Merck Serono

Development of sales and results of operations

In the third quarter of 2014, the Merck Serono division generated organic sales growth of 4.5%. Taking negative exchange rate effects of –0.8% into account, divisional sales rose overall by 3.7% to € 1,465 million (Q3 2013: € 1,413 million). Nearly all the franchises contributed to the division’s organic sales growth. In particular drugs for the treatment of cancer (Erbitux®), diabetes (Glucophage®), cardiovascular disease (Concor®) and thyroid disorders (Euthyrox®) as well as Gonal-f®, a leading recombinant hormone used in the treatment of infertility, drove the development of organic sales in the third quarter of 2014.

Merck Serono | Sales by region – Q3 2014

Europe, the division’s top-selling region, posted slight organic sales growth of 1.1%, thereby generating sales of € 594 million (Q3 2013: € 588 million). At 41% (Q3 2013: 42%), Europe accounted for the largest proportion of the division’s sales.

Emerging Markets, the division’s second-largest region by sales, delivered strong organic growth of 14.0% but sustained a negative foreign exchange impact of –2.7%. Consequently, sales increased to € 442 million from € 397 million. In particular the products of the General Medicine franchise contributed to this growth, however Rebif®, Erbitux® and Gonal-f® also performed well. This region’s share of divisional sales increased from 28% in the year-earlier quarter to 30% in the third quarter of 2014.

Sales in North America amounted to € 327 million in the third quarter of 2014, which was at the previous year’s level (Q3 2013: € 328 million). This reflects an organic sales decline of –1.1% and positive exchange rate effects of 0.8%. North America’s contribution to divisional sales fell by one percentage point to 22%.

In the Rest of World region, sales grew organically by 5.3% in the third quarter of 2014. Including negative foreign exchange effects of –3.1%, sales thus rose to € 101 million (Q3 2013: € 99 million). Particularly sales of Gonal-f® developed well in this region. Once again, the Rest of World region contributed 7% to divisional sales.

In the third quarter of 2014, sales of the two top-selling products of the Merck Serono division, Rebif® and Erbitux®, developed as follows:

Sales of Rebif®, which is used to treat relapsing forms of multiple sclerosis, increased organically by 1.7% in the third quarter of 2014 despite increasing competitive pressure from oral therapies. Taking adverse exchange rate effects of –0.4% into account, Rebif® sales rose by a total of 1.3% to € 466 million (Q3 2013: € 460 million). In North America, which generates 53% of overall Rebif® sales (Q3 2013: 53%) and is the product’s largest market, sales increased slightly to € 248 million (Q3 2013: € 244 million). The price increases implemented last year compensated for lower sales volumes, leading to a slight organic sales increase of 0.5%. In Europe, which accounts for 38% of sales (Q3 2013: 39%) and is the second-largest region for the product, sales of Rebif® declined organically by –2.5% to € 176 million (Q3 2013: € 181 million) due to competition, however they were positively affected by a tender in eastern Europe. The Emerging Markets and Rest of World regions, which together accounted for a 9% share of sales (Q3 2013: 7%), registered strong organic sales growth in the third quarter of 2014.

With the oncology drug Erbitux®, the division generated organic sales growth of 6.5%, which even exceeded the strong year-earlier quarter. Taking negative currency effects of –2.5% into account, sales rose by 4.0% to € 232 million (Q3 2013: € 223 million). Merck Serono achieved organic sales increases in all three regions in which it holds the marketing rights. In Europe, where 54% of Erbitux® sales were generated (Q3 2013: 53%), making it the top-selling region for this product, Erbitux® sales grew organically by 5.5%. Coupled with slightly negative exchange rate effects of –0.5%, sales amounted to € 125 million (Q3 2013: € 119 million). At 11.7%, the Emerging Markets region generated the strongest organic growth for this oncology drug, delivering sales of € 68 million (Q3 2013: € 63 million). This region thus accounted for 29% of total Erbitux® sales (Q3 2013: 28%). Brazil, for example, was a significant contributor. In the Rest of World region, Erbitux® sales declined to € 39 million (Q3 2013: € 41 million), since organic growth of 1.1% was unable to offset negative foreign exchange effects of –5.0%. In Japan, sales did not reach the high growth rates that were achieved in previous quarters by the market launch in the head and neck cancer indication and are now included in the comparison basis. Nevertheless, sales grew organically by 2.7%.

Sales and the organic growth rates of the other key products developed as follows:

Merck Serono | Sales and organic growth of key products – Q3 2014

In the third quarter of 2014, Merck Serono generated organic sales growth of 7.5% with Gonal-f®. Including slight adverse foreign exchange effects, sales increased by 7.0% to € 147 million (Q3 2013: € 137 million). Sales of Gonal-f® grew in all regions, with the highest absolute growth achieved in the Emerging Markets region.

The Endocrinology franchise, which mainly consists of products to treat metabolic and growth disorders, posted an organic sales decline of –2.8%. Including negative foreign exchange effects of –1.0%, sales amounted to € 99 million (Q3 2013: € 103 million). Sales of the growth hormone Saizen®, the top-selling product of this franchise, saw an organic increase of 0.5% as well as negative exchange rate effects of –1.8%. Consequently, sales almost reached the previous year’s level of € 60 million.

The General Medicine franchise, which commercializes Merck Serono’s products to treat cardiovascular diseases and diabetes, among others, generated organic sales growth of 7.2%. Organic sales of Concor® and products to treat thyroid disorders (Euthyrox®) developed well in the third quarter of 2014. Following declining sales of the diabetes treatment Glucophage® in the first half of 2014, the division posted an increase in sales of this product to € 104 million in the third quarter of 2014 (Q3 2013: € 98 million). Including negative exchange rate changes of –0.5%, sales by the General Medicine franchise amounted to € 440 million (Q3 2013: € 412 million).

In the first nine months of 2014, the division’s sales slipped by 0.4 % to € 4,286 million (Jan.–Sept. 2013: € 4,269 million). Reported sales reflected organic growth of 3.9% and a foreign exchange impact of –3.5%. The division’s sales of Rebif® totaled € 1,389 million in the first nine months of 2014 (Jan.–Sept. 2013: € 1,413 million). Despite organic growth of 1.3%, Rebif® sales declined by a total of –1.7% owing to negative foreign exchange effects. Sales of Erbitux® increased slightly by 1.6% to € 670 million (Jan.–Sept. 2013: € 659 million). Organic growth of 6.1% was partially offset by negative exchange rate effects. Organic sales growth was driven by all three regions in which Merck Serono holds the marketing rights to Erbitux®.

The Fertility business franchise, in which Gonal-f® is the top-selling product, reported sales of € 461 million (Jan.–Sept. 2013: € 438 million), reflecting organic sales growth of 8.8% and a foreign exchange impact of –3.7%. All four regions contributed to organic sales growth, primarily the Emerging Markets region. During the first nine months of 2014, the Endocrinology franchise generated sales of € 287 million (Jan.–Sept. 2013: € 296 million). Divisional sales of products from the General Medicine franchise (including CardioMetabolic Care) amounted to € 1,231 million (Jan.–Sept. 2013: € 1,228 million).

The division’s results of operations developed as follows:

Royalty, license and commission income, which besides sales is also reported as part of total revenues, dropped substantially in the third quarter of 2014 by –69.1% to € 26 million (Q3 2013: € 85 million). This was due primarily to lower royalty and license income from Humira® and Enbrel®. The agreement reached with Bristol-Myers Squibb in 2013 to co-promote Glucophage® in China had a slightly positive effect on commission income in comparison with the year-earlier quarter.

Taking into account the development of sales and total revenues as well as cost of sales, the gross profit of the Merck Serono division fell by around € –47 million to € 1,200 million, leading to a gross margin of 81.9% (Q3 2013: 88.3%). This decrease was primarily due to lower royalty, license and commission income but also to stronger sales growth in regions with lower margins as well as production and supply bottlenecks for some products. The development of other operating expenses and income (net) in the third quarter of 2014 mainly reflected the adjustment of provisions for litigation (see also “Verbal agreement on the resolution of the legal disputes with IBEP” in the Notes to the Consolidated Financial Statements), the decline in allowances for receivables as well as the reduction in one-time expenses. Conversely, other operating expenses and income were impacted in the third quarter of 2014 by impairments of intangible assets in connection with the discontinuation of the clinical development program for tecemotide (also known as L-BLP25), an investigational antigen-specific cancer immunotherapy (see also “Discontinuation of the clinical development programs for tecemotide and plovamer acetate” in the Notes to the Consolidated Financial Statements). The increase in research and development spending was largely due to one-time effects resulting from the discontinuation of the clinical development programs for tecemotide and plovamer acetate. In addition, investments in the Biosimilars pipeline led to higher research and development costs. The division’s research spending ratio thus increased in the third quarter of 2014 to 28.0% (Q3 2013: 20.9%). After eliminating depreciation and amortization, and adjusted for one-time items, EBITDA pre one-time items declined by –4.0% to € 449 million and the EBITDA margin pre one-time items was 30.6% (Q3 2013: 33.1%).

In the first nine months of 2014, Merck Serono recorded EBITDA pre one-time items of € 1,339 million. The decrease of –3.0% in this key performance indicator reflects, among other things, the negative impact of exchange rate developments on earnings as well as the decline in royalty and license income. The EBITDA margin pre one-time items fell to 31.2% (Jan.–Sept. 2013: 32.3%).

Development of business free cash flow

Business free cash flow of the Merck Serono division fell significantly in the third quarter of 2014 by € –135 million to € 377 million (Q3 2013: € 512 million). The changes in trade accounts receivable had the strongest impact on the development of this indicator. Whereas in the year-earlier quarter, cash generated by the decline in receivables amounted to € 98 million, in the third quarter of 2014, cash used owing to the increase in receivables was € –17 million.

Owing to the weaker business free cash flow in the second and third quarters of 2014, the division could not achieve the year-earlier figure in the first nine months of 2014. Accordingly, business free cash flow declined by € –143 million or –10.7% to € 1,195 million in the first nine months of 2014.