Merck Earnings Call NUGGETS: Fertility Franchise, Guidance Upgrade
On Tuesday, Merck KGaA ADR (MKGAY) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Liav Abraham – Citi: This is Liav Abraham from Citi, on behalf of Andrew Baum. Two questions please; firstly, on the fertility franchise. Given your focus on this franchise, should we anticipate significant business development going forward in line with the recent BD that you’ve done in the MS and immunotherapy for cancer spaces, that’s the first question? Second question is regarding the ONO compound. You’ve stated that you’re evaluating whether to take this compound into Phase 3. When can we expect the decision to be made in this regard and what will constitute the basis for this decision, is it data specific to the compound or relative to the competitive environment and competing products?
Dr. Stefan Oschmann – Head, Pharmaceuticals Business Sector: This Stefan Oschmann, I’m going to address your questions, both on fertility and on the ONO compound. We are very happy with the performance of our fertility franchise. We see a global trend in this direction given the demographic challenge we’ve seen in many countries. We see other suicidal trends i.e. that women want to have children later in lives and all of these mega trends influence our business profitably. If you look at the structure of the business, we see that there are basically three players in that market results in the leadership position. As you should not expect significant i.e. let me call it transformational business development activities for fertility. We don’t think that this would make any sense. We also don’t expect high-level R&D investment in this area. What we’re looking into is smaller bolt-on type of bidding things. We see that there is opportunity for innovation in the area of providing solutions to fertility centers on top of purely drugs but at this moment we have no plans for any major bidding activities. When it comes to the ONO compound, we are acutely aware of the need to put a program together that provides a significant chance for the product to be differentiated from competition. Gilenya patent will expire depending on the definition in either 2017 or 2020, so that plays a major role. Currently, we’re generating comprehensive clinical and non-clinical data for ONO-4641. We’re focusing on cardiac safety and on the pharmacokinetic efficacy model and we need to look at the broader dose range. A remuneration of these studies will hopefully provide us with more information on the efficacy safety of this product and will provide us with a solid basis for decision as to whether to move this drug into Phase 3 in 2013, that’s the timeframe we are envisioning.
Graham Parry – Merrill Lynch: The first one is just on the guidance upgrade for 2012. Of the €50 million EBITDA upgrade, just looking at the sensitivities you gave us in the third quarter from FX, it looks as if about €50 million underlying would come from FX, pre any hedging losses. So I was wondering could you quantify hedging losses and what the actual underlying upgrade is presumably somewhere in the €25 million to €30 million range or so. Then secondly, of that underlying upgrade, how much is just dropping straight through from the Rebif sales upgrade and how much of that sales upgrade is due to pricing, and on that note, could you just comment on how you see pricing into next year with products like BG-12 and Aubagio launching into the market? Then thirdly on liquid crystals and clearly you’re making some fairly cautious comments around order books for fourth quarter, I’m just wondering how we should think about that into 2013, should we think about Q4 annualizing into ’13 or perhaps even margins going down into 2013 for liquid crystals?
Matthias Zachert – CFO: Let me address the guidance first of all and then take them in sequence. As far as the FX sensitivity is concerned, we provided last year our sensitivity for the U.S. dollar where we stated $0.01 up or down moves the profitability, i.e. EBITDA up or down by round about €6 million, €7 million. This is unchanged and covers basically everything transactional, translation also. For ease we gave this clarity last year in the second quarter in order to make things more transparent to you. We equally gave that point on time our sensitivity for the Swiss franc and these two currencies eventually are the drivers on the currencies, whilst the other currencies Taiwanese dollar, Japanese yen, do not play such a significant role. So, here you can see that when we look at – I’ve just given out the example specifically, for the U.S. dollar. In the U.S. dollar we gave guidance with Q1 that we foreshadow the remaining three quarters at €1.35 and we now do that at €1.25. So there’s a €0.10 delta which on a yearly basis, should lead to €60 million, €70 million EBITDA enhancements and here the big point I would like to indicate, of course we make risk management. So we introduced last year, when we saw the dollar at €1.40, €1.45 we introduced the three years risk management horizon, so we already started hedging last year and we currently have U.S. dollar hedge position of round about 50% which are at forward rates of roundabout €1.35. So of the €60 million, €70 million profit I alluded to earlier, on a yearly basis only €35 million are truly hitting the P&L on a full year basis. Now you can basically take an equal chunk of that on a quarter-to-quarter basis and you would come to something like €15 million that you have indicated earlier on. This is the FX sensitivity. Now on Rebif, the feedback on the U.S. sales of course we have co-promotion agreement with Pfizer, so here it’s 50-50 split on the respect of profitability which we share and the P&L or show in the P&L under commission expenses. So, of course the momentum in the U.S. was healthy on Rebif and for that very reason of course we posted an increase on the commission expense line. As far as pricing is concerned, I think you should take into consideration that all other players have taken a similar pricing initiative and what 2013 will be Stefan and Bernd have clearly pointed out the approach that has taken on Rebif that we descent our franchise, but where prices will be in 2013 depends of course on competitors entering or not entering and also on markets dynamics, and therefore let’s look at Rebif and what we do there, pricing was in 2013, but first of all it gets now the Rebif product into the market, the way we would like to handle it and talk about 2013 when that year has started. Now as far as the last question is concerned on liquid crystals, so here there is nothing negative that we see in the markets besides that of course we’re coming out of strong volume quarters and chemicals move with GDP move with the cycle, and therefore you do see that the chemicals industry and the consumer electronics industry is softening and once we still have the strong order book now in Q3 which is not as but quite as healthy as Q2, here we have normal seasonality that we have after good quarter, especially when the chemical segment softens, that the fourth quarter will soften. So this is something that we hear from the industry, we hear in our key accounts, and for that reason, we are trying to be as transparent as we can, and of course factor in also then the higher idle costs that we will have through putting some inventories down, and that is making the guidance for the fourth quarter. As far as 2013 is concerned, that’s pretty much your question on the margin, pretty much depends also on where the cycle will go. Beginning of the year, there was the assumption in the chemical industry that the second half will stabilize and improve whilst the first half will be rocky. As a matter of fact, it has turned exactly the opposite, first half was – volume was relative healthy, the second half is now becoming more rocky, and as far as 2013 is concerned, our current view is that in 2013, we will not have the new technology entering the liquid crystals domain, so for that very reason, we will not have pricing upgrades in 2013. Once we continue working hard on the two new technologies that we are exploring, our view is they will not come into the market in 2013, we are still testing the technologies, and for that very reason, the margin which will depend on where the volumes will go. Should the volumes be healthy, we will maintain somewhat in the area that we currently have posted, should volumes in the chemical segment go down, we will of course face some volatility here whilst overall our (indiscernible) clearly liquid crystals will stick around and whilst it has been considered as the business that will go southwards operationally it will remain healthy.