Gross profit increased by 13.9% to € 2,044 million (Q2 2011: € 1,796 million) or 74.5% as percentage of sales (Q2 2011: 72.7%). This improvement is the result of higher sales as well as comparatively lower manufacturing costs and favorable capacity utilization rates. These lower costs more than offset increased start-up costs for Merck Serono’s biopharmaceutical production in Vevey, Switzerland. Additionally, the majority of Merck’s manufacturing sites are located in Europe but nearly two-thirds of sales are generated outside of Europe. Consequently, changes in foreign exchange rates – primarily the strengthening of the US$ – resulted in sales increasing disproportionately higher than manufacturing costs. This foreign exchange rate effect also positively impacted the gross margin.
Conversely, Group marketing and selling expenses in the second quarter of 2012 were adversely affected by changes in foreign exchange rates, but this was partly offset by tight cost controls and lower discretionary spending. Marketing and selling increased by 2.2% to € 617 million (Q2 2011: € 604 million), an increase significantly less than the growth in sales. Royalty, license and commission expenses increased by 28.0% to € 152 million (Q2 2011: € 118 million) due to higher sales of Rebif® and Erbitux®. These expenses were also higher due to changes in foreign exchange rates since all of the Rebif® commissions are related to US$ denominated sales.
On May 15, 2012, Merck announced that it expected to incur one-time costs related to its "Fit for 2018" efficiency program of approximately € 600 million between 2012 and 2014. This announcement included guidance that approximately € 400 million in costs would be incurred in 2012. During the second quarter of 2012, Merck reported € 394 million in total one-time costs, including restructuring expenses (impairments and restructuring costs) of € 376 million for its "Fit for 2018" efficiency program. These costs are primarily related to the Merck Serono division and its planned closure of its headquarters in Geneva, Switzerland. This resulted in other operating expenses totaling € 489 million, up 75.7% compared to the year-ago quarter (Q2 2011: € 278 million).
Research & development (R&D) spending rose 9.7% in the second quarter to € 404 million (Q2 2011: € 368 million), representing 14.7% of sales (Q2 2011: 14.9%). Key drivers of this increase were costs relating to the discontinuation of two Merck Serono pipeline projects, additional investment for recently in-licensed compounds and significantly higher R&D spending by Merck Millipore, particularly in its Process Solutions business unit.
Amortization of intangible assets in the second quarter of 2012 declined 31.9% to € 217 million (Q2 2011: € 319 million), while impairments of € 107 million weighed down last year’s second quarter.
The Group reported an operating result (EBIT) of € 23 million (Q2 2011: € –24 million) in the second quarter of 2012 while the operating result excluding depreciation and amortization (EBITDA) amounted to € 375 million (Q2 2011: € 563 million), down 33.4%. However, adjusted for one-time costs totaling € 372 million (Q2 2011: € 92 million), EBITDA pre one-time items increased 13.9% to € 747 million (Q2 2011: € 655 million).
In the second quarter of 2012, the Group’s financial result improved by 8.9% to € –70 million (Q2 2011: € –76 million). This improvement was driven by lower debt balances and lower interest costs on pension provisions as a result of the transfer of plan assets into a contractual trust arrangement (CTA) in the fourth quarter of 2011 that covers parts of Merck’s pension obligations.
Income tax amounted to € –14 million in the quarter under review (Q2 2011: € 13 million). Of note, the reported tax rate was substantially distorted by the one-time charges described above. However, on an adjusted basis, the income tax rate of 25.5% continues to be at the midpoint of the company’s underlying tax rate of 25% to 26%. Turning to the bottom-line, net income (profit after tax attributable to Merck KGaA shareholders) totaled € –63 million (Q2 2011: € –89 million) and earnings per share (EPS) were € –0.29 (Q2 2011: € –0.41) in the second quarter of 2012. Adjusted for one-time costs, EPS pre one-time items increased 20.0% to € 1.92 (Q2 2011: € 1.60).
Merck’s strong operational performance in the second quarter of 2012 combined with improved working capital management generated a substantial increase in free cash flow (net cash flow from operating activities less acquisitions/divestments, purchase/disposals of intangible assets, property, plant and equipment, non-current financial assets and marketable securities). Free cash flow totaled € 626 million in the second quarter of 2012 (Q2 2011: € 253 million), up 147.1%. Working capital as a percentage of sales for the last twelve months declined to 26.7%, as of June 30, 2012 (29.5%, as of December 31, 2011).