sales of omeprazole in the United States.

Pharmaceuticals recorded a total of EUR 44 million in exceptional gains ?

EUR 47 million on the divestment of the Biomet-Merck joint venture and a charge of EUR 2.4 million for adjustments to existing exceptionals. Return on sales (ROS) fell to 7.4% in the second quarter from 12.8% in the year-ago quarter.

Sales of Ethicals declined 4.3% to EUR 369 million as generic competition continued to erode U.S. sales of Glucophage products.

On June 29, the cancer drug Erbitux received marketing approval in all 25 member states of the European Union as well as Iceland and Norway. Earlier in the quarter, Erbitux won marketing authorization in Mexico, Argentina and Chile. The first approval and launch of Erbitux came late last year in Switzerland. Merck's sales of Erbitux continue to develop at the upper end of expectations and reached EUR 11.5 million for the second quarter and EUR16.4 million in the first half of 2004.

The lipid-disorder treatment Niaspan? went on sale in Germany on May 3 and initial sales results indicate a successful launch. Its first European launch occurred late last year in the United Kingdom and Niaspan is expected to be introduced in nine other European countries yet this year.

Sales of Merck's Concor® product line of beta-blockers increased 8.9% to EUR 72 million in the second quarter. The company's thyroid medicines, such as Euthyrox®, increased sales by 5.3% to EUR 25 million. Merck is number one in Europe and Latin America for thyroid treatments and number three worldwide.

Generics sales increased 5.9% in the second quarter to EUR 402 million from EUR 380 million a year ago. The overall 4.0% sales growth rate in Europe masks significant movements in specific markets. For example, sales were up 43% in France mainly due to the success of two widely prescribed antidepressants paroxetine (Paxil?) and citalopram (Celexa?), and the ulcer medicine omeprazole (Prilosec?) Spain and Belgium had double-digit sales growths and Portugal, Austria and Israel also improved sales. Intense price pressure drove down sales in the U.K. and Germany.

In the U.S., Dey Inc. sales were up 16% in local currency on growing demand for DuoNeb®, the unit-dose nebulization drug for chronic obstructive pulmonary disease (COPD), and EpiPen®, an auto-injector device for emergency rescue from anaphylactic allergic reactions. Their sales rose 32% and 14%, respectively.

Consumer Health Care sales increased 16% to EUR 90 million. The Seven Seas business in the U.K. showed a strong sales increase mainly due to good development of the cod liver oil business. The 6.4% rise in French sales was generally due to dermatological products such as Apaisyl® and Exfoliac®.

Bion3® and Médiflor® were also contributors. The 16% organic sales growth in Latin America was almost completely eroded by strong currency effects.

Chemicals

Chemicals sales soared 23% to EUR 504 million, the first quarter in which this business sector surpassed the half-billion-euro mark. All four divisions reports excellent growth, with Liquid Crystals sales up an amazing 71% compared to the year-ago quarter. Chemicals' operating result jumped 60% to EUR 124 million, boosted especially by an excellent performance from Liquid Crystals, but also good results from the other three divisions. The return on sales (ROS) rose to 24.7% in the second quarter from 19.0% in the year-ago quarter.

Liquid Crystals again recorded an outstanding sales growth, swelling 71% to EUR 166 million from EUR 97 million in the year-ago quarter. Sales were driven by a brisk demand for the patented VA (Vertically-Aligned) and IPS (In-Plane Switching) liquid crystal materials for flat LCD-TVs. TFT (Thin Film Transistor) liquid crystal materials sales for use in flat PC monitors and notebooks remained stable at a high level.Electronic Chemicals continued its rebound in the second quarter with sales up 25% to EUR 51 million. In the core business, Process Chemicals, Merck maintained its good position in the market with an overall growth rate of 26%. This was aided by strong sales in Asia, especially for new application fields in the flat-panel-display industry.

Pigments sales increased 10% to EUR 85 million in the second quarter, with double-digit organic sales growth in North America, Latin America and Asia.Pigments used in printing and plastics applications had a 24% increase in sales. Demand from the auto-paint industry remained high for Merck's color-intensive, crystal-luster Xirallic® pigments. Life Science & Analytics, formed January 1 from the former divisions of Life Science Products and Analytics & Reagents, increased sales by 3.3% to EUR202 million from EUR 195 million in the year-ago quarter. The Formulation and Reagents business contributed strongly to the increase. All regions except Europe showed growth.

Outlook

The Merck stars of 2004 are, without a doubt, Liquid Crystals and Erbitux.Both products are expected to reach "Blockbuster" status. Liquid Crystals sales in the first half of 2004 already exceeded EUR 300 million and it won't be long before total annual sales exceed EUR 1 billion. With only marketing authorization in Switzerland, Merck sales of Erbitux still totaled EUR 16.4 million in the first half of 2004. Erbitux's June 29 marketing authorization for the European Union should increase second-half sales significantly.

With these two top products and solid performances expected to continue at the other divisions, Merck expects second-half sales, excluding VWR, to grow at approximately the same rate as the first half, i.e. high single digit. The operating result for 2004, also excluding VWR, is expected to increase by a single-digit rate as Chemicals should more than compensate for the anticipated decline at Pharmaceuticals, where payments on U.S.sales of Glucophage products and omeprazole are coming to an end.

Based on this anticipated operating result and due to capital gains on the divestments of VWR and the Biomet-Merck joint venture, better financial results and a better underlying tax rate, Merck is further improving its earlier guidance that full year profit after tax would increase by a high double-digit rate. Merck now expects that profit after tax for 2004 should increase by at least 150%. This guidance takes into consideration the possibility of exceptional charges in the fourth quarter.

Source: Merck Group


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