Merck KGaA May Benefit From the Recent Life Science Reset Period Ending Soon

Senior Equity Analyst

Julie Utterback

Merck KGaA has made a series of acquisitions and divestitures in the past decade or so to position the group for solid long-term growth in three key segments: life sciences, electronics, and healthcare. So although Merck is in the middle of a reset period following the pandemic boom years and although the biopharmaceutical pipeline has experienced a setback with evobrutinib (multiple sclerosis), we continue to have a positive view of the company's long-term prospects.

In life sciences, Merck aims to continue growing above market after the 2023 reset period subsides following the boom years of the pandemic. After this reset period, we expect growth will return to more normalized levels in the midsingle digits during the next five years. Overall, we think the life science business will continue to benefit from decent pharmaceutical pipelines in the industry, Merck's own innovative capabilities, and the company's expansive reach as one of the top-tier life science tool providers. 

In electronics, the acquisition of Versum was sound strategically and greatly reduced Merck’s dependence on the contracting liquid crystal operations while boosting its exposure to the attractive semiconductor materials business. Overall, we expect this segment to grow in the mid-single digits during the next five years organically. 

In healthcare, we expect low-single-digit top-line growth annually during the next five years, despite expected declines in some legacy products and the setback with evobrutinib (multiple scleroris). For example, top product Rebif continues to decline moderately as new multiple sclerosis treatment options—such as Ocrevus, Gilenya, Aubagio, and Tecfidera—have stolen market share in recent years. With approval of the highly convenient although side effect-challenged oral MS therapy Mavenclad in the EU (2017) and US (2019), we expect Merck to continue gaining share in the MS market. Another key product, Bavencio (cancers, particularly bladder), is ramping up as well, which could help the growth trajectory of this segment offset weakness in mature product lines.

Business Strategy & Outlook

We believe a narrow moat surrounds Merck KGaA’s diversified business of life sciences, electronics, and biopharmaceuticals. While Merck’s acquisition activities have cut into its economic profit generation somewhat, our narrow moat rating recognizes the attractive fundamental qualities of its core businesses, which appear likely to maintain returns over capital costs for at least the next 10 years. Specifically, we see significant intangible assets and some switching costs in its key business segments that inform our view of its competitive advantages. 

In life sciences and in electronics, we believe Merck benefits from both intangible assets and switching costs for end users. We think the basic argument surrounding these competitive advantages are similar for each segment. Generally, the company offers proprietary technology (intangible assets) that enables the essential operations of its clients, and switching to another supplier of that technology could change the outcome of those operations, which would be undesirable for those users once Merck’s products are incorporated into their practices. 

The company’s primarily consumable life science products enable a wide variety of scientific research and benefit from intangible assets and switching costs as moat sources. We see a particularly sticky business in its process solutions division (a little less than half of the life sciences segment) that serves biopharmaceutical firms from the discovery of a new molecule to the production of that medicine. Once Merck’s products are chosen by the end user as part of the production process of a molecule near the beginning of the clinical trial process, the client is unlikely to switch due to regulatory and reproducibility factors. Additionally, if that molecule is successfully marketed, the revenue stream would likely continue through the life cycle of that product. From discovery to patent expiration, Merck could generate recurring revenue for up to 20 years on small molecules and even longer for difficult-to-manufacture biologics, which bodes well for the maintainability of its economic profit generation in the process solutions division of the life science segment. Generic and biosimilar producers typically seek to replicate the branded production process, too, which can extend revenue streams for Merck's life science tools. 

We think Merck leans on intangible assets more heavily than switching costs in its other life science tools that enable basic scientific research and other real-world applications, such as testing food and water quality. While much less constrained by regulatory forces, these divisions’ customers also require reproducibility of test results, creating some switching inertia for those technologies, as well.

Intangible assets and switching costs surround some of Merck’s electronics business, too, particularly its semiconductor solutions that represents about two thirds of this segment’s sales, including the Versum products. We generally view the semiconductor material business as attractive due to several factors. First, intangible assets in this business include patent protection on innovative materials, Merck’s favorable reputation related to being a reliable supplier in a dynamic end market, and its collaborative abilities with leading chipmakers and semiconductor equipment manufacturers. Additionally, meaningful switching costs for customers surround electronic materials in critical chip production processes. Switching costs relate most directly to a customer's unwillingness to disrupt high value production processes at its major facilities in order to utilize an untested alternative product or supplier for a relatively low-cost component of the chip’s production process. 

Within the healthcare segment, Merck relies on intangible assets, such as patents, brand names, and reputation, as its moat source. Like most branded biopharmaceutical firms, Merck’s products possess unique safety and efficacy profiles that inform prescriber and end user decisions. Some of its products are protected by patents, ensuring exclusivity of those unique therapies during a long period of time, which can help the firm generate economic profits. Beyond patent protection, some of its products are biologics (about half of this segment by our calculations) that can also benefit from difficult manufacturing processes and other factors that keep competition at bay. So even after its patent protections expire, biologic therapies can face limited competition. For example, Rebif (multiple sclerosis) and Erbitux (oncology) lack patent protection, but they have enjoyed long runways of relatively moderate declines since their patent expirations due to the lack of direct competition, which compares favorably with small molecules that typically drop precipitously once generic competition enters the fray. The company sells branded generics in emerging markets, too, that continue to grow at a healthy pace as consumers in these markets seek out trusted brands. Going forward, while Merck’s R&D productivity has been below-par in the past, two recently approved drugs (Mavenclad in MS and Bavencio in a variety of cancers) and its other pipeline candidates look likely help Merck's healthcare business grow somewhat, despite expected declines in some of its top products.

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Merck KGaA is a science and technology company, which engages in the manufacture of pharmaceutical and chemical products. It operates through the following sectors: Healthcare, Life Science, Performance Materials and Corporate and Other. The Healthcare sector discovers, develops, and produces prescription medicines used to treat cancer, multiple sclerosis, and infertility. The Life Science sector provides scientists with laboratory materials, technologies, and services. The Performance Materials sector offers specialty chemicals and materials for demanding applications. The firm offers pharma and biopharma manufacturing, pharmaceutical research, pharma quality control, and government and academic research services. The company was founded by Friedrich Jacob Merck in 1668 and is headquartered in Darmstadt, Germany.

Merck KGaA (OTCPK:MKGAF) Q4 2023 Results Conference Call March 7, 2024 8:00 AM ET Company Participants Constantin Fest - Head of Investor Relations Belen Garijo - Chair & CEO Helene von Roeder - CFO Matthias Heinzel - CEO, Life Science Sector Peter Guenter - CEO, Healthcare Business Kai Beckmann - CEO, Electronics Conference Call Participants Colin White - UBS Sophia Gray - JPMorgan Charlie Hayward - Bank of America Falko Friedrichs - Deutsche Bank Gary Steventon - BNP Paribas, Exane Edward Hall - Stifel Oliver Metzger - ODDO BHF Operator Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Fourth Quarter 2023. As a reminder, all participants will be in a listen-only mode.

Merck KGaA (MKGAF) Q4 2023 Earnings Call Transcript

Merck KGaA predicted a return to modest operating earnings growth, when adjusted for currency headwinds, citing a gradual recovery in demand for specialty materials that are used to make biotech drugs and semiconductors.

Merck KGaA forecasts return to organic earnings growth in 2024

Merck KGaA shares plunged more than 12% on Wednesday after the company announced that its experimental multiple sclerosis (MS) drug evobrutinib failed to meet the primary endpoint in Phase 3 clinical trials. The company said that its drug did not reduce the annualized relapse rates in people with relapsing MS when compared to Sanofi's oral teriflunomide.

Merck KGaA's experimental MS drug fails in late stage trials sending shares tumbling

Germany's Merck KGaA said on Tuesday the company's experimental multiple sclerosis drug evobrutinib did not meet the primary goal in highly anticipated late-stage trials.

Merck KGaA says MS drug fails in late-stage trials

Germany's diversified group Merck KGaA reported a 20% decline in quarterly operating profit on weak demand for specialty materials that are used to make biotech drugs and semiconductors.

Merck KGaA Q3 earnings down 20% on weak biotech, electronics demand

Merck KGaA is an undervalued pharma company with a long history and strong fundamentals. The company has above-average margins and a diverse business portfolio in healthcare, life sciences, and electronics. Despite a conservative dividend yield, Merck KGaA has potential for long-term growth and a target price of at least €180/share.

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Germany's Merck KGaA on Monday said it struck a collaboration deal with Chinese drugmaker Jiangsu Hengrui Pharmaceuticals to widen Merck's work in an area known as "DNA damage response" drugs.

Merck KGaA widens work on 'DNA damage' drugs in deal with China's Hengrui

The CEO of Germany's Merck KGaA said the company's experimental multiple sclerosis drug can be a "blockbuster", an industry term for annual sales that exceed $1 billion, even after concerns emerged that it may cause liver damage.

Merck KGaA says MS drug has blockbuster potential; key data expected in December

Germany's diversified group Merck KGaA has raised the prospect of returning to revenue growth next year, recovering from a slump in demand for its specialty materials to produce biotech drugs and semiconductors.

Merck KGaA raises prospect of return to sales growth next year

ExScientia Ltd

Frontier IP Group PLC (AIM:FIPP), a firm specialising in the commercialisation of intellectual property, announced in an RNS today that its portfolio company Exscientia has entered into a collaboration with Merck to discover novel small molecule drug candidates in the fields of oncology, neuroinflammation, and immunology. Under the terms of the agreement, Exscientia will receive an upfront payment of $20 million from Merck.

Frontier portfolio company signs collaboration deal with Merck

Exscientia PLC shares climbed as much as 30% in pre-market trading on Wednesday after the precision-medicine company announced a new, multi-year collaboration with German science and technology company Merck KGaA, which could be worth hundreds of millions of dollars.  The collaboration will involve using Exscientia's AI-driven precision drug design and discovery capabilities to discover novel small-molecule drug candidates across oncology, neuroinflammation and immunology, according to the company.

Exscientia stock surges on Merck KGaA partnership

The U.S.-listed shares of Exscientia PLC EXAI soared 28.5% toward a record one-day gain, and enough to pace all premarket gainers on major U.S. exchanges, after the U.K.-based precision medicine company announced a collaboration with Germany-based Merck KGaA MKKGY XE:MRK for the discovery of drug candidates across oncology, neuroinflammation and immunology. The multi-year collaboration will utilize Exscientia's drug design and discovery capabilities, which are driven by use of artificial intelligence.

Exscientia's stock rockets toward a record gain after AI-driven drug discovery collaboration with Germany's Merck KGaA

DARMSTADT, Germany--(BUSINESS WIRE)--Merck, a leading science and technology company, today announced two new strategic drug discovery collaborations aimed at harnessing powerful artificial intelligence (AI)-driven design and discovery capabilities, further advancing the company's research efforts. The partnerships, with BenevolentAI, London, U.K., and Exscientia, Oxford, U.K., are expected to generate several novel clinical development drug candidates with first-in-class and best-in-class pote.

Merck Enters Two Strategic Collaborations to Strengthen AI-driven Drug Discovery

Merck KGaA reported disappointing Q2 results with a decrease in gross profit and EBIT compared to the previous year. The company remains confident in its 2025 targets despite reducing its full-year guidance for 2023. Anticipated double-digit revenue growth in 2024 and 2025 makes Merck a potential investment opportunity.

Merck KGaA: Expect A 10% CAGR EBITDA Increase In 2024-2025

Merck KGaA (OTCPK:MKGAF) Q2 2023 Earnings Conference Call August 3, 2023 8:00 AM ET Company Participants Constantin Fest - Head of Investor Relations Belén Garijo - Chief Executive Officer Helene von Roeder - Chief Financial Officer Matthias Heinzel - Chief Executive Officer of Life Science Peter Guenter - Chief Executive Officer of Healthcare Kai Beckmann - Chief Executive Officer of Electronics Conference Call Participants Richard Foster - J.P. Morgan Matthew Weston - Credit Suisse Sachin Jain - Bank of America James Quigley - Morgan Stanley Michael Leuchten - UBS Gary Stevenson - BNP Paribas Peter Verdult - Citi Oliver Metzger - Oddo BHF Simon Baker - Redburn Dylan van Haaften - Stifel Nicolaus Rajesh Kumar - HSBC Constantin Fest Thank you very much Sharon, a very warm welcome to this Merck Q2 2023 Results Call.

Merck KGaA (MKGAF) Q2 2023 Earnings Call Transcript

Merck KGaA (OTCPK:MKGAF) Q1 2023 Earnings Conference Call May 11, 2023 8:00 AM ET Company Participants Constantin Fest - Head of Investor Relations Belén Garijo - Chair of the Executive Board and Chief Executive Officer Marcus Kuhnert - Chief Financial Officer Peter Guenter - Chief Executive Officer, Healthcare Matthias Heinzel - Chief Executive Officer, Life Science Kai Beckmann - Chief Executive Officer, Electronics Helene von Roeder - Chief Financial Officer Conference Call Participants Matthew Weston - Credit Suisse Sachin Jain - Bank of America Gary Steventon - Exane BNP Paribas Peter Verdult - Citigroup Falko Friedrichs - Deutsche Bank Oliver Metzger - ODDO BHF Bank Simon Baker - Redburn Partners Florent Cespedes - Societe Generale Matthew Weston - Credit Suisse Operator Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the First Quarter 2023. As a reminder, all participants will be in a listen-only mode.

Merck KGaA (MKGAF) Q1 2023 Earnings Call Transcript

Merck KGaA: A German Free Cash Flow Machine

DARMSTADT, Germany--(BUSINESS WIRE)--Merck KGaA, Darmstadt, Germany, which operates its Healthcare business as EMD Serono in the US and Canada, today announced it has strengthened its Oncology franchise by regaining exclusive worldwide rights to develop, manufacture, and commercialize anti-programmed death ligand-1 (PD-L1) antibody BAVENCIO® (avelumab) following the termination of its Alliance agreement with Pfizer.

Merck KGaA, Darmstadt, Germany Strengthens Oncology Franchise by Securing Exclusive Worldwide Rights to Anti PD-L1 Antibody BAVENCIO® (avelumab)

MERCK Kommanditgesellschaft auf Aktien (OTCPK:MKGAF) Q4 2022 Results Earnings Conference Call March 2, 2023 8:00 AM ET Company Participants Constantin Fest - Head of Investor Relations Belén Garijo - Chair of the Executive Board and Chief Executive Officer Marcus Kuhnert - Chief Financial Officer Peter Guenter - Chief Executive Officer, Healthcare Matthias Heinzel - Chief Executive Officer, Life Science Kai Beckmann - Chief Executive Officer, Electronics Conference Call Participants Sachin Jain - Bank of America Richard Vosser - J.P. Morgan Matthew Weston - Credit Suisse Keyur Parekh - Goldman Sachs Michael Leuchten - UBS Peter Verdult - Citigroup Gary Steventon - Exane BNP Paribas Rosie Turner - Jefferies James Quigley - Morgan Stanley Falko Friedrichs - Deutsche Bank Oliver Metzger - ODDO BHF Bank Simon Baker - Redburn Partners Operator Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Fourth Quarter 2022.

MERCK Kommanditgesellschaft auf Aktien (MKGAF) Q4 2022 Results - Earnings Call Transcript

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DARMSTADT, Germany--( BUSINESS WIRE )--Merck KGaA, Darmstadt, Germany, a leading science and technology company which operates its Healthcare business as EMD Serono in the US and Canada, today shared updates on the company's healthcare research and development strategy, aimed at doubling R&D productivity. To achieve the goal of introducing one new product or major indication every 1.5 years on average, the company will focus its expertise and capabilities and leverage synergies within the existing pipeline to deliver transformative medicines in Oncology, Neurology and Immunology, augmented by an increased focus on external innovation. The company expects to maintain the output of its internal discovery engine, while more than 50% of future launches will result from external co-development partnerships and strategic in-licensing of assets for further in-house development. The strategy was shared today at the company's R&D Update Call.

Merck KGaA, Darmstadt, Germany Aims to Double R&D Productivity in Oncology, Neurology and Immunology to Deliver More Medicines to Patients Faster

DARMSTADT, Germany--( BUSINESS WIRE )--Merck, a leading science and technology company, today shared updates on the company's healthcare research and development strategy, aimed at doubling R&D productivity. To achieve the goal of introducing one new product or major indication every 1.5 years on average, the company will focus its expertise and capabilities and leverage synergies within the existing pipeline to deliver transformative medicines in Oncology, Neurology and Immunology, augmented by an increased focus on external innovation. The company expects to maintain the output of its internal discovery engine, while more than 50% of future launches will result from external co-development partnerships and strategic in-licensing of assets for further in-house development. The strategy was shared today at the company's R&D Update Call.

Merck Aims to Double R&D Productivity in Oncology, Neurology and Immunology to Deliver More Medicines to Patients Faster

MERCK Kommanditgesellschaft auf Aktien (OTCPK:MKGAF) Q3 2022 Earnings Conference Call November 10, 2022 8:00 AM ET Company Participants Constantin Fest - Head, IR Belen Garijo - Group, CEO Marcus Kuhnert - Group CFO Matthias Heinzel - CEO, Life Science Kai Beckmann - CEO, Electronics Peter Guenter - CEO, Healthcare Conference Call Participants Rosie Turner - Jefferies Sachin Jain - Bank of America Peter Verdult - Citi Wimal Kapadia - Bernstein Gary Steventon - BNP Paribas Exane James Quigley - Morgan Stanley Michael Leuchten - UBS. Florent Cespedes - Societe Generale Falko Friedrichs - Deutsche Bank Simon Baker - Redburn Operator Ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on Third Quarter 2022.

MERCK Kommanditgesellschaft auf Aktien (MKGAF) CEO Belen Garijo on Q3 2022 Results - Earnings Call Transcript

DARMSTADT, Germany--(BUSINESS WIRE)--Merck, a leading science and technology company, today announced findings which demonstrated that annualized relapse rates (ARR) remained low and Expanded Disability Status Scale (EDSS) scores were stable in people with relapsing multiple sclerosis (RMS) treated with investigational evobrutinib through more than three and half years.

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