Merck KGaA Delivers Weak End to 2022 and Conservative 2023 Outlook
Narrow-moat Merck KGaA MRK delivered fourth-quarter results and 2023 guidance that were slightly lower than we anticipated. However, when considering cash flows generated in recent months, our euro-denominated fair value estimate has not changed; a mild adjustment to our U.S. dollar-related fair value estimate is only due to recent currency movements. Shares look likely to still trade slightly above intrinsic value.
Overall in 2022, Merck performed a bit weaker than we anticipated, despite its top- and bottom lines being helped by exchange-rate changes, particularly the stronger U.S. dollar (where a significant chunk of sales are generated) relative to the euro (in which most of its operating expenses are recognized). On an organic basis, sales grew 6% (13% reported) while adjusted EBITDA grew 6% (12% reported). By segment, life sciences (8% organic growth) led the way with continued strength in process solutions, which provides tools for the sticky manufacturing processes of biopharmaceutical firms. Merck’s healthcare segment turned in 6% organic growth, driven primarily by new products Bavencio (oncology) and Mavenclad (multiple sclerosis), while legacy product Erbitux (oncology) grew a bit on expansion in China and legacy product Rebif (multiple sclerosis) faced ongoing competitive pressure that led to a double-digit organic decline. Merck’s electronics segment (4% organic growth) reflected semiconductor solutions expansion (15% organic growth) while display solutions continued to drop (20% organic decline). While weaker than we anticipated, Merck’s adjusted EPS growth of 15% in 2022 outpaced long-term expected norms for Merck.
For 2023, management expects headwinds to emerge relative to that tough comparable period, as macroeconomic challenges mount and COVID-19-related sales contract while the pandemic turns into an endemic. Overall, the company’s outlook for 2023 looks weak to us and includes a potential decline in adjusted EBITDA on a constant-currency basis.
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