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Morningstar | Performance in Merck's Life Sciences and Healthcare Divisions Should Offset Liquid Crystal Weakness

Following the acquisition of life sciences firm Sigma-Aldrich, Merck's life sciences business helps offset the more uncertain futures for its pharmaceutical and performance materials segments. The life sciences segment should maintain stable mid-single digit growth and profitability.We expect little revenue growth in the pharmaceutical segment as Merck battles declines on key products like Rebif and Erbitux combined with a modest contribution from new products like Bavencio and Mavenclad. Rebif faces new multiple sclerosis treatment options, such as Gilenya, Aubagio, and Tecfidera, stealing market share. Despite recent product approvals, we expect little growth in the pharmaceutical segment given Merck's mixed record of internal research and development over the past decade. Merck KGaA's partnership with Pfizer for Bavencio in the anti-PD-L1 immuno-oncology market holds modest promise, in our view, thanks to a large market opportunity offset by its late entry into the market and less compelling combo opportunities. Upon approval in Europe, Mavenclad enters a crowded multiple sclerosis market with a concerning side effect profile and tough odds for a U.S. approval. However, after suffering numerous setbacks, the firm has revamped its R&D efforts, and productivity may slightly improve. The firm has canceled numerous programs, reorganized its corporate structure, and refocused its research efforts, but we think the pipeline remains a fairly high-risk gamble on oncology products. Management has also sold its consumer healthcare business on favorable terms to Procter & Gamble for nearly $4 billion.Merck's performance materials segment remains an area of long-term concern. Liquid crystal operations make up the bulk of sales and earnings in this division, and despite dominate market share and high profitability, the entry of China-based competitors and the gradual market shift of OLED technology has begun to disrupt this segment's performance. Despite Merck's efforts to compete in the OLED market, we remain concerned about increasing commoditization and diminishing barriers to entry in the display market.