Merck Reports Strong Third Quarter
In comparison with the year-earlier quarter, Group net sales increased by 9.7% to € 4.4 billion
EBITDA pre, the Group’s most important earnings indicator, rose to € 1.7 billion, which was 53.0% higher than in the third quarter of 2019. Among other things, this increase was attributable to the strong operating performance of the businesses as well as income from the release of a provision amounting to € 365 million for potential damages from the patent litigation with Biogen Inc. Merck has revised its forecast for the full year 2020 and refined its expectations for net sales as compared with the most recent forecast published in the half-yearly financial report as of June 30 to a narrower range of between € 17.1 billion and € 17.5 billion. In addition, the company now expects higher EBITDA pre of between € 5.05 billion and € 5.25 billion.
“The superb results of the third quarter once again underscore the strength of our diversified business model. First and foremost, our medicines Mavenclad and Bavencio, our Process Solutions business with products and services for drug manufacturing, and our Semiconductor Solutions business contributed substantially to the growth of Merck. We are achieving success with our three innovation-driven business sectors even in difficult times and are making important contributions to the fight against the pandemic,” explained Stefan Oschmann, Chairman of the Executive Board and CEO of Merck. Among other things, the company is supporting more than 50 potential Covid-19 vaccines, supplying products and reagents for diagnostics and is investigating an active pharmaceutical ingredient for the treatment of patients with Covid-19 pneumonia.
Organic and acquisition-related sales growth at Group level
The increase in Group net sales by 9.7% in the third quarter stemmed from organic growth of 7.2%, which was driven by the Life Science and Healthcare business sectors. Group sales rose by 6.9% due to portfolio changes. This was offset by negative foreign exchange effects of -4.4%. The 53.0% rise in EBITDA pre over the year-earlier quarter was due particularly to an organic increase of 52.6%. This also included income from the aforementioned release of a provision. Excluding this income, EBITDA pre rose organically by 19.8%. Acquisitions were responsible for an 8.2% increase in EBITDA pre. This was amid negative foreign exchange effects of -7.8%. The operating result (EBIT) soared by 91.9% to € 1.2 billion. Net income grew by more than 100.0% to € 805 million. Earnings per share pre were € 2.34, or 73.3% more than in the year-earlier quarter.
Bavencio and Mavenclad drive organic sales growth of Healthcare
In the third quarter, Healthcare net sales declined by -3.1% to € 1.7 billion in comparison with the year-earlier quarter. Organically, the business grew by 3.2%. However, negative foreign exchange effects had an adverse impact of -5.1% as did a negative portfolio effect of -1.2% from the divestment of the Allergopharma allergy business in the first quarter of 2020.
The Oncology franchise generated organic growth of 7.2%, which was primarily driven by the immuno-oncology medicine Bavencio. This product delivered organic sales growth of 52.9% over the year-earlier quarter. The key driver of the growth of Bavencio was its approval in the United States in June 2020 as a maintenance therapy in patients with locally advanced or metastatic urothelial carcinoma. The Neurology & Immunology franchise generated organic sales growth of 8.9% in the third quarter. This was driven by Mavenclad, a medicine for oral short-course treatment of highly active relapsing multiple sclerosis, which delivered organic growth of 71.7% over the year-earlier quarter. In the third quarter, sales of the Fertility franchise recovered significantly from the pandemic-related impacts in the first half of the year. In comparison with the year-earlier quarter, sales declined organically by -1.3%. The General Medicine & Endocrinology franchise generated an organic sales increase of 2.4%. EBITDA pre of Healthcare soared in the third quarter by 78.9% to € 896 million. The key driver of this increase was organic growth of 93.7%, which also includes the income from the aforementioned release of a provision. Excluding this income, EBITDA pre of Healthcare rose organically by 20.8%.
Process Solutions remains key growth driver within Life Science
In comparison with the year-earlier quarter, third-quarter net sales of Life Science rose by 11.3% to € 1.9 billion. In the third quarter, Life Science generated organic sales growth of 15.6% amid currency headwinds of –4.2%.
The key driver of organic growth was the Process Solutions business unit, which markets products and services for the entire pharmaceutical production value chain. Sales of this business unit increased organically by 26.5% in the third quarter. This was mainly due to continued high underlying demand as well as to additional business related to the Covid-19 pandemic. The Research Solutions business unit achieved organic sales growth of 9.5% in the third quarter, among other things owing to the strong business recovery following the closures of academic laboratories in the first half due to the pandemic. Applied Solutions generated organic sales growth of 3.7% in the third quarter, also thanks to a slight recovery from the negative impacts of the Covid-19 pandemic on the business. In the third quarter, EBITDA pre of Life Science rose by 18.7% over the year-earlier quarter to € 630 million.
Performance Materials: Semiconductor Solutions delivers very strong organic growth
Performance Materials generated a 43.4% rise in net sales to € 836 million in the third quarter. The key factor behind this increase was the contribution of 51.6% from the acquisitions of Versum Materials and Intermolecular. This positive effect was weakened by an organic decline in sales of -5.4% and negative foreign exchange effects of -2.8%.
Excluding the effects of the Versum Materials and Intermolecular acquisitions, the Semiconductor Solutions business unit generated organic growth of 8.0% in the third quarter. The Covid-19 pandemic had only a minor negative impact on the business unit in the third quarter. In the same period, Display Solutions saw an organic sales decline of -9.9%. Following a markedly weaker second quarter of 2020, the decrease has moved significantly closer to the company’s expectations for medium-term sales performance for this business unit. Nevertheless, weaker end-user demand owing to the Covid-19 pandemic resulted in continued lower customer production capacity utilization. Net sales of the Surface Solutions business unit declined organically by -12.3% in the third quarter. This was primarily the outcome of ongoing weakness in the automotive and decorative cosmetics markets, which remain impacted by the Covid-19 crisis. In the third quarter, EBITDA pre of Performance Materials amounted to € 254 million, an increase of 43.3% over the year-earlier quarter.
Forecast: Group net sales to grow organically by 4% to 5%, EBITDA pre excluding provision release expected to rise organically by 6% to 8%
In connection with the global outbreak of the Covid-19 pandemic, Merck confirms the assumptions made in the outlook published in the quarterly statement as of March 31 and in the half-yearly financial report as of June 30. In this context, the company continues to assume that its businesses will be impacted to varying degrees. Adverse impacts can be seen particularly in Performance Materials and Healthcare, whereas Merck expects positive effects in Life Science, particularly in the Process Solutions business unit.
The past several weeks have seen stronger outbreaks with potential further widespread lockdowns in many countries. This is associated with further negative consequences for the economic recovery. Owing to the inherent uncertainty that these measures involve, the potential negative impacts of these developments on the company’s businesses have not been taken into account in the forecast.
Following the second quarter, in which the effects of the Covid-19 pandemic were clearly visible, the third quarter developed more strongly than previously expected. Consequently, for the full year 2020, Merck now expects an organic sales increase of 4% to 5% over the previous year. Previously, the company had expected a slight to moderate organic increase in sales. Life Science should remain a major driver of this organic growth. Following a stronger third quarter and despite significantly negative effects from the Covid-19 pandemic, Healthcare is also expected to contribute positively. The development is likely to be weakened by the organic decline in the Performance Materials business, which continues to suffer from the negative impacts of the Covid-19 pandemic. In the first three quarters, the effect of the acquisition of Versum Materials will be reported as a portfolio effect, which Merck still forecasts in the mid single-digit percentage range at Group level. With regard to exchange rate developments, the company continues to expect a volatile environment due to political and macroeconomic developments. In contrast to the previous forecast given in the half-yearly financial report as of June 30, Merck now anticipates a stronger negative impact of -2% to -3% owing to the latest developments. Overall, Merck is thus specifying its forecast for 2020 and expects net sales in a range between € 17.1 billion to € 17.5 billion at Group level.
In addition, in contrast to the latest forecast published in the half-yearly report as of June 30, the company expects higher EBITDA pre. At Group level, this is now likely to be in a corridor between € 5.05 billion and € 5.25 billion. The increase is due in particular to the strong operating performance of the businesses. Accordingly, excluding the release of the provision for the patent dispute with Biogen, Merck expects organic growth of between 6% and 8%. This development should be driven particularly by Life Science as well as Healthcare, whereas the company expects to continue to see an organic decline in Performance Materials. In addition, the release of the provision of € 365 million for the patent dispute with Biogen had a positive effect. Overall and in contrast to the forecast published in the half-yearly financial report as of June 30, Merck therefore expects an organic increase in EBITDA pre of 14% to 16% in comparison with the previous year. Previously, the company had expected a slight to moderate organic increase. The portfolio effect from the acquisition of Versum Materials, which the company still expects to be in the mid single-digit percentage range, should lead to a slight improvement in the Group margin. The assumed foreign exchange development is forecast to have a negative effect of between -3% and -5% on Group EBITDA pre compared with the previous year; it is likely to be seen particularly in the Healthcare and Life Science businesses.
The company has raised its forecast for earnings per share pre and now expects this in a range of between € 6.50 and € 6.80. This includes € 0.63 due to the release of a provision for the aforementioned patent dispute.
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