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Merck KGaA Earnings: New Drug Launches Help Offset Life Science Reset

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Securities In This Article
Merck KGaA
(MRK)

Narrow-moat Merck KGaA MRK delivered solid first-quarter results, and its 2023 guidance looks in line with our expectations. To reflect cash flow generated in recent quarters, a slight increase in our long-term margin outlook for the firm, and currency movements since our last valuation change, we moderately raise our fair value estimate (EUR 171/$38 from EUR 158/$33). Shares still trade near fair value after these changes.

In the quarter, Merck performed about as expected, especially considering the reset that is ongoing in the life science business. On an organic basis, sales grew 1% (2% reported) while adjusted EBITDA declined 2% (down 3% reported). By segment, Merck’s healthcare segment led the way, turning in 5% organic growth, driven primarily by new products Bavencio (oncology; 31% organic growth) and Mavenclad (multiple sclerosis; 23%), while legacy product Erbitux (oncology; 4%) grew a bit on expansion in China and legacy product Rebif (multiple sclerosis; negative 25%) faced ongoing competitive pressure. The life sciences segment (1% organic growth) faced significant growth hurdles from tough COVID-19-related demand in previous periods, but its basic research applications in its science and lab solutions helped steady the ship. Merck’s electronics segment (down 7% organically) reflected semiconductor solutions expansion (2% organic growth) while display solutions continued to drop (28% organic decline). Considering all the above, including the decline of the high-margin display solutions products, Merck’s adjusted EPS decline of 2% was about as expected.

For 2023, the company faces a tough comparable period, as macroeconomic challenges mount and COVID-19-related sales contract. The company expects low-single-digit organic sales growth (down 5% to up 2% reported) and a low-single-digit decline in adjusted EBITDA (negative 11% to negative 2% reported), or in line with our near-term assumptions that are toward the high end of management’s profit expectations.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Julie Utterback, CFA

Senior Equity Analyst
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Julie Utterback, CFA, is a senior equity analyst, AM Healthcare, for Morningstar*. She focuses on medical technology and service companies. She covers managed care organizations including UnitedHealth, service providers like HCA, medical suppliers such as Baxter, and life sciences companies like Danaher. She is also the chairperson of the equity research team’s capital allocation methodology.

Before joining Morningstar in 2005, Utterback was an equity analyst at State Farm Insurance for several years. Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry, and initially she primarily covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Utterback holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign’s Gies College of Business. She also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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