Currency effects undermined German pharmaceutical and chemicals group Merck KGaA's second-quarter results, turning what would have been 2.8% revenue growth into a 0.4% decline year-on-year.
IHS Global Insight perspective | |
Significance | German firm Merck KGaA's overall revenues declined slightly in the second quarter due to currency effects. Within this, revenues of its Merck Serono pharmaceutical division were down 1.5% year-on-year to EUR1.624 billion (USD2.161 billion), and income from royalties, licensing and commission saw a 10.8% fall in the second quarter. |
Implications | Despite the negative currency effects on revenue, the overall company, and Merck Serono in particular, has managed to cut costs, resulting in an overall improvement in operating profit. |
Outlook | The improvement in the company's bottom line led to a change in Moody's rating of Merck KGaA from Baa1 to A3 in July, and in Standard & Poor's rating of the company to A. Whatever Merck KGaA's short-term challenges are, it should at least be easier for it to borrow going forward, which should allow the German firm to boost investments. |
German firm Merck KGaA's overall revenues totalled EUR2.841 billion (USD3.52 billion) in the second quarter, slightly below revenues for the same quarter of 2012. The small decline in revenue of 0.4% year-on-year (y/y) was mainly due to the negative 3.4-percentage-point impact of currency exchange rates. Sales for the group grew organically by 3.3% y/y, but this was offset by the negative 3.4-percentage-point currency effect, while income from royalties, licensing, and commission fell by 10.8% y/y on a reported basis to EUR97 million. The latter decline was mainly due to the expiry of a licence agreement for the company's Merck Serono division.
Prescription drug division Merck Serono accounted for 56% of Merck KGaA's sales, while Consumer Health, which makes over-the-counter medicines, had sales of EUR115.6 million, accounting for 4% of total group sales. Performance Materials (which makes LCD screens) accounted for 16% of total sales, and laboratory equipment maker Merck Millipore accounted for 24% of total group sales in the second quarter.
Merck Serono had organic revenue growth of 1.5% y/y in the second quarter, but after a 3-percentage-point negative currency impact, the division's total revenue declined by 1.5% to EUR1.624 billion. However, Merck Serono's cost of sales declined by 10.6% y/y as the result of "an improved product mix and higher biotech production yields". As a result, despite a challenging marketing environment, Merck Serono's operating profit improved by 10.2%, while the company's operating margin (as calculated by IHS Global Insight) was 3.2 percentage points (pp) higher in the second quarter.
Merck Serono Q2 and H1 2013 results (EUR mil.) | ||||
Q2 2013 | % change y/y | H1 2013 | % change y/y | |
Sales | 1,530.8 | -1.0 | 2,985.1 | -0.7 |
Royalty, licence, and commission income | 92.9 | -9.0 | 186.3 | 3.4 |
Total revenue | 1,623.8 | -1.5 | 3,171.4 | 0.9 |
Cost of sales | 283.1 | -10.6 | 532.0 | -9.6 |
Marketing and selling expenses | 351.6 | -2.0 | 664.0 | -3.9 |
Royalty, licence, and commission expenses | 151.7 | 2.4 | 283.4 | 7.6 |
Administration expenses | 51.4 | -6.0 | 103.3 | -3.2 |
R&D expenditure | 296.1 | -9.1 | 620.3 | -1.3 |
R&D as % of sales | 18.2 | 1.6 pp lower | 19.6 | no difference |
Operating income* | 489.9 | 10.2 | 968.4 | 11.8 |
Operating margin (%)** | 30.2 | 3.2 pp higher | 30.5 | 3.0 pp higher |
Earnings before interest and tax (EBIT) | 282.5 | 1,917.9 | 477.8 | 1,722.5 |
* Calculated by IHS Global Insight as revenues minus cost of sales; R&D expenses; marketing and selling expenses; royalty, licence, and commission expenses; and administration expenses | ||||
Cost-containment challenges in Europe – particularly generic promotion policies in France – contributed to a 2.7% y/y decline in organic sales in Europe for Merck Serono. When currency exchange rates are also factored in, sales in Europe fell by 3.1% y/y to EUR623 million. On the other hand, sales in emerging markets saw organic growth of 5.2% y/y to EUR451 million. US sales increased by 3.5% organically under the positive impact of price increases for Rebif (interferon beta-1a), while rest of the world sales increased by 13.5% y/y organically to EUR105 million (although the increase on a reported basis was much smaller due to a 12.4-percentage-point negative currency exchange rate impact).
The unit's two top-selling products – multiple sclerosis treatment Rebif and cancer drug Erbitux (cetuximab) continued to generate organic sales growth (if currency exchange rates are ignored). However, sales growth declined substantially for diabetes treatment Glucophage (metformin). Income from royalty, licensing, and commission fell by 9.0% y/y in the second quarter to EUR93 million; this was mainly as a result of the end of a licensing agreement for Avonex (interferon beta-1a) following the expiry of a patent in May 2013.
Q2 2013 key product sales | ||
Sales (EUR mil.) | Organic growth y/y | |
Rebif | 499 | 3.5 |
Erbitux | 215 | 0.5 |
Gonal-f (follitropin alpha) | 156 | -1.0 |
Glucophage | 100 | -6.5 |
Concor (bisoprolol) | 104 | 9.5 |
Saizen (somatropin injection) | 61 | -3.2 |
Source: Merck KGaA | ||
Outlook and implications
Looking at the company's results on a reported basis (with currency exchange rates factored in), Merck KGaA as a whole, and Merck Serono, appear to have not had a particularly successful quarter. However, the stagnation in sales outside Europe is mainly due to negative currency effects. The operating environment in Europe – the company's largest market – is expected to remain challenging in the medium term. However, sales gains in other markets and efficiencies in the production process should boost the company's bottom line. Late-stage development projects – particularly with Erbitux in combination with bevacizumab in KRAS wild-type metastatic colorectal cancer, and with MUC1 antigen-specific cancer immunotherapy tecemotide – are also likely to boost the company's sales if and when regulatory approval is gained. While waiting for a boost in sales, Merck KGaA will continue to focus on its "Fit for 2018" efficiency programme. The company would also benefit from easier access to credit after its credit rating was upgraded to A3 by Moody's in July and to A by Standard & Poor in May.
Merck KGaA's guidance indicates that for financial year 2013, moderate organic sales growth is expected for Merck Serono and Merck Millipore, while sales are due to remain stable for Consumer Health and Performance Materials. Overall group sales are forecast to reach EUR10.7–10.9 billion.