Mixed Fortunes for Merck Serono as Q3 Profit Drops on Acquisition Effects

Germany's Merck KGaA remains in the throes of post-merger consolidation, with the acquisition of Swiss biotech Serono contributing to double-digit revenue growth both at group level and in pharmaceuticals, but also dragging down group earnings due to one-time writedowns. Group turnover expanded by 60.6% year-on-year (y/y) during the third quarter (Q3), reaching 1.7 billion euro (US$2.4 billion). Pharmaceuticals made up some 1.2 billion euro of this, the lion's share of which was brought in by Merck Serono, which saw its total revenues grow by 8.6% y/y to stand at just under 1.1 billion euro. Muted operational costs within Merck Serono allowed for a 56.4% y/y increase in the unit's operating result, which reached 310.8 million euro. Profits at the group level fared rather worse, however, with earnings before interest and taxes (EBIT) shrinking by 29.2% y/y to stand at 108.2 million euro. Third-quarter net profit after minorities, including both continued and discontinued operations, plummeted by 74.9% y/y to reach just 36.2 million euro.

Within Merck Serono, multiple sclerosis treatment Rebif (interferon beta-1a) remained the top-selling product, with third-quarter turnover of 306.5 million euro. However, Rebif's momentum in sales growth remains slow, expanding by just 4% y/y on a reported basis and by 8% y/y on an organic basis. Cancer drug Erbitux benefited from its two approved indications, with sales growing by 36% y/y in reported terms to 117.7 million euro. Merck Serono filed for European approval for Erbitux as a first-line treatment for metastatic colorectal cancer last month, and is hoping to launch the drug in this setting by the second half of next year, allowing for further growth ahead. Elsewhere in the Merck Serono portfolio, cardiometabolic drugs saw a slight pick-up in their performance compared with earlier quarters, including type 2 diabetes treatment Glucophage (metformin), which saw an 8% y/y hike to 66.9 million euro in turnover. On the other hand, Saizen (somatropin [rDNA origin] for injection)—the only remaining growth-hormone product to stay within the top 10—continued to suffer a slow decline in sales, contracting by 2% y/y on a reported basis.

Merck KGaA's Consumer Health Care unit had somewhat cooler growth over the period, with third-quarter sales up by just 0.5% y/y at 103.1 million euro. This was not enough to offset heavy operating costs, particularly an 11.2% y/y rise in sales, general and administrative (SG&A) expenses, and resulted in a 16.5% y/y decline in the unit's operating result, which reached 19.6 million euro.

Outlook and Implications

Merck KGaA is expecting full-year group sales to increase by 7-9% y/y, but this excludes the effects of currency fluctuations. Given that the company generates over half its sales outside the Eurozone, currency effects—particularly concerning the U.S. dollar—will have a noticeable impact on annual sales growth. When factored into Merck's guidance, currency effects result in a dampening of the 2007 sales growth forecast to 4.6% y/y. The company is also expecting a more than 20% y/y rise in full-year operating results. This figure includes the impact of amortisation related to the Serono purchase-price allocation but excludes Serono's 2006 pro-forma results. Meanwhile, the proceeds from Merck's divestment of its Generics unit, sold to U.S. drug-maker Mylan Laboratories for 4.9 billion euro, will be included in Merck KGaA's fourth-quarter financial results.