Merck's Net Jumps on Sale of Generics Unit
Operating Profit
Misses Expectations;
Outlook Is Positive
By APRIL BOEHM
February 19, 2008
FRANKFURT -- German pharmaceutical and chemical company Merck KGaA said fourth-quarter profit soared, boosted by the sale of its generics unit last year, but its quarterly operating profit missed expectations, due to a write-down and higher integration costs.
Merck also gave an upbeat outlook.
Net profit in the fourth quarter soared to €3.39 billion ($4.98 billion) from €130 million a year earlier, boosted by the sale of Merck's generics unit to Mylan Laboratories Inc. last May for €4.9 billion.
"We produced the strongest financial results in Merck's long history, allowing us to recommend an increased regular dividend of €1.20 and a one-time bonus dividend of €2," said Chief Executive Karl-Ludwig Kley.
Also, Merck last year took control of Swiss drug maker Serono for €10.2 billion, making for difficult 2006 comparables.
The group said its operating profit, which is driven by multiple sclerosis and cancer drugs and liquid crystals used in television sets, was a better measure of its underlying business performance.
Fourth-quarter operating profit fell 21% to a weaker- than-expected €166.1 million versus €209.3 million a year earlier.
Merck, which isn't affiliated with Merck & Co. of the U.S., took a €53.6 million write-down for Serostim, a drug used in treating AIDS-related illness. It also spent a higher-than-expected €75 million on expenses such as layoffs and office closures after the purchase of Serono.
Sales in the fourth quarter rose 51% to €1.73 billion from €1.15 billion a year earlier.
For 2008, Merck KGaA expects total revenue growth between 5% and 9%, with its Serono drug unit generating 7% to 11% revenue growth. Liquid crystals are slated to produce 5% to 10% revenue growth.
Merck also forecast an operating margin excluding amortization and Serono integration costs of 23% to 27%.
Shares in Merck fell €1.08, or 1.3%, €83.46 in Frankfurt after the results.
Landesbank Baden-Wuerttemberg analyst Hanns Frohnmeyer said he was surprised at the share price's performance.
He said that, overall, the results were in line with expectations with a particularly positive outlook.
He noted that the market may be disappointed with the group's thinner pipeline now that it has decided to stop co-development of the Matuzumab drug with Takeda Pharmaceutical Co. of Japan. Mr. Frohnmeyer has put both his rating and target price for Merck under review.
A Merck spokesman said the German group hasn't decided to totally end development of the drug, and is still considering its future.
An M.M. Warburg analyst added the inclusion of projected 2008 integration costs into 2007 results may indicate the Serono integration is proceeding more quickly than expected. Citigroup analysts said the increased focus on Serono's biologics business was welcome, as performance for the company's other key driver liquid crystals has proved volatile in the past.
Citigroup noted that biologics offer triple the sales growth of traditional pharmaceuticals, and growth for the unit's Rebif multiple-sclerosis drug appears underappreciated. Rebif, one of the group's leading products, saw sales increase 11% in the fourth quarter to €317 million.
Cancer drug Erbitux contributed €127 million to quarterly sales -- a 33% rise on the same period the previous year. The company also highlighted Erbitux's potential as a pipeline product for use in treating gastric cancer, breast cancer and non-small cell lung cancer. The drug has been approved in 69 countries for use in treatment of colorectal cancer and squamous cell carcinoma of the head and neck.
The market for multiple-sclerosis treatments is currently shared among just four companies: Biogen Idec Inc. of the U.S., Merck, Teva Pharmaceutical Industries Ltd. of Israel and Germany's Bayer AG.
Merck's Rebif, acquired in the Serono takeover, is the second best-selling multiple-sclerosis drug with Biogen Idec's Avonex leading the market and Teva's Copaxone coming in third.
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