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Merck finishes year of key strategic moves with record figures

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Good operating business and acquisition of AZ boost sales and EBITDA pre one-time items to new record levels

Merck has successfully completed a year of strategically important moves and achieved its objectives. Total revenues of the Merck Group rose by 3.7% to € 11.5 billion in 2014 (2013: € 11.1 billion). Sales grew by 5.5 per cent to € 11.3 billion (2013: € 10.7 billion). This was primarily the result of organic growth of four per cent as well as acquisition-related increases of 3.3 per cent, which were attributable to the acquisition of AZ. At the same time, foreign exchange effects lowered sales by -1.8 per cent.

Merck markedly increased its operating result (EBIT) by 9.4 per cent to € 1.8 billion (2013: € 1.6 billion). The key financial indicator used to steer operating business, EBITDA pre one-time items, climbed 4.1 per cent to € 3.4 billion (2013: € 3.3 billion), also thanks to good operating performance and the acquisition of AZ. Solid growth and the good development of operating business also contributed significantly to offsetting sharply lower royalty, license and commission income, which fell by -47 per cent to € 209 million (2013: € 395 million). Net income, i.e. profit after tax attributable to Merck shareholders, for 2014 was € 1,157 million (2013: € 1,202 million), representing a decline of -3.7 per cent, as the previous year 2013 benefited from the one-time effect of a very low tax ratio of 13 per cent.

Earnings per share pre one-time items advanced, taking into account the 1:2 share split in June 2014, by 4.8 per cent to € 4.60 (2013: € 4.39). Merck will therefore propose to the annual general meeting an increase in the dividend by € 0.05 to € 1.00 per share.

Even though the purchase price payment for AZ amounting to around € 1.9 billion was financed, net financial debt rose by only € 252 million to € 559 million (2013: € 307 million). As of June 30, 2014, this figure had temporarily risen to € 2.2 billion. This renewed evidence of the Merck Group’s high internal financing power shows that Merck is well-prepared for the acquisition of Sigma-Aldrich. As of December 31, 2014, Merck had 39,639 employees worldwide (2013: 38,154).

Merck was thus able to meet its forecast of moderate growth in sales, EBITDA pre one-time items, as well as earnings per share before one-time items. However, business free cash flow, which was forecast to increase slightly, did not meet expectations.

Merck markedly increased its operating result (EBIT) by 9.4% to € 1.8 billion (2013: € 1.6 billion). The key financial indicator used to steer operating business, EBITDA pre one-time items, climbed 4.1% to € 3.4 billion (2013: € 3.3 billion), also thanks to good operating performance and the acquisition of AZ. Solid growth and the good development of operating business also contributed significantly to offsetting sharply lower royalty, license and commission income, which fell by -47% to € 209 million (2013: € 395 million). Net income, i.e. profit after tax attributable to Merck shareholders, for 2014 was € 1,157 million (2013: € 1,202 million), representing a decline of -3.7%, as the previous year 2013 benefited from the one-time effect of a very low tax ratio of 13%.

Earnings per share pre one-time items advanced, taking into account the 1:2 share split in June 2014, by 4.8% to € 4.60 (2013: € 4.39). Merck will therefore propose to the Annual General Meeting an increase in the dividend by € 0.05 to € 1.00 per share.

Even though the purchase price payment for AZ amounting to around € 1.9 billion was financed, net financial debt rose by only € 252 million to € 559 million (2013: € 307 million). As of June 30, 2014, this figure had temporarily risen to € 2.2 billion. This renewed evidence of the Merck Group’s high internal financing power shows that Merck is well-prepared for the acquisition of Sigma-Aldrich. As of December 31, 2014, Merck had 39,639 employees worldwide (2013: 38,154).

Merck was thus able to meet its forecast of moderate growth in sales, EBITDA pre one-time items, as well as earnings per share before one-time items. However, business free cash flow, which was forecast to increase slightly, did not meet expectations.

In the fourth quarter of 2014, Merck achieved strong sales growth of 12.9 per cent to € 3.0 billion compared with the year-earlier period (Q4/2013: € 2.6 billion). Apart from organic growth of 4.4 per cent, portfolio effects from the AZ acquisition and favourable foreign exchange effects were responsible for the considerable increase. Consequently, despite declining royalty, license and commission income, EBITDA pre one-time items grew 10.5 per cent to € 878 million (Q4/2013: € 795 million). Earnings per share pre one-time items rose 7.5 per cent to € 1.14 (Q4/2013: € 1.06).

Merck Serono, the biopharmaceutical business of Merck, recorded organic sales growth of 3.6 per cent in 2014. Including negative foreign exchange effects of -1.9 per cent, divisional sales rose overall by 1.7 per cent to € 5.8 billion. Almost all of Merck Serono’s franchises contributed to growth, with the highest absolute sales increase coming from the Fertility franchise. From a geographic perspective, Merck Serono achieved the strongest growth in the emerging markets region.

The drug Rebif, which is used to treat relapsing forms of multiple sclerosis, posted a slight organic sales decline of only -0.2 per cent in 2014, despite increasing competitive pressure from oral formulations. Amid currency headwinds of -1.2 per cent, Rebif sales amounted to € 1.8 billion. In 2014, sales of the oncology drug Erbitux grew organically by 5.9 per cent. Including negative foreign exchange effects of -3.4 per cent, sales of Erbitux rose overall by € 22 million to € 904 million. With Gonal-f, the leading recombinant hormone used in the treatment of infertility, Merck achieved organic sales growth of 9.1 per cent in 2014. Including adverse foreign exchange effects, sales of Gonal-f rose to € 628 million.

In 2014, research and development costs of Merck Serono were higher following the continued focus on strategically important pipeline projects and the termination of individual, less promising research initiatives. At the same time, royalty, license and commission income of Merck Serono fell sharply by -48.5 per cent to € 192 million in 2014 (2013: € 372 million). Other operating expenses and income (net) saw a strong improvement. This led to a -1.3 per cent decline in EBITDA pre one-time items, which totalled € 1.8 billion (2013: € 1.9 billion).

In 2014, sales by consumer health, the over-the-counter pharmaceutical business, rose by 3.2 per cent to € 766 million (2013: € 742 million). The 5.4 per cent organic increase in sales was countered by a negative foreign exchange impact of -2.2 per cent. Organic sales were driven on the one hand by growth in the two key regions, namely emerging markets and Europe, and on the other hand by the growth of the strategic brands Neurobion, Femibion and Floratil as well as local brands in Germany. Consumer Health reported EBITDA pre one-time items of € 169 million (2013: € 172 million), thus nearly reaching the earnings level of 2013 despite significantly higher investments in marketing and sales in connection with efforts to strengthen strategic brands.

Sales of performance materials, Merck’s specialty chemicals business, increased in 2014 by 25.4 per cent to € 2.1 billion (2013: € 1.6 billion). Both solid organic growth of 4.1 per cent as well as acquisition-related sales increases of 22.8 per cent or € 375 million contributed to 1.9 per cent. The bioscience business area, which markets products and services for pharmaceutical and academic research laboratories, recorded a slight organic sales decline of -0.5 per cent. Among other things, lower demand for antibodies dampened sales.

For 2015, Merck expects a slight increase in organic sales over the previous year amid moderately positive foreign exchange effects. Moreover, due to the inclusion of AZ for a full fiscal year, a slightly positive portfolio effect is expected. Owing to the expected operating development and positive foreign exchange effects, Merck forecasts a slight increase in EBITDA pre one-time items in 2015. EBITDA pre one-time items in 2015 should, however, at least reach the previous year’s level.

Karl Ludwig Kley, Chairman of the Executive Board, Merck, “We strengthened all three of Merck’s business sectors: healthcare, life science and performance materials. With the acquisition of AZ, the offer to acquire Sigma-Aldrich and the alliance with Pfizer in immuno-oncology, we have laid the foundations for future growth. These developments are the result of our long-term transformation and growth strategy. Merck is transforming into a highly specialised, global technology company with the goal to improve the lives of patients and customers.”

EP News BureauMumbai

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