Merck Reports: ‘2004 Is Best Year in 336-Year History’

Commenting on the results of 2004 and the expectations for 2005, Merck KGaA Chairman Bernhard Scheuble said: "Merck produced the best year in its 336-year history, confirming our strategy of focused diversification. For 2005, we are assuming a continuation of Merck's overall good business development. We are particularly optimistic about the future development of Liquid Crystals and our cancer treatment Erbitux^®."

The Merck Group reported that its Profit After Tax for 2004 more than tripled to EUR 672 million as the result of exceptional gains, good business results, improved Financial Result and a lower tax rate. Liquid Crystals sales jumped 33% to EUR 583 million and Erbitux, with first-year sales of EUR 77 million, far exceeded expectations.

Merck's Executive Board will propose at the Annual General Meeting of Shareholders on March 31 that the company pay a dividend of 80 cents per share plus a one-time bonus dividend of 20 cents per share.

This bonus dividend reflects the non-recurring exceptional items of EUR 267 million that Merck recorded in 2004. Within this amount are exceptional gains of EUR 287 million from the divestment of its laboratory distribution business VWR International in the second quarter and EUR 47 million on the first-quarter divestment of its stake in the BioMer Joint Venture. In addition, there were exceptional charges totaling EUR 66 million, mainly for litigation provisions and goodwill impairments.

Full-year sales, excluding VWR, rose 6.7% to EUR 5,339 million with all divisions reporting increases. Liquid Crystals sales soared 33% in the year. Fourth-quarter sales rose 4.4% to EUR 1,339 million as Liquid Crystals sales were up only slightly in comparison to a very strong year-ago quarter. The weak U.S. dollar resulted in negative currency effects that reduced sales by 2.7% for both the year and the quarter.

The full-year Operating Result, excluding VWR, rose 15% to EUR 755 million as the gross margin rose and operating expenses declined. The fourth-quarter Operating Result improved by 19% to EUR 195 million. Merck's ROCE (return on capital employed) for 2004 was 16.0%, exceeding the company's mid-term target of 15%. ROS (return on sales) for the year was 14.1%, nearing the 15% target.

Full-year Earnings Before Interest and Tax (EBIT) without VWR jumped 60% to EUR 735 million as large exceptional charges in 2003 were not repeated. EBIT including VWR for 2004 nearly doubled to EUR 1,044 million from EUR 538 million in 2003.

Not only are all divisions doing well, Merck's financial house is also in good order. The company's Financial Result was improved by 28%, to –EUR 83 million in 2004 compared to –EUR 115 million the year before as the company is now free of net financial debt. The company's gearing ratio, net debt including pension provisions of EUR 931 million compared to net equity, was 0.27 at the end of 2004 compared to 1.01 at the end of 2003.

Free cash flow for 2004 was EUR 1,882 million, boosted by proceeds from the divestments of VWR and the BioMer Joint Venture. Free Cash Flow for 2003 was 442 million.

Merck paid 2004 income tax of EUR 289 million with a tax rate of 30.1% compared to income taxes of EUR 205 million and a tax rate of 48.5% in 2003. Net profit after minority interests in 2004 rose to EUR 659 million, or EUR 3.47 per share, compared to EUR 208 million, or EUR 1.15 per share, the year before.

Outlook for 2005

Economists are predicting global economic growth in 2005 of 4.1%, euro-zone growth of 2.0% and growth in Germany of 1.0 to 1.7%. The Merck Group is expecting all divisions of its Pharmaceuticals and Chemicals business sectors to perform well during the year.

In Pharmaceuticals, Merck is especially optimistic about the sales growth potential of Erbitux. In just its first six months on the European Union market, it penetrated 18 individual markets within the 25-member EU and generated sales of EUR 62 million. So far in 2005, it has been launched in Spain. The six remaining EU countries will follow soon as prices are agreed. Merck expects to file for additional approval of Erbitux for the treatment of head and neck cancer in the EU and Switzerland in mid-2005. Phase III studies of Erbitux are underway for first-line treatment of colorectal, non-small cell lung, and head and neck cancers, and second-line treatment of colorectal cancer.

Besides continuing its good business practices, Merck Generics will be expanding its research efforts to develop specialty products with added value, such as improved delivery methods for existing off-patent medicines.

Industry projections for the growth of the LCD market, especially for large format televisions, are very positive and Merck as the main supplier of high-end liquid crystals expects its sales will follow the LCD industry. Sales of color filters and ITO (indium tin oxide) coated glass for displays also show potential for growth. In addition, Merck is planning to expand its share in the growing display market to include further components.

As a research-based company, Merck will continue to expand its core businesses in Pharmaceuticals and Chemicals – mainly with its own resources through innovations by its talented and entrepreneurial employees but also through strategic acquisitions of research-driven and high-potential businesses.

Merck now reports Operating Results also for the divisions

Beginning with the full-year figures for 2004 announced and continuing in future quarters, Merck is reporting the Operating Results not only for the group and business sectors but also for the divisions. This decision was made following the divestment of VWR International in order to improve the transparency of the company's financial reports. Some of the divisions' individual Operating Results are becoming large enough to be considered relevant to the Group as a whole. This situation became apparent as the divisions now provide larger percentages of the Group's results since the divestment of VWR.

Chemicals

Chemicals sales in 2004 increased organically by 15% but that rate was reduced to an actual 11% increase due to currency effects. Sales growth was driven by strong demand for Liquid Crystals and Electronic Chemicals, which both produced double-digit sales increases. Fourth-quarter sales were unchanged from the year-ago period.

The full-year Operating Result jumped 39% due to significant increases in all divisions (EC 136%, LSA 50%, LC 37%, Pigments 16%). Fourth-quarter Operating Results increased 36% due to effective cost management in 2004 and one-time effects (provisions for early retirements) in 2003. Both the ROS at 23.2% and the ROCE at 22.3% are very positive. The very strong full-year Free Cash Flow of EUR 427 million nearly matches the Operating Result.

For more divisional operating results and further details please visit the Company’s website.