Merck KGaA’s (MKGAF) second quarter 2011 results fell short of the Zacks Consensus Estimate on all fronts, although it reported higher year-over-year revenues.
Earnings per share for the second quarter 2011 came in at $1.32, substantively below the Zacks Consensus Estimate of $2.62 and the year-ago earnings of $2.07. Higher operating expenses washed down the gains in revenues to drag the earnings lower.
Revenues for the reported quarter climbed 22.1% to $3,584.7 million, driven primarily by the acquisition of Millipore Corp. last year. However, revenues missed the Zacks Consensus Estimate of $3,642 million.
Quarterly Details
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 revenue increased only 2.0% during the quarter. Strong performance from Rebif (up 5.2%) was offset by lower Erbitux sales (down 3.0%). Erbitux sales experienced a decline mainly due to lower sales in Japan.
The Consumer Health Care division’s revenues went up 3.9%, aided by improved sales in European markets.
The Performance Materials division’s revenues slid 6.5% during the second quarter of 2011, due to negative currency impact and the divestment of Crop BioScience business in the first quarter. The Performance Materials division consists of Liquid Crystals business and Pigments business.
Merck KGaA’s Merck Millipore division comprises of three business units – Bioscience, Lab Solutions and Process Solutions. We note that the Bioscience business unit constituted 17% of the division’s total revenue. While the Lab Solutions business unit represented 42%, the balance was contributed by the Process Solutions business unit.
Merck KGaA recorded a 9% increase in research and development expenses during the quarter, primarily due to the increase in expenses in the Chemicals division.
Forecast for 2011
Merck KGaA expects 2011 revenues to lie in the range of €10.0 – €10.4 billion. The company now expects Merck Serono division sales to grow in the range of 1-2% and Consumer Health Care division sales to experience growth in the range of 6-9%.
Further, the Merck Millipore division is anticipated to grow by about 50% and the Performance Materials division to grow 4-6% in 2011.
Our Take
We currently have a Zacks #3 Rank (short-term Hold rating) on Merck KGaA. We note that during the second quarter of 2011, Merck KGaA submitted an application to the European Medicines Agency (EMA) for the approval of Rebif to treat patients who have experienced a single demyelinating event (an early symptom of the disease) and who stand a high risk of developing multiple sclerosis (MS).
Rebif is currently available worldwide as a treatment for the relapsing versions of MS. The drug primarily faces competition from Biogen Idec’s (BIIB), Tysabri and Avonex and Teva Pharmaceuticals’ (TEVA) Copaxone.
Also, during the quarter, Merck KGaA halted the development of cladribine, which was being evaluated as a treatment for MS. The company’s decision came on the belief that data from the ongoing clinical trials will not be sufficient to address the US Food and Drug Administration’s (FDA) requirements for approval.
The company is of the view that to gain US and EU approval, it will have to conduct a new clinical trial program that would take several years to complete.
