2010 – A successful and eventful business year Audited

The financial and earnings position developed very positively in 2010. Following the acquisition of Serono of Switzerland within the Pharmaceuticals business sector in 2007, we also made a major acquisition in the Chemicals business sector by purchasing Millipore Corporation of the United States in 2010. This acquisition had a very strong impact on the 2010 financial statements. The revenues and expenses of the Millipore companies have been included in the income statement since July 2010. Moreover, the expenses from the purchase price allocation as well as one-time transaction and integration costs have been taken into account.

Total revenues

Product sales of the Merck Group rose in 2010 by 21% to EUR 8,929 million. Declining by 2%, royalty, license and commission income was slightly lower than in 2009. Total revenues, meaning the sum of product sales as well as royalty, license and commission income, rose by 20% to EUR 9,291 million. This sharp increase is related to the purchase of Millipore. However, our business also grew satisfactorily on an organic basis, i.e. adjusted for acquisition and currency effects, by 7.9%.

Total revenues by business sector

Total revenues by business sector – 5-year diagram (bar chart)

Cost of sales

Cost of sales increased by 18%. In the course of the purchase price allocation, the inventories from the Millipore acquisition were already recognized at fair values based on realizable sales revenues, and thus stepped up by EUR 86 million. This amount was fully expensed in cost of sales in the second half of 2010, and had a one-time negative impact on gross margin. Overall, gross margin rose by 21%. Marketing and selling expenses increased relatively sharply by 20% since the costs of the Millipore companies were included for six months compared to 2009. Excluding the acquisition and currency effects, the increase amounted to 7.9%.

Royalty, license and commission expenses

Owing to the increasing significance of royalty, license and commission expenses, we disclose these separately below marketing and selling expenses. The 15% cost increase is sales-dependent and relates to the positive development of our Merck Serono products Rebif® and Erbitux®.

Royalty, license and commission income and expenses include the royalty, license and commission income reported in total revenues as well as the expenses for marketing licenses and to a lesser extent production licenses. The components are as follows:

Royalty, license and commission income and expenses by division in 2010

XLS

 

 

 

 

 

 

 

EUR million

Total

Merck Serono

Consumer Health Care

Merck Millipore

Performance Materials

Corporate and Other

Royalty + license expenses

–183

–163

–7

–13

Royalty + license income

340

323

2

7

8

Total

157

160

2

–5

 

 

 

 

 

 

 

Commission expenses

–297

–293

–3

–1

Commission income

22

22

Total

–275

–271

–3

–1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Royalty, license and commission income and expenses by division in 2009

 

 

 

 

 

 

 

 

EUR million

Total

Merck Serono

Consumer Health Care

Merck Millipore

Performance Materials

Corporate and Other

Royalty + license expenses

–172

–151

–1

–3

–17

Royalty + license income

345

328

2

7

8

Total

173

177

1

4

–9

 

 

 

 

 

 

 

Commission expenses

–257

–253

–3

–1

Commission income

24

23

1

Total

–233

–230

–2

–1

Administration expenses

The marked 12% increase in administration expenses was due mainly to the first-time consolidation of the Millipore companies, as well as to currency effects. Excluding acquisition and currency effects, administration expenses rose by only 1.9%.

Showing a net expense of EUR 390 million, the line item “Other operating income and expenses” grew slightly (EUR –18 million) compared to the net expense reported in 2009. While the figure for 2009 included an increase of around EUR 80 million in expenses due to additions to provisions for litigation, the figure for 2010 includes transaction and integration costs for Millipore totaling EUR 87 million. Transaction costs accounted for around EUR 31 million, which were no longer capitalized as part of the purchase price due to changes in IFRS accounting rules but recognized immediately in the income statement. Additionally, higher impairment losses on intangible assets and property, plant and equipment lowered this item. In total, impairment losses amount to EUR 66 million. These are largely related to the termination of research projects and research alliances, but also to altered market conditions, which lead us to expect lower sales than previously assumed. In 2010, we recorded EUR 25 million for exchange rate gains, whereas in 2009 we recognized exchange rate losses of EUR 7 million.

Research and development

Research and development costs increased by 3.9% to EUR 1,397 million. Thus, the ratio of R&D expenses to total revenues was 15% compared to 17% in 2009.

Research and development spending by business sector

Research and development spending by business sector – 5-year diagram (bar chart)

Intangible assets

Amortization of intangible assets, which previously related mainly to the Serono purchase price allocation, now also include amortization of the intangible assets identified within the scope of the purchase price allocation for Millipore. These are mainly customer relationships and technologies as well as trademarks and brands, which are amortized over a period of 8 to 17 years. Consequently, depreciation and amortization rose significantly, totaling EUR 96 million for the Merck Millipore division. This item also includes expenses for amortization of intangible assets resulting from the previous Serono purchase price allocation. Due to a reassessment of the potential future sales for safinamide, we recorded an impairment of EUR 134 million to a residual value of EUR 63 million. This reassessment was based on the results of a Phase III study conducted by our development partner Newron. The results led to a reassessment of the market potential especially with regard to the achievable indications. In addition, the new valuation covers a delay in the project as well as an increase in R&D costs owing to increased regulatory requirements.

Operating result

Overall, the operating result of the Merck Group amounted to EUR 1,113 million, corresponding to an increase of 72% over 2009.

Operating result by business sector

Operating result by business sector – 5-year diagram (bar chart)

Exceptional items

Exceptional items include the gain on the sale of Théramex amounting to EUR 69 million. Further information on this can be found in the Notes under “Scope of consolidation”.

In connection with the legal risk of our former subsidiary Dey Inc., USA, having allegedly reported false price information, a settlement was reached with the U.S. Department of Justice in 2010. The resulting expenses of EUR 67 million were recorded under exceptional items. Although Dey Inc. was transferred to Mylan Inc., USA, within the scope of the divestment of the Generics business in 2007, Merck remains liable to Mylan for the costs of this litigation. Additional expenses amounting to EUR 1 million relate to the sale of the Electronic Chemicals business in 2005 and include a purchase price reimbursement to the buyer for subsequent taxes. Moreover, this item includes transaction costs of EUR 1 million for the planned sale of the Crop BioScience business. The transaction, which is subject to antitrust clearance, is expected to close in 2011.

Profit after tax

The financial result showed an expense balance of EUR 252 million compared to EUR 134 million in 2009. The marked increase was due mainly to interest expenses for the financing of the Millipore acquisition.

Adjusted for exceptional items, the tax rate was 25.3%, compared to 21.6% in 2009. It should be noted that the capitalization of deferred tax assets on tax loss carryforwards had favorable one-time effects on the tax rate in 2009. Profit after tax amounted to EUR 642 million, which is 70% more than in 2009.

Profit before and after tax

Profit before and after tax – 5-year diagram (bar chart)