Merck KGaA ADR Executive Insights: Emerging Markets, Rebif
On Tuesday, Merck KGaA ADR (OTC:MKGAY.PK) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Matthias Zachert – CFO: If you go through the backup slide, we have an overview basically on the organic growth rates of the respective key products. I think it is Slide 16 or 15. Here you see that the organic performance including price and volume of course on Rebif was roundabout 3%. Erbitux performed more mildly in the area of roundabout 1%. While the endocrinology drugs posted high single-digit growth rates, organically and as far as (all our efforts) is concerned we were in the teens. So that is giving you the breakdown on the key products. As far as the pricing is concerned for the (key two) product, we at this point in time do not provide the color. In the respect of pricing and volume direction, what I would verbally like to indicate to you, however, is overall you’d see that absolute-wise Rebif sales went up. Of course, we had a stronger contribution due to the pricing initiatives that we took in the U.S., so this was of course a major driver behind net sales increase while volumes were slightly negative and so net-net we posted an overall net sales increase whilst pricing being clearly positive and volume being negative. This is the key answer for Rebif.
Unidentified Analyst: I think that’s the (indiscernible) double-digit or high single-digit with historic (indiscernible) the major markets going to effect this quarter being weak-ish, a very specific practice you’ve call out your business and then the second question is on the €50 million of savings and just a few more details if possible. Is that a net figure? Which division predominantly I guess is Merck Serono and is it predominantly fourth quarter?
Matthias Zachert – CFO: So I’ll start with the second question. The net savings predominantly is – so the €50 million saving is a net saving. So that’s the reason why we can be on the EBITDA pre I would say quite on a position to somewhat upgrade the qualitative guidance we’ve provided. At the beginning of the year we only stated at the beginning of the year that we would be slightly above previous year level. If you go into the new corridor of the guidance €2.8 billion to €2.9 billion, the increase here especially across the higher end of concern is stemming from the net savings. So it’s truly a net savings. So this is your second question and of course a predominantly this is coming from Merck Serono. As far as your first question is concerned, I think our emerging market setup is one that in the past never showed the same strong growth rates of others being given in the double-digits. We have always been in the single-digits however on a continued path. This is stemming from the fact that the emerging market setup that we have is relatively diversified. We are not only present in China, as a matter of fact we are from the leadership position stronger in other markets like in Latin America and the remainder countries of Asia. So here, the growth rates are not as high as the growth rates of other companies, but the diversification in our emerging markets is clearly stronger. For that very reason, I think the stability on the growth rates has been an element that you have seen in the past and is an element you despite the (toughy) environment that most of the companies face in the emerging markets was one that we are not so much impacted in Q1, 2012.
Richard Vosser – JPMorgan: Hi, Richard Vosser from JPMorgan. Just one question, just on Millipore. I’ve didn’t seen that the first quarter always seem to be the strongest of the year. What contribute to that seasonality and comments on that would very be useful? If indeed there is seasonality there?
Matthias Zachert – CFO: Well, I think in Merck Millipore and the tools business it’s a very, very fragmented industry. So we have seen that the first quarter in the tools industry basically was not the strongest quarter so far. You have seen growth rates of many life tools company being in the area of roundabout 2%. So here we performed reasonably well, but the one area that you can I think easily grasp as far as first quarter performance is concerned. In the first quarter as far as academia, laboratory business the budgets are full and then, people start expensing and then are little bit milder as they then move into the holiday seasons of Q2 and Q3 and then in the fourth quarter, they realize there is budget left and then they accelerate again. So this is a little – average indication on the life tools business especially, as far the academia laboratory business is concerned, of course, there are many other trends that lead to that purchases I think one that you can take a note of.
Unidentified Analyst: (Indiscernible). Matthias, I’m just wondering if you could add a little color in the cash flow so that line others last year you booked the gains from the selling of the Crop Science and academics. What explains the big swing we see here, you booked 466 entered to 266 and now we sort of see minus 38. What does that keep booked in that line, is it a lot of money going through that line, I guess?
Matthias Zachert – CFO: Absolutely, yes and I think the biggest swings are coming from the divestitures that we’ve indicated and of course, you have areas left in Q1 we saw and this relates to adjustments in financial transactions that we did on the currency side we had €10 million, €20 million flowing out here, but this is I would say on an underlying basis not the one that can be repeated and therefore the biggest change that you’ve seen in Q1 is stemming from the acquisitions and that is what we’ve highlighted.
Vincent Meunier – Exane BNP Paribas: Vincent Meunier from Exane BNP Paribas. The first question is on Erbitux. Can you please give us more details regarding the dynamic (issue in Japan) where you say that there is still a decline? Also, can you give us a breakdown of the commission expenses between Rebif and Erbitux? The last question is on the debt, so there is a €0.5 billion repayment in Q1. What’s your target for this year?
Matthias Zachert – CFO: So as far as Japan is concerned, we’ve seen that Q3 and Q4 gradually improved in terms of sales erosion. So we saw that Q2 was a tough hit, than in Q3 sales erosion reduced, in Q4 it was further mitigated. Now, Q1 is in between Q3 and Q4. So we have not further improved versus Q3 and Q4. So here it’s a little shortfall in the momentum and therefore this reflects to a reduction in the overall Erbitux performance in Q1 versus previous year levels and therefore we were only able to post a roundabout 1% organic sales increase. Stefan will later on give you indications on our guidance for Erbitux. So here our feedback for entire year 2012 is in the area between 1% and 4% of sales growth. So here the indication that you should read out of that is we assume that we can again improve, but of course Japan is a tough market and competition is tough and therefore we are trying to do our best, but of course, it’s one that is high on the agenda of our pharma management team so that we definitely have in Q1 looked at that, access that and want to improve the situation, but it’s a very competitive market, differently setup in Europe. If you look into Erbitux’s another performance over the last three to four quarters, you basically can see from the IMS later that we have market share wide performance pretty nicely. So Japan is clearly high on the list so that is what Erbitux’s concerns perform in Japan. Second question on Rebif and Erbitux and the split on the commission, royalty expenses and commission expenses and the answer is unfortunately we don’t provide this level of granularity. As far as that is concerned, I will a feedback later on in the presentation for the capital markets and here clearly there will be an EPS kicker coming from the gross debt’s repayments. Merck currently has the luxury of round about €2 billion cash position on the balance sheet, so we don’t need to freak out when Southern Europe countries freak out all the banks there. We are definitely not in a situation to be worried about that but of course, we have cost of carry and the cost of carry we currently have reduce EPS and for that very reason we started gross deleveraging. There will be another maturity with an even bigger interest kicker in the fourth quarter which will also be if we think and I will give you the implications what does it mean absolute term wise and what does it mean gross debt wise later on in the presentation under the Capital Market Day agenda and with this, I think, I had addressed all your questions.
Vincent Meunier – Exane BNP Paribas: Just on the €50 million in net savings just looking to understand, there is a growth number associated with that? Trying to understand the reinvestment rate in essence? On Rebif the U.S. price increases, obviously another sort of 9%, I think there were two last year of a similar magnitude. Just trying to understand the sustainability of that pricing going forward? Then, if you have a quick update on the Rebif manufacturing with respect to the FDA warning letters?
Matthias Zachert – CFO: So as far as the savings is concerned, we will give you details on that later on. The explicit decision that we have taken is we will communicate to you net savings, it’s easier. So net savings means this is what you should see going down in the respective P&L lines. Will there be gross investments, I have seen many of you debating about that. If Merck is going to give gross savings and then they don’t give net savings and at the end of the day nothing ends up in the P&L. So what we have decided to do — we’ll not communicate on gross savings. We communicate on net savings. Moreover, we will give you absolute targets later on in calls of today, by the Group, by the Division. So the package I think giving you net savings and targets should make it easier for you to understand where we will go. More on that (indiscernible) later on in the capital market place. On pricing, we monitor all our competitors, notably, in the U.S. So we see what’s Avonex, Copaxone (indiscernible) are doing and therefore, when we see it will make sense from our side to position and to price Rebif differently, what we know that this is a very, very good product. We take appropriate action. Last year we have taken the actions, that’s right, you are fully correct. This year, we’ve again taken pricing in January and we have very recently for May announced another price increase of 6.5% in the U.S. So this is also something that you will most likely hear in more detail later on and for that very reason, our communication on Rebif and our guidance for Rebif for 2012 is again stable, safe performance versus previous year’s levels. As far as FDA is concerned, the one thing that I can say to you is, we do everything in order to comply with the request of the FDA this is an ongoing exercise and I think here you should address this to the project leader who takes care of that in all the interactions with the FDA Annalisa Jenkins where you have the opportunity today to speak to the former officers that are basically in-charge of that and give you all level of granularity, so that you see that we are taking actions in order to manage this concern from the FDA. Of course, we’ll do everything in order to make sure that our patient receives the right quality for our product so that from this sense everything is just in order.
Andrew Baum – Citi: It’s Andrew Baum from Citi. To that point, would you like to put that in what you think the CapEx implications are for whatever remedial work the FDA recommends and rectifying the manufacturing issues the FDA (versus) the U.S.?
Matthias Zachert – CFO: I think as far as CapEx and OpEx and this is something we make no sacrifice on, but it’s something that is of course embedded in the guidance that we provide you on the CapEx but also as far as our OpEx and our financial targets are concerned.
Andrew Baum – Citi: So it’s already embedded and what you’ve given us?
Matthias Zachert – CFO: Yes. If there is something extraordinary happens, extraordinary element you cannot factor in but that is what we are seeing at this point in time. So as far as CapEx is concerned, as far as audit costs or quality costs are concerns, we are getting the support also externally in order to manage that. So we’re addressing that. We spend money on that in order to make sure that the standards are being achieved and that is, however, embedded in the forecast numbers that I have just provided for the entire Group with the respective €2.8 billion to €2.9 billion that I indicated earlier on.
Matthew Weston – Credit Suisse: Matthew Weston, Credit Suisse. Matthias, regarding the restatement of earnings outside the division and into the Group, you explained the rationale why to give the managers better visibility on the P&L and therefore better control. Can you just explain what the first wave of restated or reallocated costs (up for), what will you reallocate in the second wave and what’s the rationale for doing it in two stages, why not just get it all done?
Matthias Zachert – CFO: Well, first of all, you have to be granular in this assessment. So what we spend in the first run was basically to first of all carve out the costs that are allocated from corporates to divisions. The divisions also allocate costs to the countries and countries allocate costs to each other. So we relatively (thick) allocation machine running in this company, which I was – I’ve seen a few allocations before, especially when I started in my previous job conglomerate often has kind of allocation in (indiscernible) and I’ve seen that too when I joined and I stopped that immediately, because I have the same kind of (finger pointing). Operationally, I’ve made my P&L, but when these allocations from corporate came, it’s nuisance and it’s not value-added. So Merck has done that as well in the past and for that very reason we’ve started with the first step to change the allocations from Group to divisions. Now, on the new budget process that we roll out in course of 2012 for the year 2013, we go level deeper, we go through all the countries, look at the allocations that are done from divisions to countries, from countries-to-countries and basically make a stop to that. Cost in the future we try to put on cost principal. So the one that creates costs gets them, but costs are not just dumped in operational P&L performance for allocation reasons, as there is no value generation. At the end of the day this is inward looking, it’s not value creating and for that very reason we take it in two steps because it was not feasible to do everything in one go. So the first approach was Group to division and on the second approach we take divisions to countries and countries among themselves, and that is most likely going to happen then at the end of the year 2012.