Merck Serono

In the second quarter of 2013, total revenues of the Merck Serono division increased organically by 1.5% in an increasingly difficult market environment. Including a foreign exchange impact of –3.0%, total revenues decreased by –1.5% to € 1,624 million in comparison with the year-earlier quarter (Q2: 2012: € 1,649 million). Despite moderate organic growth of 2.1%, the division’s reported sales declined slightly by –1.0% overall to € 1,531 million due to currency headwinds of –3.1% (Q2 2012: € 1,546 million).

The division’s two top-selling products, the multiple sclerosis treatment Rebif® and the cancer therapy Erbitux®, continued to generate positive organic growth rates. However, the diabetes treatment Glucophage® recorded negative growth. The Latin American currencies, the Japanese yen and the U.S. dollar were primarily responsible for the negative foreign exchange effects. Royalty, license and commission income declined by –9.0% to € 93 million (Q2 2012: € 102 million). This decrease was mainly due to the end of a licensing agreement following the expiry of a patent for the third-party product Avonex® in May 2013.

The division’s cost of sales fell by –10.6% to € 283 million in the second quarter of 2013 (Q2 2012: € 317 million). Consequently, cost of sales declined more than sales as a result of an improved product mix and higher biotech production yields. Despite lower royalty, license and commission income, this led to an increase in gross profit of 0.7% to € 1,341 million (Q2 2012: € 1,332 million) and an improved gross margin (in % of sales) of 87.6% (Q2 2012: 86.1%).

Marketing and selling expenses decreased by –2.0% and amounted to € 352 million (Q2 2012: € 359 million). Royalty, license and commission expenses increased by 2.4% to € 152 million (Q2 2012: € 148 million). This was primarily due to higher sales of Rebif® in the United States and the resulting higher level of commission payments to Pfizer, the division’s marketing partner.

With respect to the decline in other operating expenses from € 266 million in the year-earlier quarter to € 53 million in the second quarter of 2013, it must be noted that one-time items (including impairments) from “Fit for 2018” amounting to € 214 million were recorded in the second quarter of 2012. One-time items in the second quarter of 2013 amounted to only € 1 million and included impairments of € 4 million (Q2 2012: € 23 million). The decline in administration expenses from € 55 million to € 51 million in the second quarter of 2013 reflects the successful cost reductions achieved within the scope of “Fit for 2018”.

Research and development spending by the Merck Serono division fell from € 326 million to € 296 million, a decline of –9.1%. The decrease was due both to the higher comparison basis in the year-earlier quarter resulting mainly from the one-time expenses for terminating two Phase III trials for Erbitux®, and to the impact of cost management efforts in connection with the restructuring program.

Since the useful life of an intangible asset capitalized as part of the Serono purchase price allocation has expired, amortization of intangible assets declined by –6.1% to € 155 million. This effect will continue to be seen in future quarters.

In the second quarter of 2013, the division’s EBIT rose sharply to € 283 million (Q2 2012: € 14 million) and EBITDA soared by 91.3% to € 494 million (Q2 2012: € 258 million). This development was mainly due to the high level of one-time items reported in the year-earlier quarter. Adjusted for one-time effects, EBITDA pre rose by 9.2% to € 491 million, equivalent to 32.1% of sales (Q2 2012: € 450 million; 29.1% of sales). This strong margin improvement underscores the division’s good operational management and improved cost structure.

Merck Serono | Sales by region – Q2 2013

Sales development by region

Emerging Markets, Rest of World and North America were the regions that contributed to the organic sales growth achieved by the Merck Serono division. Only Europe, the division’s largest region by sales, registered negative organic growth, which amounted to –2.7%. Together with the adverse effects of changes in foreign exchange rates, sales in Europe fell overall by –3.1% to € 623 million (Q2 2012: € 643 million). In addition to a pricing environment that remains difficult, especially in France due to government promotion of generic products, the ongoing budget constraints of several European countries as wells as the resulting health care cost containment measures impacted the business. Europe still accounted for the largest proportion, or 41%, of divisional sales (Q2 2012: 42%).

Emerging Markets, the division’s second-largest region by sales, posted organic growth of 5.2%. However, a foreign exchange impact of 5.7% caused sales to slip slightly from € 451 million to € 449 million. The positive organic growth in this region was driven primarily by CardioMetabolic Care & General Medicine. Overall, Emerging Markets again generated 29% of divisional sales.

Sales in North America benefited from the Rebif® price increases, which were almost exclusively responsible for the organic growth of 3.5% to € 355 million in this region (Q2 2012: € 349 million). North America’s contribution to divisional sales remained unchanged at 23%.

Organic growth of 13.5% in the Rest of World region was fueled by the good sales performance of Erbitux® as well as Gonal-f®, the leading recombinant hormone for the treatment of infertility. Including the adverse currency impact of –12.4%, sales amounted to € 105 million (Q2 2012: € 104 million). The Rest of World region thus once again contributed 7% to divisional sales.

Sales development by key products and therapeutic areas

At product level, global sales of Merck’s largest individual product Rebif®, which is used for the treatment of relapsing multiple sclerosis, grew organically by 3.5%. This was due in particular to price increases, amongst others related to the good launch of RebiDose®, thereby mitigating tougher competition. The Merck Serono division was thus able to defend its position in the interferon market. Including the impact of foreign exchange, sales grew by 1.4% to € 499 million (Q2 2012: million € 492 million). Apart from higher organic sales growth in the Emerging Markets region, North America also contributed to this development with organic growth of 6.7% as a result of price increases. In the second quarter of 2013, North America accounted for € 271 million (Q2 2012: € 259 million) or more than half of global sales of Rebif®. To expand the range of injection devices in the United States, RebiDose® was launched in March after having been approved by the U.S. Food and Drug Administration (FDA) in December 2012. Patients with relapsing forms of multiple sclerosis now have a total of three Rebif® delivery options along with prefilled syringes and the injection device Rebiject II to meet their treatment needs. In Europe, sales of Rebif® remained relatively constant, totaling € 186 million (Q2 2012: € 188 million). A mixed picture resulted in the two other regions: While Emerging Markets registered a 6.8% organic increase in sales, the Rest of World region saw an organic decline of –16.7%. Including the adverse impact of foreign exchange, sales of Rebif® in the Emerging Markets region declined by –3.2% to € 34 million (Q2 2012: € 35 million) and dropped in the Rest of World region by –19.9% to € 8 million (Q2 2012: € 10 million). Overall, however, the combined contribution of around 9% to Rebif® sales by these two regions in the second quarter of 2013 remained comparatively low.

At € 215 million, sales of Erbitux® were –4.8% lower in the second quarter (Q2 2012: € 226 million) since the negative foreign exchange impact exceeded organic growth of 0.5%. The development of sales was uneven in the three regions in which Merck Serono holds the marketing rights to Erbitux®. Accounting for 58% of sales and organic growth of 0.9%, Europe generated sales of € 125 million (Q2 2012: € 125 million). At 6.8%, the Rest of World region generated the strongest organic growth and recorded Erbitux® sales of € 35 million (Q2 2012: € 39 million). The business developed well in Japan, especially thanks to double-digit organic growth from the launch in head and neck cancer. However, this was canceled out by adverse currency effects from the weak Japanese yen. In Emerging Markets, sales totaled € 55 million in the second quarter (Q2 2012: € 62 million), declining by –11.3%, mainly as a result of negative growth rates and adverse currency effects.

Merck Serono | Sales and organic sales growth for key products – Q2 2013

Sales of Gonal-f®, the leading recombinant hormone used in the treatment of infertility, totaled € 156 million in the second quarter of 2013 (Q2 2012: € 161 million). This included an organic sales decline of –1.0%, which was primarily attributable to weaker business in North America and Europe. The situation reflects the relationship that exists to some extent between economic developments and the demand for fertility products. Sales developed positively in the Rest of World region, where double-digit increases in sales volumes were achieved.

At € 101 million, second-quarter sales by the Endocrinology business, which mainly consists of Merck Serono’s products to treat metabolic and growth disorders, were slightly lower than in the year-ago quarter (Q2 2012: € 103 million). While organic sales of the growth hormone Saizen® fell by –3.2%, sales of Serostim® for HIV-associated wasting increased as did those of Kuvan® for the treatment of the metabolic disorder hyperphenylalaninemia. Both Serostim® and Kuvan® posted solid organic growth rates.

In its CardioMetabolic Care & General Medicine business, Merck Serono achieved organic sales growth of 2.1%. Including the negative currency impact, sales amounted to € 501 million (Q2 2012: € 510 million). Overall, sales volumes in this business continued to develop well. However, the performance of the three top-selling franchises, namely Glucophage® for the treatment of diabetes, the beta-blocker Concor® and Merck’s portfolio for the treatment of thyroid disorders was uneven. While sales of Concor® grew organically by 9.5% to € 104 million (Q2 2012: € 98 million) and organic sales of thyroid medicines grew by 16.3% to € 66 million (Q2 2012: € 57 million) mainly owing to strong demand from Emerging Markets, the sales decline at Glucophage® has to be seen in conjunction with the very strong organic growth achieved in the first quarter (+25.0%).

Half-year 2013 Performance

During the first six months of 2013, the division’s total revenues increased by 0.9% to € 3,171 million (January–June 2012: € 3,144 million). Sales rose by 0.7% to € 2,985 million (January–June 2012: € 2,964 million). Reported sales reflected organic growth of 3.0% and adverse currency effects of –2.3%. With organic growth of 4.7% and sales of € 953 million (January–June 2012: € 922 million), Rebif® was the division’s key sales driver. Sales of Erbitux®, the division’s second best-selling product, declined slightly by –0.6% to € 437 million (January–June 2012: € 439 million). While both the Emerging Markets and Rest of World regions achieved strong organic growth of 5.8% and 6.1% respectively, these growth rates were more than canceled out by negative foreign exchange effects. In Europe, the top-selling region for Erbitux®, the product achieved organic growth of 1.6%, thus generating first-half sales of € 258 million (January–June 2012: € 254 million). In the first half of 2013, Europe accounted for 59% (January–June 2012: 58%) of the product’s overall sales.

The Fertility franchise, where Gonal-f® is the top-selling product, reported sales of € 412 million (January–June 2012: € 416 million), reflecting organic sales growth of 0.6% and a foreign exchange impact of 1.4%. During the first half of 2013, sales by the Endocrinology business totaled € 193 million (January–June 2012: € 195 million). Sales of the division’s CardioMetabolic Care & General Medicine products were on a par with the year-earlier quarter at € 990 million (January–June 2012: € 990 million).

In the first six months of 2013, the division’s EBITDA pre one-time items increased, on the back of moderate business performance and savings already achieved from the “Fit for 2018” efficiency program, by 11.8% to € 954 million (January–June 2012: € 853 million). This resulted in an EBITDA pre margin of 31.9% of sales (January–June 2012: 28.8%).

Merck Serono R&D update in Q2 2013

Merck Serono Pipeline in Q2 2013

The results of the Phase III START trial were presented at the American Society of Clinical Oncology (ASCO) Annual Meeting on June 4, 2013. This trial investigated the MUC1 antigen-specific cancer immunotherapy tecemotide (formerly referred to as Stimuvax and L-BLP25) versus placebo in patients with unresectable, locally advanced Stage III non-small cell lung cancer (NSCLC). As previously announced on December 19th, 2012, the primary endpoint of improving overall survival (OS) was not met in the overall population of patients. Following a post-hoc analysis, data presented at ASCO showed that in a predefined subgroup of patients receiving initial concurrent chemoradiotherapy an overall survival of 30.8 months was observed in patients treated with tecemotide compared to 20.6 months in patients receiving placebo (HR 0.78, p=0.016)¹. Analyses of the data continue; Merck Serono will decide about the future of this development program in the second half of this year.

Results of the FIRE-3 study, a randomized, controlled, independent head-to-head phase III trial comparing Erbitux® and bevacizumab on top of standard chemotherapy (FOLFIRI) in patients with KRAS wildtype metastatic colorectal cancer (mCRC) funded by Merck, were also presented at the ASCO meeting by the German cooperative investigator group AIO. The data presented showed that the primary endpoint, objective response rate (ORR), was not significantly different for the two treatment arms: 62% for Erbitux® combination versus 58% for bevacizumab combination. However, investigators reported an increase in median overall survival (secondary endpoint) of 3.7 months in the Erbitux® plus FOLFIRI arm compared to the bevacizumab plus FOLFIRI arm based on a 57% event rate. The median overall survival was 28.7 months for the Erbitux® combination versus 25.0 months for bevacizumab combination.²

In Immunology, clinical and biomarker results from the APRIL SLE study of atacicept were presented at the Annual Meeting of the European League Against Rheumatism (EULAR) in Madrid in mid-June. APRIL SLE was a double-blind, placebo-controlled Phase II study assessing the therapeutic value of atacicept in systemic lupus erythematosus (SLE). While the 150 mg arm was terminated early due to two fatal pulmonary infections, no statistically significant difference was observed in the number of patients experiencing a disease flare between atacicept 75 mg and placebo during the 52week treatment period (primary endpoint). However, ad hoc analyses suggested that treatment with the 150-mg dose of atacicept was associated with a reduced number of patients experiencing SLE flares versus placebo (36.6% versus 54.1%, respectively). The 150-mg arm was also associated with a delayed time to first new flare versus placebo. The decision about further development of atacicept in SLE will be made in the second half of 2013.

1 Adverse events reported for tecemotide included injection side reactions, flu-like symptoms, cough, dyspnea, fatigue, back pain, nausea, chest pain, nasopharyngitis, headache, decreased appetite and arthralgia.

2 The toxicity profiles were as expected and manageable for both combinations.

Other highlights

On May 24th, Merck signed a global licensing, co-development, and commercialization agreement with the Chinese company BeiGene Co., Ltd., for BeiGene-283, a second-generation BRAF inhibitor for the treatment of cancer that is currently in preclinical development. It is expected to enter clinical development next year. Under the terms of the collaboration, BeiGene will be responsible for the development and commercialization of BeiGene-283 in China and Merck Serono will be responsible for the development and commercialization for the rest of the world.

In mid-May, Merck and Quintiles, the world’s largest provider of biopharmaceutical development and commercial outsourcing services, announced a new, five-year clinical development agreement. This collaboration is a novel approach to clinical development that is founded on a shared commitment to cost-disciplined science and particularly follows Merck Serono’s strategy to variabilize costs in research and development as part of the “Fit for 2018” efficiency program. Under this agreement, Merck will shape and lead the strategy of its clinical development programs, with Quintiles directing clinical trial planning and execution.

Lastly, also in mid-May Merck announced that it would increase its commitment to its strategic corporate venture capital fund MS Ventures to € 100 million. MS Ventures was originally established in March 2009 with a € 40 million commitment to invest in emerging biotechnology companies. In addition to the € 100 million strategic venture fund, MS Ventures also manages the € 10 million Merck Serono Israel BioIncubator Fund as well as portfolio companies funded through the € 30 million Entrepreneur Partnership Program established to fund spin-offs from Merck Serono.