Forecast for the Merck Serono division Audited

Due to the aforementioned decision to transfer two product groups, Neurobion® and Floratil®, from the Merck Serono division to the Consumer Health division as of January 1, 2014, the base for the Merck Serono division will decrease by approximately € 265 million in sales, around € 100 million in EBITDA pre one-time items and around € 77 million in business free cash flow, based on 2013 results of the transferred brands. Accordingly, the 2014 forecast for the Merck Serono division is based on the 2013 results reduced by the transfer.

Stable organic sales are expected for 2014, while an unfavorable expected impact from foreign exchange development might negatively weigh on the reported numbers. We assume that Rebif®, Merck Serono’s top-selling product, will continue to face severe competitive pressure in the United States and that it will also start to lose market share in Europe as a result of the market entry of new products in the multiple sclerosis segment. Sales of the oncology drug Erbitux® are expected to grow moderately fueled by the recent update of the metastatic colorectal cancer labeling to patients with RAS wild-type tumors as well as due to continued good performance in Japan. For Gonal-f®, the largest drug in the Fertility franchise, Merck expects only a marginal improvement in 2014 coming from market expansions in Emerging Markets but offset by expected launches of biosimilar products in Europe. Slight growth is assumed for the CardioMetabolic Care and Endocrinology franchises.

We forecast Merck Serono’s EBITDA pre one-time items to decrease slightly compared to 2013 driven by the reduction in royalties from Avonex®, Enbrel® and Humira® amounting to a net EBITDA pre one-time items effect of € 115 million versus 2013.

In the United States, Merck distributes Rebif® under a co-promotion agreement with the pharmaceutical company Pfizer until end of 2015. Based on the agreement Merck pays commission expenses, which are expected to decline in 2014 in line with lower Rebif® sales. From 2016 onwards Merck intends to take over the entire Rebif® distribution in the United States and consequently no longer be subject to commission expenses.

While the worldwide pharmaceutical market is expected to recover and to grow at mid-single-digit rates in 2014 according to IMS Health, geographic growth remains unevenly distributed. Mature markets show tentative signs of recovery, but remain sluggish. Austerity measures are expected to continue to put pressure on the health care industry in Europe, which is still Merck’s dominant regional market. By contrast, many Emerging Markets such as China and Brazil will grow at double-digit rates and remain growth drivers for the pharmaceutical industry.

Owing to geographic developments, Merck Serono intends to strengthen its profitability position in Europe and the United States, to further redirect its resources to Emerging Markets and to grow in these developing economies. At the same time cost development will be monitored closely.

As part of Merck’s strategy we will forge ahead with the build-up of Merck Serono’s Biosimilars unit and therefore plan an increase in our divisional R&D expenses. Driven by the initiation of further growth projects such as the construction of a production facility in China, Merck Serono’s investment in property, plant and equipment will increase in 2014. As a result of the lower EBITDA pre one-time items and these investments, a moderate decrease is expected for Merck Serono’s divisional business free cash flow.