Merck KGaA Earnings: Weak Life Science and Electronics Segments Cut Into 2023 Outlook

Narrow-moat Merck KGaA MRK delivered weak second-quarter results, and with these trends, management reduced its 2023 outlook. Mild tinkering with our near-term expectations does not materially affect our fair value estimates for the firm (EUR 171/$38), though, and shares continue to trade near fair value, in our opinion.

In the quarter, Merck turned in weak results, reflecting the ongoing reset in life sciences and decline in electronics. On an organic basis, sales declined 1% while adjusted EBITDA declined 7%. The life sciences segment faced significant growth hurdles from a tough comparable period of COVID-19-related demand while inventory destocking took its toll on the process solutions business, in particular. Merck’s electronics segment reflected industrywide declines in semiconductor solutions while display and surface solutions also dropped. Offsetting those weak segments, Merck’s healthcare segment remained robust by turning in low-double-digit organic growth, driven primarily by new products Bavencio (oncology) and Mavenclad (multiple sclerosis), while legacy product Erbitux (oncology) grew on expansion in China and legacy product Rebif (multiple sclerosis) faced ongoing competitive pressure.

Considering the weak overall trends, the company has reduced its overall expectations based on challenges in the life science and electronics segments. Now for 2023, the company expects organic sales in a range of a 2% decline to a 2% increase (down from a low-single-digit increase previously) and adjusted EBITDA to decline 3% to 9% (down from a low-single digit decline previously.) Positively, management maintained its 2025 goal for EUR 25 billion of sales, and making mild adjustments to our near-term forecast does not materially change our fair value estimate for Merck.