Merck Serono business development Audited

In 2012, Merck Serono’s total revenues rose to € 6,405 million (2011: € 5,920 million). Sales increased 7.8% to € 5,996 million (2011: € 5,564 million). This absolute increase of more than € 400 million was driven by organic sales growth of 4.9% and positive exchange rate effects of 2.8%, primarily owing to a stronger U.S. dollar. The solid performance was based predominantly on our multiple sclerosis (MS) treatment Rebif®, our fertility product Gonal-f®, and our diabetes drug Glucophage®. These key products delivered organic growth rates ranging from 8% to 15%. Royalty, license and commission income increased 15.2% to € 409 million (2011: € 356 million), mainly driven by higher income from the strong sales performance of Humira® in addition to a positive impact from foreign exchange rates.

Production costs rose 16.0% to € 1,193 million (2011: € 1,028 million) reflecting higher sales volumes as well as higher start-up costs for the Large-Scale Biotech production plant (LSB) in Vevey (Switzerland) in addition to one-time expenses related to the FDA warning letter. Gross profit increased 6.5% to € 5,212 million (2011: € 4,892 million), translating into a lower gross margin (in % of sales) of 86.9% (2011: 87.9%), reflecting the ongoing pricing pressure and growing volumes of our General Medicine portfolio.

Marketing and selling costs declined by 2.9% to € 1,371 million (2011: € 1,412 million) thanks to focused resource allocation. Royalty, license and commission expenses, however, rose 17.3% to € 562 million (2011: € 479 million) owing to the strong performance of Rebif® in the United States compounded by positive foreign exchange rate effects, which resulted in higher commission payments to our co-marketing partner Pfizer.

Net other operating expenses and income increased by more than 75% to € –675 million (2011: € –382 million) due to restructuring charges amounting to € 339 million. These charges were related to the efficiency program, in particular to the preparations for the closure of the Merck Serono site in Geneva. In addition, impairments of € 46 million were incurred on site closures and obsolete software. In 2011, other operating expenses were especially impacted by the impairment loss of € 165 million on the LSB plant.

R&D expenses decreased slightly to € 1,187 million (2011: € 1,225 million) representing 19.8% of sales (2011: 22.0%). This decline reflects initial structural savings achieved in connection with the Geneva site closure.

Amortization of intangible assets resulting mainly from the 2007 acquisition of Serono accounted for charges of € 659 million (2011: € 799 million). In 2011, impairments of € 149 million related to the discontinuation of three products in development were recognized in addition to amortization. Furthermore, in the second quarter of 2011, the estimated remaining useful life of Rebif® was shortened by two years, which led to higher amortization expenses of € 17 million in 2012 compared to the previous year.

The division’s EBIT was € 508 million compared to € 342 million in 2011. Adjusting for one-time items and adding back depreciation and amortization, divisional EBITDA pre one-time items increased 13.8% to € 1,785 million (2011: 1,569 million) reflecting a margin (in % of sales) of 29.8% (2011: 28.2%). This increase already includes savings related to the efficiency program.