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Morningstar | Merck Posts Better-Than-Expected 3Q, but Long-Term Outlook Mostly Unchanged

While negative currency effects in Latin America weighed on Merck KGaA’s third-quarter results, the company witnessed strong underlying growth, especially in its healthcare and life sciences segments. Consolidated organic growth reached 8.8% while currency, investments in operations, and the pricing pressure in the liquid crystals business led to an EBITDA margin of 25.7%, down about 340 basis points from last year. Management raised its revenue outlook for the year but kept its bottom-line guidance unchanged. We may modestly raise our fair value estimate as we incorporate higher near-term growth in our model. We’re leaving our narrow moat rating unchanged.

Merck posted surprisingly strong growth in its healthcare and life sciences segments of 9.9% and 9.8%, respectively. Glucophage, fertility products, and newer drugs like Bavencio in immune-oncology and Mavenclad for multiple sclerosis lifted healthcare sales and offset ongoing declines in Rebif and Erbitux. This pace of growth will likely be difficult to sustain since international tenders helped this quarter’s performance. Bioprocessing sales remain a bright spot for Merck's life science operations led by demand for filtration and single-use technologies. The company is likely taking market share even though we’ve seen impressive results from peers in this area, such as Danaher in its Pall business, for instance.

Performance materials surprisingly reported positive growth this quarter, but the long-term outlook remains challenging for this segment. Facility expansion efforts among Chinese competitors enabled Merck to retain some liquid crystal business, which management expects to last into the first half of next year. Regardless, we don’t expect to shift our long-term expectations as competitors should continue to gain share and drive pricing pressure over the coming years. Segment margin was down to 32.5% from 40.7% a year ago, roughly in line with our expectations.