Merck Raises 2013 Profit Forecast on Speed of Cost Cuts

Merck KGaA (MRK), the German maker of the cancer drug Erbitux, raised its profit forecast for the year as cost reductions are taking effect faster than planned. The stock rose the most in almost nine weeks.

Earnings before interest, taxes, depreciation, amortization and some one-time items will total 3.2 billion euros ($4.3 billion) to 3.25 billion euros, versus a previous forecast of 3.1 billion euros to 3.2 billion euros, Darmstadt-based Merck said today in a statement. Third-quarter Ebitda on that basis rose 10 percent to 830.7 million euros, beating the 806.7 million-euro average of 11 analyst estimates.

Merck is eliminating jobs and has closed facilities following drug-development setbacks that have weighed on sales prospects. The company, whose products also include liquid crystals for electronic flat-screen panels and laboratory equipment, is looking to expand outside Europe, particularly in the U.S., Japan and China, amid the after-effects of a sovereign-debt crisis in its home region.

“Merck is already stronger today and more profitable than when it started the change process a few years ago,” Chief Executive Officer Karl-Ludwig Kley said in the statement. “We’re now focusing on leveraging the substantially stronger platform to further develop our business in a sustainable and profitable manner.”

Photographer: Hannelore Foerster/Bloomberg

Film-coated tablets are inspected by machine at the Merck KGaA pharmaceutical plant in Darmstadt, Germany. Close

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Film-coated tablets are inspected by machine at the Merck KGaA pharmaceutical plant in Darmstadt, Germany.

Stock Jumps

Merck rose as much as 2.6 percent to 125.10 euros, the biggest intraday jump since Sept. 16, and closed up 1.7 percent at 124 euros at 5:30 p.m. in Frankfurt. The stock has gained 26 percent this year, including reinvested dividends, valuing the drugmaker at 27 billion euros. That compares with a 28 percent increase by the Bloomberg Europe Pharmaceutical Index in 2013.

Full-year core earnings per share, which exclude some costs such as writedowns or merger expenses, will amount to 8.50 euros to 9 euros, with sales at 10.7 billion euros to 10.9 billion euros, Merck said, reiterating its earlier forecast.

Third-quarter net income surged 83 percent to 339.6 million euros. Profit a year earlier was held back by 98 million euros in one-time costs mostly related to the reorganization. Core earnings gained 16 percent to 2.29 euros a share.

Currency Effects

Total revenue, which includes royalty payments, fell 3.1 percent to 2.75 billion euros, falling short of the 2.77 billion-euro average analyst estimate, because of the euro’s increase against the dollar, yen and Latin American currencies.

Photographer: Hannelore Foerster/Bloomberg

Pedestrians pass the Merck KGaA pharmaceutical plant in Darmstadt, Germany. Close

Pedestrians pass the Merck KGaA pharmaceutical plant in Darmstadt, Germany.

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Photographer: Hannelore Foerster/Bloomberg

Pedestrians pass the Merck KGaA pharmaceutical plant in Darmstadt, Germany.

The euro was the best performer among major currencies in the first nine months of 2013, peaking at a 7.2 percent gain against nine developed-market peers on Oct. 29. The increase reduces the value of revenue earned outside the 17 nations using the euro when the sales are converted to the common currency.

Revenue at the Merck Serono pharmaceutical unit declined 3.4 percent to 1.57 billion euros after negative exchange-rate effects reduced sales by 6.7 percent. Sales of multiple sclerosis therapy Rebif declined 3.4 percent, excluding effects such as currency shifts, to 460 million euros. On that basis, revenue from Erbitux grew 8.2 percent to 223 million euros.

Rebif sales were dragged down by competition in the U.S., which probably “reflects a significant step up in the levels of rebating with the strong launch of Tecfidera,” a treatment from Biogen Idec Inc., Alistair Campbell, an analyst at Berenberg, said in a report today. Rebif sales were 7 percent below Campbell’s estimate, he said.

Consumer Health

Consumer-health division sales rose 7 percent to 131 million euros. Sales at the Merck Millipore equipment, ingredient and services business fell 0.6 percent to 639 million euros.

The performance-materials unit, the world’s biggest maker of liquid crystals for flat-screen televisions and electronics, reported a sales decrease of 8.9 percent to 406.5 million euros as currency effects cut revenue by 7.1 percent and product deliveries declined slightly as customers reduced inventories.

Falling demand for television sets and personal computers has hurt earnings at producers such as Samsung Electronics Co. LG Display Co. Worldwide shipments of liquid-crystal-display TVs may total 208.8 million units this year, less than the 215.5 million projected earlier, market research firm TrendForce said in a June 13 report.

Merck has said it will explore large acquisitions once restructuring is complete, though probably not before 2014. The drugmaker has narrowed its research to focus on cancer, immune disorders, multiple sclerosis and fertility treatments.

Unsuccessful Trials

Erbitux, which is used to treat head and neck tumors and colorectal cancers, failed in tests concluded last year to determine whether it also would help patients with advanced cases of cancer of the stomach or the colon. Other experimental treatments that haven’t met trial targets in the past year include cilengitide, for brain tumors, and the L-BLP25 vaccine against lung cancer.

Merck said on Sept. 25 that it will fund a new late-stage trial for L-BLP25 after the experimental treatment failed to improve survival significantly in a study ending last year that involved more than 1,200 patients with advanced lung tumors. The product, also called tecemotide, is designed to stimulate a patient’s immune system to identify and target the MUC1 gene in cancer cells that has an effect on tumor growth and survival.

To contact the reporter on this story: Allison Connolly in Darmstadt, Germany, via aconnolly4@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net

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