Annual Report 2014 Annual Report 2014
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Report on Expected Developments

The key financial performance indicators of the Merck Group, namely sales, EBITDA pre one-time items and business free cash flow, remain unchanged. Based on these steering parameters, the following report provides a forecast for fiscal 2015 of the development of the Merck Group and its three business sectors: Healthcare, Life Science and Performance Materials. Since the internal planning process for 2015 was already based on the new segmentation, the Report on Expected Developments also reflects this new structure. Key changes relate to the composition of the Pharmaceutical business – consisting of the previous Merck Serono and Consumer Health divisions – under the umbrella of the new Healthcare business sector, as well as the renaming of the Merck Millipore business to the Life Science business sector. Information on the segmentation, which took effect on January 1, 2015, can be found under “The Merck Group” in this Annual Report.

In September 2014, Merck and the U.S. life science company Sigma-Aldrich entered into a merger agreement according to which Merck would acquire Sigma-Aldrich. Sigma-Aldrich shareholders approved the merger with Merck at an extraordinary shareholders’ meeting on December 5, 2014. From today’s perspective, the acquisition is still expected to close by mid-2015. The successful completion of the transaction is subject to the required antitrust clearances.

The forecast for expected business developments in 2015 will initially be presented without taking the Sigma-Aldrich acquisition into account. Separate forecasts for the effect of the acquisition of Sigma-Aldrich have been prepared for the Merck Group as well as the Life Science business sector, to which the acquisition relates. They are based on a potential first-time consolidation of Sigma-Aldrich in mid-2015.

Forecast for the Merck Group

Merck Group → Forecast 2015

Show table
€ million Actual results 2014 Forecast 2015 Key assumptions
       
Sales 11,291.5
  • Slight organic growth
  • Slight portfolio effect
  • Moderately positive foreign exchange effect
  • Healthcare: organic at the 2014 level; significant decline in Rebif® sales, compensated for by growth contribution from Emerging Markets and other key products by sales
  • Life Science: moderate organic growth
  • Performance Materials: slight organic increase compared with 2014; strong portfolio effect due to the inclusion of AZ Electronic Materials for a full fiscal year
EBITDA pre one-time items 3,387.7 Slight increase due to operating business developments and positive foreign exchange effects; at least at the 2014 level
  • Targeted intensification of R&D programs and thus higher research and development costs for Merck Serono
  • adverse impact due to the absence of Humira® royalty income and declining Rebif® sales for Merck Serono
  • Low double-digit percentage increase for Performance Materials due to the consolidation of the AZ acquisition for a full year and a moderate increase for Life Science
  • Low double-digit percentage increase in expenses for Corporate and Other due to the absence of currency hedging gains in 2014 as well as to the expected expenses for the “ONE Global Headquarters” project in 2015.
Business free cash flow 2,605.1 Slight increase
  • Expected slight increase in EBITDA pre one-time items
  • Further improvement in working capital management

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Sales

In 2015, a slight organic increase in sales in comparison with 2014 is expected for the Merck Group. Moreover, due to the inclusion of AZ Electronic Materials for a full fiscal year, a slightly positive portfolio effect is expected. Regarding the most important foreign currencies for the Merck Group, in 2015 it is assumed that on an annual average, the U.S. dollar, the Swiss franc and major Asian currencies will appreciate against the euro compared with the previous year. Furthermore, the value of Latin American currencies versus the euro is expected to decline. Overall, a moderately positive foreign exchange effect is expected to result for the Merck Group.

Merck expects organic sales in the Healthcare business sector in 2015 to remain at the previous year’s level. For Rebif®, Merck Serono’s top-selling product, Merck assumes a sharp organic sales decline compared with 2014, as a result of continued high competitive pressure in North America and in Europe. However, this decrease in sales is likely to be compensated for by continued growth in Emerging Markets and by growth of the business sector’s other key products by sales. Moderate organic sales growth in the Life Science business sector is assumed for 2015, which is likely to be driven especially by the Process Solutions and Lab Solutions business areas. For the Performance Materials business sector, slight organic sales growth is expected. Furthermore, a noticeable portfolio effect is expected for this business sector, as 2015 will be the first year that AZ Electronic Materials has been consolidated for a full fiscal year.

EBITDA pre one-time items

Owing to the expected operating development and positive foreign exchange effects, a slight increase in EBITDA pre one-time items, the key financial indicator used to steer operating business, is expected for the Merck Group in 2015 compared with 2014. At least EBITDA pre one-time items should reach the previous year’s level.

For the Healthcare business sector, a slight decline in EBITDA pre one-time items can be assumed overall. The targeted intensification of the strategically important research and development programs, especially for the development of the anti-PD-L1 antibody and TH-302 at Merck Serono, will lead to higher expenses in 2015. Moreover, declining sales of Rebif® and the absence of Humira® royalty income will adversely affect EBITDA pre one-time items. For the Performance Materials business sector, Merck assumes that the full consolidation of AZ Electronic Materials will lead to a low double-digit percentage increase in EBITDA pre one-time items. The Life Science business sector is forecast to see a moderate increase in EBITDA pre one-time items in 2015.

For EBITDA pre one-time items of Corporate and Other, Merck expects a low double-digit percentage decline. In 2014, the expense was largely lowered due to positive effects from currency hedging transactions, which are no longer expected in 2015 owing to the significant decline in the value of the euro versus major foreign currencies. In addition, Merck expects higher expenses in 2015 for the “ONE Global Headquarters” project at Group headquarters in Darmstadt.

Business free cash flow

Despite planned investments in growth projects, business free cash flow of the Merck Group is forecast to increase slightly in 2015 in line with the forecast development of EBITDA pre one-time items.

Forecast taking into account the successful acquisition of Sigma-Aldrich

In the event of the successful acquisition of Sigma-Aldrich and the first-time consolidation in mid-2015, Merck expects double-digit growth rates for the sales of both the Group and the Life Science business sector in 2015 as compared with 2014. Very strong growth of EBITDA pre one-time items and business free cash flow is anticipated for the Merck Group, while double-digit growth rates would be expected for the Life Science business sector.

Forecast for the Healthcare business sector

Healthcare → Forecast 2015

Show table
€ million Actual figures for 20141 Forecast for 2015 Key assumptions
       
Sales 6,549.4
  • Organic at the previous year’s level
  • Sales growth in Emerging Markets and of other key products by sales will compensate for the significant organic decline in sales of Rebif®.
  • Strong organic growth in the Consumer Health business
EBITDA pre
one-time items
2,000.3
  • Slight decline
  • Increasing research and development costs due to the prioritization and intensification of Merck Serono research and development projects, especially in connection with the further development of the anti-PD-L1 antibody within the scope of the strategic alliance with Pfizer; offset to a significant extent by the upfront payment from Pfizer attributable to 2015
  • Effect on earnings due to the expected decline in Rebif® sales
  • Absence of Humira® royalty income
  • Positive foreign exchange effects
Business free
cash flow
1,701.2
  • Slight decline
  • Slight decline in EBITDA pre one-time items
  • Higher investments in property, plant and equipment within the scope of current strategic growth projects
1
Information relating to the past for the Healthcare business sector refers to the former Merck Serono and Consumer Health divisions, which have been part of the newly created Healthcare business sector since January 1, 2015.

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Sales

Merck expects organic sales of the Healthcare business sector in 2015 to remain at the 2014 level. For Rebif®, the top-selling product in Healthcare, Merck assumes a sharp organic sales drop as a result of high competitive pressure in the United States and also in Europe. However, it is expected that this decline in sales will be compensated for by continued growth in Emerging Markets and by growth of the other key products. The Consumer Health business, for which Merck expects to see strong organic sales growth, will also help to offset the decline.

EBITDA pre one-time items

In 2014, Merck already resolutely prioritized its research and development activities in the Healthcare business sector and discontinued various projects. For 2015, Merck will drive strategically important projects forward, which will lead to increasing research and development costs. An important part of this will be the further development of the hypoxia-activated prodrug TH-302 and particularly the anti-PD-L1 antibody within the scope of the strategic alliance with Pfizer. The expenses incurred in this connection are likely to be offset to a large extent by the share of the upfront payment from Pfizer attributable to 2015. These developments, as well as the absence of royalty income for Humira® and the impact of the expected significant drop in sales of Rebif® on earnings, are likely to lead to a slight decline in EBITDA pre one-time items.

Business free cash flow

In particular, Merck Serono will be increasingly investing in the modernization and expansion as well as the new construction of production facilities in order to meet the increasing demand for Merck pharmaceuticals. Owing to these investment activities and the slight decline in EBITDA pre one-time items, Merck expects a slight decrease in business cash flow for the Healthcare business sector in 2015.

Forecast for the Life Science business sector

Life Science → Forecast 2015

Show table
€ million Actual figures for 2014 Forecast for 2015 Key assumptions
       
Sales 2,682.5
  • Moderate organic growth
  • Growth will be driven especially by the Process Solutions and Lab Solutions business areas, as well as the Emerging Markets
EBITDA pre
one-time items
658.6
  • Moderate increase
  • In line with the development of sales
Business free
cash flow
419.0
  • Strong increase
  • Improvement in EBITDA pre one-time items
  • Significant reduction in inventories

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Sales

Merck expects that continued investments in research and development activities in the pharmaceutical and biotech industries will also have a positive impact on the Process Solutions business area in 2015. Process Solutions supplies consumables and services for pharmaceutical and biotech companies. It is anticipated that the Lab Solutions business area will benefit from the expected slight growth of the global laboratory product market. Development of the Bioscience business area is expected to remain subdued. It is therefore likely that the Process Solutions and Lab Solutions business areas will be the strongest drivers of growth in the Life Science business sector in 2015.

Overall, Merck expects moderate organic sales growth in the Life Science business sector in 2015 compared with the previous year. From a geographic perspective, a sharp increase particularly in Emerging Markets is anticipated in 2015.

EBITDA pre one-time items

In line with the forecast organic sales development and continuous efficiency improvements, EBITDA pre one-time items is expected to also increase moderately.

Business free cash flow

Merck expects a strong increase in the business free cash flow of the Life Science business sector. This increase will stem not only from the improvement in EBITDA pre one-time items, but also a significant reduction in inventories.

Forecast taking into account the successful acquisition of Sigma-Aldrich

In the event of the successful acquisition of Sigma-Aldrich and first-time consolidation in mid-2015, Merck expects double-digit growth rates in the Life Science business sector for sales, EBITDA pre one-time items and business free cash flow in 2015 compared with 2014.

Forecast for the Performance Materials business sector

Performance Materials → Forecast 2015

Show table
€ million Actual figures for 2014 Forecast for 2015 Key assumptions
       
Sales 2,059.6
  • Slight organic increase
  • Strong portfolio effect
  • Continued good volume increase in liquid crystals, amid the customary price decline for established products
  • Strong portfolio effect due to the inclusion of AZ Electronic Materials for a full fiscal year
EBITDA pre
one-time items
894.8
  • Low double-digit percentage increase
  • Strong portfolio effect
  • Scheduled realization of synergies from the acquisition of AZ Electronic Materials
  • Positive foreign exchange effects
Business free
cash flow
699.6
  • Low double-digit percentage increase
  • Increase in EBITDA pre one-time items
  • Considerable investments in future technologies

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Sales

Merck expects low double-digit percentage growth in the Performance Materials business sector in 2015 compared with 2014. Slight organic sales growth is anticipated, supplemented by a strong portfolio effect due to the inclusion of AZ Electronic Materials for a full fiscal year. In the Liquid Crystals business, Merck assumes continued good volume growth amid the customary price decline for established products in this industry. This forecast is in line with the expectations of Display Search, a market research firm for the display sector, which continue to anticipate a strong increase in the surface area of global flat-panel displays produced in 2015.

Merck does not expect any significant new technologies or product launches in the liquid crystals field in 2015. Merck anticipates moderate organic sales growth in Pigments & Functional Materials and Integrated Circuit Materials overall.

EBITDA pre one-time items

For 2015, Merck forecasts a low double-digit percentage increase in EBITDA pre one-time items compared with 2014, resulting from a strong portfolio effect, the planned realization of synergies from the acquisition of AZ Electronic Materials, and positive foreign exchange effects. Merck is planning to maintain the profitability of liquid crystals at a high level.

Business free cash flow

In 2015, Merck expects a low double-digit percentage improvement in business free cash flow compared with 2014 as a result of the increase in EBITDA pre one-time items. This increase takes account of the fact that Merck will make considerable investments in property, plant and equipment for future technologies in 2015.

Summary

Slight organic sales growth of the Merck Group is assumed for 2015, which is likely to be driven by the Life Science business sector in particular. In addition to this, Merck expects a slight portfolio effect due to the first-time consolidation of AZ Electronic Materials for a full fiscal year.

Together with the positive foreign exchange effects, the business development of the Merck Group is likely to lead to a slight increase in EBITDA pre one-time items. However, it is expected that EBITDA pre one-time items will at least reach the previous year’s level. A slight decline in EBITDA pre one-time items in the Healthcare business sector due to targeted investments in strategic research and development projects, a significant decline in sales of Rebif® and the absence of royalty income for Humira® should at least be offset by the other two business sectors. Low double-digit percentage growth of EBITDA pre one-time items for the Performance Materials business sector is likely, while a moderate increase is expected for the Life Science business sector. As a consequence of this development and despite investments in strategic growth projects, Merck anticipates a slight increase in business free cash flow in 2015 compared with 2014.

In the event of the successful acquisition of Sigma-Aldrich in mid-2015, Merck expects double-digit sales growth for the Group and the Life Science business sector in 2015, as compared with 2014. Very strong growth of EBITDA pre one-time items and business free cash flow for the Merck Group is anticipated, while double-digit growth rates are expected for the Life Science business sector.

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