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July 25, 2007, 5:56 a.m. EDT

Merck KGaA's second-quarter sales rise, but profit falls on Serono buy

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By Julia Mengewein

(This updates an article published at 0647 GMT with additional details.)

FRANKFURT (MarketWatch) -- Pharmaceutical and chemical company Merck KGaA (MRK.XE) Wednesday revealed the full impact of its acquisition of Serono last year, posting a sharp drop in second-quarter net profit due to writedowns from the purchase, but good growth in sales.

Net profit including continued and discontinued operations fell 84% to EUR85.5 million against EUR528.5 million a year earlier. The company didn't provide a net profit figure excluding discontinued operations, but said adjusted profit after tax was EUR47.7 million for the second quarter, 90.3% lower than the comparable prior-year figure.

Sales, excluding discontinued operations, for the April-to-June period rose 60% to EUR1.72 billion from EUR1.07 billion a year ago, boosted by the consolidation of Serono and a 44% rise in sales of the company's key drug Erbitux, it said.

Total revenue, which includes royalty income, rose 67% to EUR1.79 billion from EUR1.08 billion in the second quarter of 2006.

Merck's $13.8 billion buy of Serono late last year catapaulted the German company into pole position in the European biotechnology sector.

It said earnings before interest and taxes and excluding discontinued operations fell 84% to EUR94.6 million from EUR573.5 million a year ago, the company said.

EBIT was burdened by an expected further purchase price allocation for Serono inventories of EUR183 million.

The write-down of EUR734 million will be completed by the end of this year in four equal quarterly installments, Merck KGaA said in earlier statements.

Furthermore, second-quarter EBIT last year was boosted by a EUR397 million gain from selling the 21.4% stake in Schering to rival Bayer AG .

At 0730 GMT, Merck shares were down EUR0.18, or 0.2%, at EUR97.36 in an overall weaker market. They have risen around 10% year-to-date, driven by synergy hopes from the Serono acquisition and following the sale of Schering shares to Bayer.

Germany's mid-cap index MDAX, in which the stock was listed up to July 18, has risen around 16% year-to-date.

A Frankfurt-based trader said he expected the shares to trade lower Wednesday in line with the overall market, but also due to the company's reference to adverse currency effects which might hamper sales growth in 2007.

"Shares should find a support at EUR96 intraday," he added.

Second-quarter operating result grew 58% to EUR277.5 million, despite integration costs of EUR34 million and EUR141 million for amortization of intangible assets, mainly stemming from the Serono acquisition.

The figures provided by the company were adjusted to exclude contributions from its Generics division which Merck KGaA has agreed to sell to Mylan Laboratories Inc. at the end of this year for EUR4.9 billion.

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