Solid business performance in a challenging environment Audited

In 2011, Merck delivered a solid business performance in a challenging environment. All four divisions contributed to this development. Total revenues of the Merck Group rose in fiscal 2011 by € 986 million or 11% to € 10,276 million. This increase was primarily due to the acquisition of Millipore Corporation, a leading U.S. life science company, which we completed in July 2010. Overall, acquisitions and divestments accounted for 6.4% of the increase in total revenues in 2011. Organically, i.e. excluding acquisitions, divestments and exchange rate effects, total revenues rose by 4.8%. Foreign exchange rates lowered total revenues by 0.6% compared to 2010.

Generally, the comparability of the income statement for 2011 with that for 2010 is impacted by the acquisition of Millipore. While the Millipore business was included in 2010 only as of July, fiscal 2011 reflects all of Millipore’s expenses and income for 12 months.

At € 370 million, royalty, license and commission income, which is disclosed as part of total revenues, was slightly higher than in 2010.

Total revenues by business sector

Total revenues by business sector (excluding Corporate and Other) (bar chart)

Cost of sales

Cost of sales rose by 17% to € 2,788 million, growing somewhat more sharply than total revenues. In the year-on-year comparison of cost of sales, it should be noted that 2010 included a one-time expense of € 86 million, which was attributable to the market valuation of the acquired Millipore inventories within the scope of the purchase price allocation. Organically, cost of sales increased by 7.0%. Gross margin rose by 8.4% to € 7,488 million in 2011.

Marketing and selling expenses

Marketing and selling expenses rose by 7.1% to € 2,393 million from € 2,235 million in 2010. The increase is largely due to the fact that in 2010, the marketing and selling expenses of the Millipore companies were only included for six months. Adjusted for acquisitions and foreign exchange rates, the increase totaled 2.0%. In 2011, the ratio of marketing and selling expenses to total revenues declined slightly from 24% to 23%.

Royalty, license and commission expenses

Royalty, license and commission expenses rose to € 512 million from € 480 million. They are incurred for sales of products which we either co-market with partners or for which we pay royalty fees in order to market. This is especially the case for 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:

XLS

Royalty, license and commission income and expenses by division in 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ million

Total

Merck Serono

Consumer Health Care

Merck Millipore

Performance Materials

Corporate and Other

Royalty + license expenses

–216

–187

–2

–13

–14

Royalty + license income

354

340

2

10

2

Total

138

153

–3

–12

 

 

 

 

 

 

 

Commission expenses

–296

–291

–2

–3

Commission income

16

16

Total

–280

–275

–2

–3

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

€ 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

Administration expenses

Administration expenses rose by 5.6% to € 505 million. This increase was due primarily to changes in the scope of consolidation. Organically, these expenses rose by only 0.3%.

Other operating income and expenses

Showing a net expense of € 582 million, the line item “Other operating income and expenses” was 49% higher than the net expense of € 390 million reported in 2010. This sharp increase is due largely to the asset impairment of the Large-Scale Biotech production plant (LSB) at the Merck Serono Biotech Center in Switzerland. Owing to expected overcapacity, an asset impairment of € 165 million was recognized on the LSB in 2011. Due to a reassessment of the business potential of cladribine tablets and the related decision to no longer pursue the global approval process, one-time expenses of € 13 million were recognized. Additionally, in this context, provisions were set up for research services still to be performed. Transaction and integration costs for Millipore amounted to € 38 million in 2011, which compares with € 87 million in 2010. Write-downs of receivables were recorded mainly for outstanding receivables from state hospitals and health care organizations in Italy, Spain, Greece and Portugal.

Research and development

At € 1,517 million, research and development spending was 8.6% higher than in 2010. This was mainly attributable to expensive late-stage clinical trials of drug candidates in the Merck Serono division. At the same time, we recorded expenses of € 42 million for research and development services still to be performed in connection with the return of the rights to safinamide to Newron Pharmaceuticals S.p.A., Milan, Italy. Despite the decision to discontinue the development and commercialization of safinamide for the treatment of Parkinson’s disease, we will maintain the ongoing clinical trial program with safinamide. In order to secure and expand our market positions in the Merck Millipore and Performance Materials divisions, we spent a total of € 269 million on research and development (2010: € 205 million). At 15%, the ratio of R&D expenses to total revenues remained at the previous year’s level.

Research and development spending by business sector

Research and development spending by business sector (bar chart)

Intangible assets

Amortization of intangible assets increased sharply to € 1,005 million in 2011 from € 819 million in 2010. This total mainly includes amortization of intangible assets in connection with the purchase price allocations for Serono and Millipore. The increase is due, on the one hand, to the fact that the amortization of intangible assets from the purchase price allocation for the Merck Millipore division are included for a full year, whereas 2010 only included amortization for the second half of the year. In addition, in the second quarter of 2011, the estimate of the remaining useful life of Rebif® was shortened by two years owing to the increasing market influence of oral forms of treatment for multiple sclerosis. This increased amortization by € 51 million in 2011. This item also includes expenses for amortization of intangible assets resulting from the Serono purchase price allocation. Owing to our decision to no longer pursue the global approval process for cladribine tablets, the residual book value of € 50 million was written off. In 2011, in order to focus our research activities, all ongoing research projects were subjected to an intensive assessment. In connection with changes in the development plan for safinamide, a potential add-on therapy for Parkinson’s disease, we wrote off the residual book value of € 63 million. Further impairments amounting to € 35 million resulted from the decision to discontinue the development of IMO-2055, a candidate for cancer treatment. In addition, owing to the termination of a further research project in the Merck Serono division, an impairment loss of € 9 million was recognized on an intangible asset. Impairment losses of € 9 million on various patents in the Performance Materials division were recorded in 2011.

Operating result

The operating result of the Merck Group totaled € 985 million in 2011. This corresponds to a year-on-year decline of 12%, which was due in particular to the aforementioned one-time expenses.

Operating result by business sector

Operating result by business sector (bar chart)

Exceptional items

In 2011, gains totaling € 152 million were disclosed under exceptional items. These relate in particular to the gain on the divestment of the Crop BioScience business amounting to € 157 million. Further information on this can be found in the Notes under “Scope of consolidation”. Furthermore, in 2011 exceptional items also included a subsequent gain of € 19 million from the sale of distribution rights in connection with the divestment of Théramex in 2010 as well as income of € 9 million owing to the adjustment of previous exceptional items. In addition, provisions for environmental protection measures amounting to € 29 million as well as expenses of € 4 million in connection with the litigation regarding Dey Inc., USA, are reported under exceptional items.

Financial result

The financial result showed an expense balance of € 286 million compared to € 252 million in 2010. The marked increase of 14% was due mainly to expenses resulting from exchange rate differences.

Profit after tax

Adjusted for exceptional items, the tax ratio was 26.1%, compared to 25.3% in 2010. It should be noted that a change in the applicable tax rate led to an adjustment of a deferred tax liability in 2011. The resulting one-time deferred tax income had a favorable impact on the tax ratio.

Profit after tax amounted to € 629 million, which is 2.0% less than in 2010.

Profit before and after tax

Profit before and after tax (bar chart)

Dividend proposal

We will propose to the Annual General Meeting on April 20, 2012 to raise the dividend from € 1.25 to € 1.50 per share.