Merck Serono

In the third quarter of 2013, total revenues of the Merck Serono division increased organically by 3.4%. Including a foreign exchange impact of –6.7%, total revenues decreased by –3.4% to € 1,568 million in comparison with the year-earlier quarter (Q3 2012: € 1,623 million). Despite solid organic growth of 5.2%, negative foreign exchange effects of –7.0% caused the division’s reported sales to decline slightly by –1.8% to € 1,483 million (Q3 2012: € 1,511 million).

Organic growth was driven not only by products from the General Medicine, Fertility and Endocrinology business franchises, but also by the oncology drug Erbitux®. In geographic terms, the Emerging Markets region and Japan fueled organic sales growth. Negative foreign exchange effects on sales were mainly due to Latin American currencies, the U.S. dollar and the Japanese yen. Royalty, license and commission income declined by –24.3% to € 85 million (Q3 2012: € 112 million). This was primarily the result of the termination of a licensing agreement owing to the expiration of a patent for the third-party product Avonex® in May 2013.

The division’s cost of sales declined by –7.2% to € 267 million in the third quarter of 2013 (Q3 2012: € 288 million). This decrease, which exceeded the percentage decline in sales, was due to an improved product mix and strict cost control. Gross profit fell by –2.6% to € 1,301 million (Q3 2012: € 1,335 million), which was largely the result of lower royalty, license and commission income. Accordingly, gross margin (in percent of sales) declined slightly to 87.7% (Q3 2012: 88.4%).

By resolutely implementing cost reduction measures, the division was able to sharply reduce its marketing and selling expenses as well as administration expenses. Marketing and selling expenses fell by –11.3% to € 301 million (Q3 2012: € 339 million) and administration expenses dropped by –14.1% to € 51 million (Q3 2012: € 59 million). Royalty, license and commission expenses decreased by –11.0% to € 139 million (Q3 2012: € 157 million). This mainly reflects the decline in sales of Rebif® in the United States and the resulting lower level of commission payments to Pfizer, the co-marketing partner.

The significant drop in other operating expenses from € 176 million in the year-earlier quarter to € 94 million in the third quarter of 2013 was largely due to the one-time items reported in this line. Whereas in the year-earlier period, one-time items (including impairments) amounted to € 94 million and were mainly incurred in connection with “Fit for 2018”, one-time items (including impairments) in the third quarter of 2013 were only € 36 million.

The division’s research and development (R&D) expenses grew by 3.5% to € 297 million (Q3 2012: € 287 million). This yielded an increase in the research spending ratio (in percent of sales) to 20.1% in the third quarter of 2013 from 19.0% in the year-earlier quarter.

With the expiration of the useful lives of two intangible assets capitalized as part of the Serono purchase price allocation, amortization of intangible assets dropped substantially by –12.8% to € 144 million (Q3 2012: € 165 million). This effect will continue to be seen in future quarters.

As a result of these developments, the division’s operating result (EBIT) soared by 80.2% to € 274 million (Q3 2012: € 152 million) and EBITDA climbed by 25.4% to € 480 million (Q3 2012: € 383 million). Adjusted for one-time effects, EBITDA pre rose by 7.7% to € 501 million, equivalent to 33.8% of sales (Q3 2012: € 466 million; 30.8% of sales). This excellent margin improvement of three percentage points, which was achieved despite significant adverse currency effects and the absence of royalty income from Avonex® (around € 30 million), clearly illustrates the division’s good operational management and improved cost structure. In this context, it should be noted that as of the fourth quarter of 2013, royalty, license and commission income will decline further owing to the expiration of the patent for Enbrel®.

Merck Serono | Sales by region – Q3 2013

Sales development by region

Achieving double-digit growth rates, both the Emerging Markets and Rest of World regions fueled the organic sales growth of the Merck Serono division.

Europe, the division’s largest region in terms of sales, recorded a slight –1.2% drop in organic sales, in line with the expected continuation of the trend seen in the second quarter. In the third quarter, Germany and the United Kingdom had the greatest influence on organic sales developments: the organic growth achieved in Germany could not offset the lower level of sales in the United Kingdom. Overall, the division continued to feel the effects of the budget constraints of several European countries and the resulting health care cost containment measures. Europe still accounted for the largest proportion, or 40%, of divisional sales (Q3 2012: 40%).

Emerging Markets, the division’s second-largest region by sales, posted strong organic growth of 19.2%, which was partly offset by a foreign exchange impact of –13.9%. Consequently, sales increased to € 462 million from € 439 million. Nearly all of the division’s business franchises contributed to this performance, with products to treat cardiovascular diseases, diabetes and thyroid disorders driving sales growth in this region. The two percentage point increase in the share of divisional sales generated by the Emerging Markets region to 31% reflects the growing importance of this region to Merck Serono.

Sales in North America amounted to € 328 million in the third quarter of 2013, declining by –8.1% compared to the strong year-earlier quarter (Q3 2012: € 357 million). Organically, sales decreased by –2.9% and unfavorable currency effects contributed –5.2%. The drop in sales was predominantly related to sales volumes of Rebif®, the division’s largest product in terms of sales. Price increases were not able to entirely offset the decline in market share resulting from increasing competitive pressure. North America’s contribution to divisional sales was 22% (Q3 2012: 24%).

In the Rest of World region, sales grew organically by 11.4%, mainly powered by the good performance of Erbitux® and strong demand for products from the Fertility franchise. Including negative currency effects of –18.4%, which were primarily attributable to the Japanese yen, sales totaled € 101 million (Q3 2012: € 108 million). Once again, the Rest of World region contributed 7% to divisional sales.

Sales development by main products and business franchises

Global sales of Merck’s top-selling individual product Rebif®, which is used for the treatment of relapsing forms of multiple sclerosis, declined organically by –3.4% in the third quarter of 2013. This was especially due to a tougher competitive environment in North America, which could not be completely compensated by price increases. Taking adverse currency effects into account, sales fell by –7.9% to € 460 million (Q3 2012: € 499 million). In North America, which generates 53% of Rebif® sales and is the product’s largest market, sales declined organically by –3.3% to € 244 million (Q3 2012: € 267 million). In Europe, organic sales of Rebif® decreased by –3.7% from a comparatively high year-earlier basis and totaled € 181 million (Q3 2012: € 190 million). Including the effect of negative exchange rate movements, sales fell by a total of –5.0%. Consequently, Europe accounted for 39% of total Rebif® sales. A mixed picture resulted in the two other regions: While Emerging Markets registered a 5.6% organic increase in Rebif® sales, the Rest of World region saw an organic decline of –28.7%. Including negative foreign exchange effects, sales in the Emerging Markets region declined by –10.7% to € 29 million (Q3: 2012: € 33 million) and dropped in the Rest of World region by –37.6% to € 6 million (Q3 2012: € 9 million). Overall, at around 8% the combined contribution of these two regions to Rebif® sales remained comparatively low.

Sales of Erbitux® in the third quarter of 2013 showed excellent organic growth of 8.2%. Including the foreign exchange impact of –8.9%, which primarily stemmed from the Japanese yen and Latin American currencies, sales declined slightly by –0.8% to € 223 million (Q3 2012: € 224 million). The development of sales was uneven in the three regions in which Merck Serono markets Erbitux®. Accounting for 53% of Erbitux® sales and an organic decline of –2.8%, Europe generated sales of € 119 million (Q3 2012: € 123 million). In Emerging Markets, sales increased in the third quarter to € 63 million (Q3 2012: € 61 million), fueled by strong organic growth of 18.4% despite currency headwinds of –14.7%. This region’s share of total Erbitux® sales increased in the third quarter of 2013 to 28% (Q3 2012: 27%). At 26.0%, the Rest of World region generated the strongest organic growth and delivered Erbitux® sales of € 41 million (Q3 2012: € 40 million). Posting double-digit organic growth, business in Japan performed well. However, this was canceled out by adverse exchange rate effects stemming from the weak Japanese yen. In particular, the approval of Erbitux® in head and neck cancer as well as higher market shares in the existing Erbitux® indications were the main drivers of the increase in organic sales in Japan.

Merck Serono | Sales and organic sales growth for key products – Q3 2013

Merck Serono’s sales of Gonal-f®, the leading recombinant hormone used in the treatment of infertility, totaled € 137 million in the third quarter of 2013 (Q3 2012: € 145 million). This reflected organic growth of 0.8% and a foreign exchange impact of –5.9%. Strong organic growth in the Emerging Markets and Rest of World regions slightly exceeded the weaker sales performance in Europe, where the relationship between economic developments and the demand for fertility products remained visible. However, other products to treat infertility achieved strong organic growth, thereby lifting organic sales growth of the total business franchise to 5.8%.

At € 103 million, third-quarter sales by the Endocrinology franchise, which mainly consists of products to treat metabolic and growth disorders, were at the previous year’s level (Q3 2012: € 102 million). Sales of the growth hormone Saizen® saw slight organic growth of 0.9%, which was however more than offset by adverse foreign exchange effects. As a result, sales declined by a total of –5.5% to € 61 million. Merck Serono achieved double-digit organic growth rates with Serostim® for HIV-associated wasting as well as Kuvan® for the treatment of hyperphenylalaninemia, a metabolic disorder.

The General Medicine business franchise, which includes Merck Serono’s products to treat cardiovascular diseases and diabetes, generated strong organic sales growth of 12.2%. Including negative foreign exchange effects, sales amounted to € 506 million (Q3 2012: € 492 million). Overall, sales volumes in this business franchise continued to develop well. This reflected the performance of the three leading product franchises, namely Glucophage® for the treatment of diabetes, the beta-blocker Concor®, and Merck’s portfolio for the treatment of thyroid disorders, all of which achieved high organic growth rates. However, negative exchange rate effects were registered here as well. Sales of Glucophage® which grew organically by 8.3% primarily in the Emerging Markets region, totaled € 98 million (Q3 2012: € 100 million). Thanks mainly to strong demand in Emerging Markets and Europe, Concor® generated organic growth of 19.3% and sales of € 100 million (Q3 2012: € 91 million) while thyroid medicines delivered organic growth of 33.8% and sales of € 75 million (Q3 2012: € 59 million).

Performance in the first nine months of 2013

In the first nine months of 2013, the division’s total revenues slipped by –0.6% to € 4,740 million (Jan.-Sept. 2012: € 4,767 million) and sales declined slightly to € 4,468 million (Jan.-Sept. 2012: € 4,474 million). Sales in the first nine months of 2013 reflected organic growth of 3.8% and a foreign exchange impact of –3.9%. Rebif® and Erbitux®, the division’s two top-selling products, delivered positive organic growth rates, however they could not compensate for the negative foreign exchange effects. Rebif® achieved organic growth of 1.8%, delivering sales of € 1,413 million € (Jan.-Sept. 2012: € 1,421 million). The currency-adjusted increase was primarily due to excellent sales growth in North America in the first half of 2013. Sales of Erbitux®, the division’s second best-selling product, declined slightly by –0.7% to € 659 million (Jan.-Sept. 2012: € 664 million), since organic growth of 5.0% was more than offset by negative foreign exchange effects. Geographically, both the Emerging Markets and Rest of World regions achieved double-digit organic growth rates. However, these were for the most part either canceled out or more than offset by negative foreign exchange effects. In Europe, the top-selling region for Erbitux®, sales in the first nine months of 2013 were flat and amounted to € 377 million or 57% of total Erbitux® sales.

The Fertility business franchise, where Gonal-f® is the top-selling product, reported sales of € 604 million (Jan.-Sept. 2012: € 608 million), reflecting organic sales growth of 2.2% and a foreign exchange impact of –2.9%. In the first nine months of 2013, sales by the Endocrinology business franchise totaled € 296 million (Jan.-Sept. 2012: € 298 million). Sales of the division’s General Medicine products achieved strong organic growth of 6.1% to € 1,496 million (Jan.-Sept. 2012: € 1,482 million).

In the first nine months of 2013, the division’s EBITDA pre increased on the back of good business performance and achieved savings from the “Fit for 2018” transformation program, by 10.4% to € 1,455 million (Jan.-Sept. 2012: € 1,318 million). On this basis, the EBITDA pre margin (in percent of sales) came in at 32.6% (Jan.-Sept. 2012: 29.5%), improving by around three percentage points.

Merck Serono R&D update in Q3 2013

Pipeline development

Tecemotide (also known as L-BLP25): in September, Merck announced its decision to proceed with a new Phase III study: START2. This was based on the results of the Phase III START study that were presented at the American Society of Clinical Oncology (ASCO) last June as well as consultation with the regulatory authorities. While the primary endpoint of the START study was not met, a post hoc analysis of a predefined subgroup of patients receiving initial concurrent chemoradiotherapy (CRT) in START showed a longer overall survival (30.8 months, compared to 20.6 months in patients receiving placebo; p=0,016).

START2 is a Phase III, multicenter, randomized, double-blind, placebo-controlled clinical trial designed to assess the efficacy, safety and tolerability of tecemotide in patients suffering from unresectable, locally advanced (Stage IIIA/B) non-small-cell lung cancer (NSCLC) who have had a response or stable disease after at least two cycles of platinum-based concurrent CRT. Concurrent CRT is the current standard of care for these patients. The trial’s primary endpoint is overall survival. Merck received scientific advice from the European Medicines Agency (EMA) on the program, and reached an agreement with the U.S. Food and Drug Administration (FDA) on a Special Protocol Assessment (SPA) for this study.

Concerning atacicept (anti-BlyS/anti-APRIL fusion protein), following presentation of the APRIL-SLE study results at the European League against Rheumatism (EULAR) meeting in June, Merck has decided to proceed to a new Phase II study: ADDRESS II. This is a double-blind, placebo-controlled study to assess the efficacy and safety of atacicept at two doses in reducing disease activity, for patients with systemic lupus erythematosus.

Sprifermin (recombinant human FGF-18) completed a Phase II study in cartilage injury repair, the results of which will be presented at a scientific meeting in 2014. In March, Merck decided to focus on the much larger osteoarthritis (OA) indication, with a new multinational Phase IIb trial known as the FORWARD study to be performed as part of a strategic alliance with Nordic Bioscience. FORWARD is now underway and is scheduled to include over 500 patients. It will further evaluate sprifermin for inhibition of the progression of structural damage, reduction of pain and improvement of physical function in patients with OA of the knee.

Other corporate highlights

An updated version of the easypod™ system for use in European markets was presented in September on the occasion of the 9th Joint Meeting for Paediatric Endocrinology. The easypod™ system is an electronic, fully automated recombinant human growth hormone injection device that provides accurate adherence data. The new easypod™ system provides information to help physicians address the issues of poor patient compliance and low adherence rates that are often associated with Growth Hormone (GH) therapy.

Merck and Ablynx announced in late September that they have further expanded their relationship through a multi-year research alliance that could lead to several co-discovery and co-development collaborations. Both partners will jointly select disease targets against which Nanobodies® will be developed up to in vivo proof-of-principle in the Merck Serono’s core research and development fields, including oncology, immuno-oncology, immunology and neurology.

In early July Merck announced its strong support for the Grant for Fertility Innovation (GFI) fund with grants totaling up to € 4 million for the years 2013/2014. The announcement was made during the 29th annual meeting of the European Society of Human Reproduction and Embryology (ESHRE). Launched in 2009, the GFI is dedicated to transforming innovative translational fertility research projects into concrete health solutions to improve the outcomes of assisted reproductive technologies (ART). In the last four years, 26 projects from 16 countries were awarded a grant for a total of € 6 million.