Forecast for sales and operating result of the Merck Group
Merck has an extensive risk and opportunity management system, which is described in the Risk Report. Relative to the forecast period of two years published here, we mainly see business-related opportunities and risks. Owing to Merck’s diversification and broad product portfolio, a very different spectrum of important opportunities and risks results for each individual division. The relevant explanations are given for the respective divisions in the Management Report.
Our forecasts for Merck take into account the company’s weighing up of risks and opportunities in accordance with our operational plans and medium-term assumptions. However, possible acquisitions, divestments and other exceptional items are not included.
The forecasts assume a moderate development of energy and raw material prices, as well as increasing personnel costs. Since we produce specialty chemicals, the volatility of oil prices does not have a direct impact on our business. As a company that operates globally, Merck is exposed to a variety of foreign exchange risks, arising especially from the U.S. dollar and the Swiss franc. Targeted hedging measures are taken to offset these risks to a certain degree.
Against the background of expected overall economic developments, the Executive Board assumes that total revenues of the Merck Group will increase slightly in 2012 and 2013. However, in both the Performance Materials division and the Pharmaceuticals business sector, we see ourselves exposed to relative price pressure especially as a result of the structural problems faced by health care systems. This could potentially impact total revenues.
Furthermore, the Executive Board expects that before exceptional items, the EBITDA of the Merck Group will increase slightly in 2012 and then increase further in 2013. Reported EBITDA could, however, be lower due to one-time expenses within the scope of the efficiency-enhancement and cost-reduction programs. Book value write-downs of intangible assets with definite useful lives that were measured at fair value in connection with the acquisitions of Serono and Millipore will also have a negative impact on EBIT in 2012 and 2013. In addition, as of April 2011, the estimated remaining useful life of Rebif® was shortened by two years to 2019. Consequently, amortization amounting to € 17 million in the first quarter of 2012 will have an additional adverse impact in comparison with 2011. The commissioning of the Large-Scale Biotech production plant in Switzerland in 2012 will also increase depreciation of property, plant and equipment by € 26 million per year. Merck is aiming for the ratio of R&D expenses to total revenues to amount to around 14% in 2012. In 2013, we expect research spending to decline further. We continue to expect a tax ratio of around 25% in both 2012 and 2013.
We expect free cash flow from operating business to be high in 2012 and 2013. Should payments for litigation be necessary, this would have a negative impact on free cash flow. The financial liabilities of the Merck Group will steadily decrease in the coming years, also as a result of our high free cash flow. Capital spending on property, plant and equipment will increase moderately to around € 360 million to € 380 million in 2012 and will remain roughly at this level in 2013. We expect the equity ratio to increase slightly and remain at a high level in both 2012 and 2013.
Apart from Europe, Merck considers Brazil, China, India, Japan, Mexico, Russia, South Korea, and the United States to be strategically important. Details on the respective business forecasts and expected developments for these countries can be found in the forecasts for the divisions.
For fiscal 2011, we intend to maintain our existing, long-term dividend policy and are proposing to the Annual General Meeting the payment of a dividend of € 1.50 per share. Based on our earnings expectations for the next two years, the family of owners and Merck shareholders can continue to expect to receive an earnings-oriented dividend.
Merck largely achieved the growth forecasts it made for 2011 total revenues in a difficult global economic environment. Due to negative one-time effects in the second quarter of 2011, the growth forecast made for the 2011 operating result could not be achieved. The target set for the operating result would have been achieved had these one-time effects not occurred.
The actual results of the Merck Group and its divisions may deviate substantially from the expectations of the likely developments. This would be the case if one of the uncertainties mentioned here, or others, were to occur, or if the planning assumptions were to prove inaccurate.
Forecast for the Merck Serono division
Cancer and multiple sclerosis are of particular importance to the Merck Serono division as they are diseases for which we offer patients therapeutic options. In the diabetes field, our product Glucophage® is the drug of choice for first-line treatment of type II diabetes.
External market observers such as IMS Health consider oncology drugs as the world’s largest pharmaceutical market by therapeutic class. While the volume of this market amounted to US$ 57.1 billion in 2010, it is estimated to increase by 5% to 8% annually to between US$ 75 billion and US$ 80 billion by 2015. Evaluate Pharma shares this estimation. This market is expected to grow annually by an average of 7.1% to € 90.5 billion by 2016. According to estimates by Evaluate Pharma, Erbitux® will generate global sales of US$ 2.23 billion by 2016, which includes the sales figures for Merck, Bristol-Myers-Squibb and Eli Lilly.
According to Evaluate Pharma, in 2012 the global market for drugs to treat multiple sclerosis will be dominated by Copaxone (Teva Pharmaceuticals, 28.1% market share), followed by Avonex (Biogen Idec, 20.8%), Rebif® (Merck, 16.1%), Betaferon/Betaseron (Bayer, 10.9%) as well as Tysabri (Elan, 6.9%). Evaluate Pharma expects a total market volume of US$ 14.5 billion for MS drugs by 2016; the market is expected to grow by an average of 4.5% annually.
According to the forecasts prepared by IMS Health, the market for drugs to treat multiple sclerosis will rank 13th among all therapeutic classes in 2015 and have a volume of between US$ 12 billion and US$ 15 billion, corresponding to annual growth of between 5% and 8%.
According to IMS Health, antidiabetic agents will represent the second-largest category of global health care spending in 2015. By 2015, the market is likely to reach a volume of between US$ 43 billion and US$ 48 billion, which corresponds to an annual increase of between 4% and 7%. This expectation is also confirmed by Evaluate Pharma. This market is expected to grow by an average of 7.5% per year to US$ 47.3 billion in 2016 and will be the therapeutic class with the second-largest market volume after oncology drugs.
For the Merck Serono division, we expect total revenues in 2012 to remain at the level of 2011 and increase slightly in 2013. The efficiency-enhancement and cost-reduction program could adversely affect reported EBITDA primarily in 2012, yet also in 2013. However, in 2012 EBIDTA before exceptional items should slightly exceed the good level of 2011. If the efficiency-enhancement measures are successfully implemented, EBITDA before exceptional items can be expected to increase further in 2013. Free cash flow of the Merck Serono division will initially decline substantially in 2012 compared to 2011 owing to the proceeds of around € 270 million from the 2010 divestment of the Théramex business booked in 2011. However, compared with 2012, free cash flow should increase in 2013 owing to moderately higher earnings and a stable capital spending level.
As a regularly recurring expense, divisional EBIT includes book value write-downs of intangible assets with definite useful lives that were measured at fair value within the scope of the Serono acquisition. Amortization is expected to amount to around € 660 million in 2012 and to decline to around € 600 million in 2013 owing to the expiration of the useful lives of several assets. Marketing and selling expenses, administration expenses and R&D costs could decrease significantly in 2012 and 2013 as a result of the efficiency program.
Merck Serono assumes that the sales of Rebif®, its top-selling product, will decline in the coming years owing to increased competitive pressure among multiple sclerosis therapies. The oncology drug Erbitux® will continue to show slight growth in 2012 and 2013. For the Fertility as well as CardioMetabolic Care and General Medicine business units, we also expect to see slight growth in both 2012 and 2013. Products such as Kuvan® and Egrifta™, which were approved in recent years, will help the Endocrinology business unit to achieve higher sales growth. The markets of Asia and Latin America will remain our geographic growth drivers in the coming years. Opportunities in Europe and the United States, Merck Serono’s key sales markets, will result from life cycle management as well as the development of new dosage forms.
We see important opportunities and risks for the Merck Serono division closely linked to the successful launch of new products. Ongoing high levels of national debt in some countries and the associated potential reductions in health care spending could lead to further declines in sales. Moreover, litigation has been widespread in the pharmaceutical industry for years and this has also adversely impacted Merck Serono in the past. We cannot rule out the possibility of this also being the case in the coming years.
Forecast for the Consumer Health Care division
According to the market research firm Nicholas Hall, the global volume of the over-the-counter drugs market rose by 4.5% to € 81 billion in 2011. For 2012, Nicholas Hall expects stronger growth of 5.9% to around € 85.4 billion and for 2013 anticipates growth of 5.1% to around € 89.7 billion.
The market researchers forecast growth primarily in Latin America (slightly more than 10% annually) and Asia (slightly more than 9% annually). According to Nicholas Hall, the market in Europe is to grow by 4.3% in 2012 and 4.2% in 2013. For the United States, Nicholas Hall forecasts growth of 3.6% in 2012 and 2.4% in 2013.
Merck assumes that the total revenues of its Consumer Health Care division will increase slightly in 2012 and 2013. However, in both these years the focus will be on raising profitability. Therefore, EBITDA before exceptional items is expected to rise in 2012 and 2013. This will be achieved, for example, by strict cost control in all operating areas as well as by focusing on growth markets. In parallel to the increase in EBITDA before exceptional items, free cash flow is expected to develop positively in 2012 and 2013.
In 2012 and 2013, the opportunities and risks of the Consumer Health Care division will be closely linked to the development of the existing product portfolio and geographic reach. The focus here will be placed equally on strategic and local brands. Increasing the profitability of existing products will be one of the main priorities. Geographically, Consumer Health Care will continue to focus on Europe – its core market – as well as growth markets in Asia, Latin America and eastern Europe. The Consumer Health Care division faces risks especially from global changes in health care policy framework conditions and consumer purchasing behavior, factors that can negatively impact the business.
Forecast for the Merck Millipore division
Market researchers from Frost & Sullivan expect that the market volume of laboratory products, one of Merck Millipore’s main markets, will amount to US$ 39.2 billion (+3.7%) and US$ 40.5 billion (+3.5%) in 2012 and 2013, respectively.
Frost & Sullivan emphasizes that the markets in China and India will register double-digit growth, namely 17.5% in India from 2010 to 2013 and 16.6% in China in the same period. By the end of 2013, both markets would then each account for 9% of the total global market. Other markets would only show single-digit growth.
Evaluate Pharma forecasts that global research and development spending by the pharmaceutical industry, and thus the customers of Merck Millipore, will grow by an average of 2.5% per year from 2010 to 2016. According to Evaluate Pharma, R&D costs will then total US$ 134.1 billion (+1%) in 2012 and US$ 137.1 billion (+2.2%) in 2013.
It can be assumed that government-sponsored academic research will continue to suffer from public budget spending cuts. In the United States, for example, Frost & Sullivan market researchers believe this area of spending will increase by only 0.3% in 2012 and even decline by 0.7% in 2013. Overall, government spending on pharmaceutical and biotech research around the world will increase by 2.4% in 2012, according to Frost & Sullivan. In 2011, it declined by 1.1%.
The food industry is one of the sales markets for numerous products offered by the Merck Millipore division. Datamonitor, a provider of economic data, forecasts that the global market volume of the beverage industry will increase by 3.9% in both 2012 and 2013. For the food industry, Datamonitor expects growth rates of 3.3% in 2012 and 3.5% in 2013.
Against this background, the Merck Executive Board expects that the Merck Millipore division will achieve moderate total revenue growth in 2012 and 2013. Following the strong rise in EBITDA in 2011 due to the full-year consolidation of the Millipore business, EBIDTA before exceptional items is expected to rise again in 2012. We also assume that EBITDA before exceptional items will rise further in 2013 compared to 2012.
The division’s EBIT includes book value write-downs of intangible assets that were measured at fair value in connection with the Millipore acquisition. These are expected to amount to around € 190 million in 2012 and 2013. Innovations and new product launches will be one focus of the division’s future growth. For this reason, R&D costs are expected to rise further in 2012 and 2013. Despite higher capital spending on property, plant and equipment in 2012 and 2013 to support growth, free cash flow will be clearly positive in the coming years.
The BioScience business unit of Merck Millipore develops products that help scientists to better understand complex biological systems and to discover and develop new therapies. The extensive product portfolio of Merck Millipore is well positioned to grow in the dynamic bioscience market, parts of which will continue to face challenges. The slowdown in global economic growth in conjunction with cuts in government research budgets is currently causing the life science market to soften. For this business unit we see further risks particularly associated with the ongoing consolidation and restructuring of the pharmaceutical industry, but also with the expiration of patents and the development of new products. The Lab Solutions business unit supplies a broad portfolio of innovative, reliable, high-quality products for general laboratory applications in a wide variety of industries. The opportunities for the Process Solutions business unit lie especially in a comprehensive product and service portfolio, a geographic presence in future growth markets, as well as in potential volume increases that could develop as a result of demand from producers of biosimilars.
Apart from the established markets of Europe and North America, the geographic growth drivers of the Merck Millipore division will be China and India in particular. Significant risks for the division exist owing to the cost pressure in the biopharmaceutical industry. Overall, we aim to achieve further earnings growth in an uncertain market environment by offering a broad product portfolio, aligning our business globally and leveraging regional strengths.
Forecast for the Performance Materials division
Display Search, a market research firm for the display sector, forecasts that the number of liquid crystal displays sold will increase by 15% in 2012 and by 11% in 2013. Growth will primarily be attributable to LCD televisions, followed by increasing demand for LC displays for monitors. In both 2012 and 2013, the share of LCD televisions is expected to increase from 84% (2011) to more than 90% in 2012 and to 94% in 2013.
Some of our pigments are used in coatings for the automotive industry. The German Automobile Industry Association (VDA) expects that the automobile market will grow by 4% to 68 million units in 2012. According to VDA, growth is expected in India (+10%) and China (+8%), with both countries together accounting for one-quarter of the global automobile market. VDA is also optimistic for Brazil, for which it forecasts growth of 3%.
According to research by Datamonitor, the value of the market for skin care products is to increase by 4% in 2012 and in a similar range of 3.9% in 2013. This is also a market for products from the Performance Materials division. Datamonitor also expects that the global market for make-up cosmetics, a further sales market for our products, will grow by 4.2% in 2012 and by 4.1% in 2013.
The Performance Materials division consists of two business units, Liquid Crystals and Pigments & Cosmetics, as well as the Advanced Technologies unit, which is responsible for building new growth businesses. The Liquid Crystals business unit supplies materials for liquid crystal displays as well as for new lighting and display technologies. The Pigments & Cosmetics business unit supplies effect pigments for the plastics, printing and coating industries. Further key customers include cosmetic manufacturers, to whom we supply decorative pigments and active ingredients. The Advanced Technologies unit is driving forward the establishment of new businesses.
The division assumes that the Liquid Crystals business unit will maintain its market leadership position in LC mixtures in the coming years. At the same time, we expect market volumes to increase steadily. However, market pressure on the prices of LC mixtures will continue. Growth will be driven by new LC mixtures for innovative LCD technologies. To maintain our technological leadership in liquid crystals, R&D activities will continue at a high level. This also applies to promising future businesses with reactive mesogens, OLEDs and solid state lighting, which will account for an above-average share of the growth achieved by the Performance Materials division. We are prepared for the above-average growth of the Chinese display market and have invested locally to participate in it.
In addition, the Performance Materials division expects that the Pigments & Cosmetics business unit will grow only slightly. This development is due to the temporary weakening of economic activity.
The Performance Materials division expects total revenues to grow slightly in 2012 and 2013. Volume growth especially in Liquid Crystals could possibly be offset by price pressure in the market. Therefore, in 2012, EBITDA before exceptional items should remain approximately at the level of 2011 and also remain roughly constant in 2013. Efficiency-enhancement measures could adversely affect reported EBITDA especially in 2012, yet also in 2013. Excluding the effects of divestments, free cash flow in 2012 and 2013 will remain at the high level of the previous years. This will be ensured by carefully managing capital spending and working capital, among other things.