Merck KGaA (MKGAF) posted first quarter 2011 earnings of $2.78 per share, beating the Zacks Consensus Estimate of $2.13 and the year-ago earnings of $2.01. Higher revenues helped boost the quarter’s earnings.
Revenues
Revenues for the reported quarter jumped 22.1% (in local currency), driven primarily by the acquisition of Millipore Corp. last year and increased pharmaceutical sales.
The company operates under two heads: Pharmaceuticals and Chemicals. The Pharmaceutical division, in turn, functions under two heads Merck Serono and Consumer Health Care. The Chemical division is split into Merck Millipore and Performance Materials.
Merck Serono’s revenues, which increased only 1.5% during the quarter, were affected by lower Rebif sales despite strong performances from Erbitux and Gonal-f. Rebif sales, which declined 4.2% during the reported quarter, were boosted by wholesaler stocking (due to an expected supply shortage) in the year-ago quarter.
The Consumer Health Care division’s revenues went up 8.4%, given improved sales in all major markets apart from Asia, where sales remained steady.
The Performance Materials division’s revenues climbed 15% during the first quarter of 2011. The increase was primarily attributable to robust growth in the Liquid Crystals business unit of the division. The Performance Materials division consists of Liquid Crystals business and Pigments business.
We note that the earthquake in Japan in March 2011 did not have any severe impact on the division’s sales. However, production at the Onahama plant, which experienced damage due to the earthquake, is expected to resume in early June.
Merck KGaA’s Merck Millipore division and its three business units (Bioscience, Lab Solutions and Process Solutions) got fully integrated with the company’s former Performance & Life Science Chemicals division.
We note that the Bioscience business unit constituted 18% of the division’s total revenues. While the Lab Solutions business unit represented 40%, the balance was contributed by the Process Solutions business unit.
Operating Expenses
Merck KGaA recorded a 20% increase in administration expenses during the reported quarter. The addition of Millipore mainly accounted for the increase. Research and development expenses rose 9% compared with the year-ago quarter, primarily due to the increase in expenses in the Performance Materials and Merck Millipore divisions.
Forecast for 2011
Merck KGaA expects 2011 revenues to grow 10-15%, decreased from the earlier guidance range of 13-18%. The company now expects Merck Serono division sales to grow in the range of 1-6%, which represents the lower range of the guidance provided by the company in February.
Merck KGaA was earlier expecting the US Food and Drug Administration (FDA) to approve cladribine for multiple sclerosis in 2011 itself. However, the FDA issued a complete response letter (CRL) in March and asked the company to either conduct additional analyses or additional studies in order to provide more information on the safety risks and the benefit-risk profile of the drug.
Merck KGaA plans to meet with the regulatory body in May 2011 to find out whether data from the already conducted or ongoing clinical trials will be sufficient to meet the FDA’s requirements.
With cladribine’s approval being delayed, we were not surprised to see the company revise its revenue guidance.
Meanwhile, Merck KGaA maintained other aspects of its previously issued revenue guidance. The company continues to expect the Consumer Health Care division to grow 7-12% in 2011. Further, the Merck Millipore division is anticipated to grow 51-56% and the Performance Materials division to grow 2-7% in 2011.
Our Take
We currently have a Zacks #3 Rank (short-term Hold rating) on Merck KGaA. We note that during the first quarter of 2011, Merck KGaA submitted an application to the European Medicines Agency (EMA) for the approval of Erbitux (cetuximab) in combination with standard first-line platinum-based chemotherapy.
The company is seeking approval for the use of the combination therapy for patients with advanced or metastatic non-small cell lung cancer (NSCLC) with high epidermal growth factor receptor (EGFR) expression.
Erbitux is originally an ImClone product, which was acquired by Eli Lilly and Co. (LLY) in 2008. Merck KGaA has the right to market Erbitux outside the US and Canada. In Japan, the drug is jointly developed and marketed by Eli Lilly, Merck KGaA and Bristol-Myers Squibb Co. (BMY). Moreover, Eli Lilly sells Erbitux in the US and Canada in collaboration with Bristol-Myers.
Merck KGaA also entered into an agreement to acquire the microbiology unit of a German company, Biotest AG, during the first quarter. The microbiology segment, which recorded sales of about €50 million in 2010, consists of the heipha Dr. M
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