Merck KGaA's Q1 Earnings Increase Y/Y, Offers 2016 View

Merck (NYSE:MRK) KGaA MKGAF reported first-quarter 2016 earnings of $1.50, compared to the year-ago figure of 73 cents.

Net sales in the reported quarter came in at $4 billion (€3.7 billion), up 18%, primarily driven by portfolio changes and moderate organic growth.

Segment Sales in Detail

The company reports results under three business sectors – Healthcare, Life Science and Performance Materials.

Sales at the Healthcare division were down 2.4% year over year to €1.6 billion. This decrease was primarily due to foreign exchange fluctuations in Latin America and the return of Kuvan rights to BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) . Organically, sales at this segment improved 5.4%. Erbitux’s sales increased to €207 million, while Rebif sales were slightly down to €422 million due to continued competitive pressures and negative currency impact.

Life Science recorded sales of €1.4 billion, up 89.3%, primarily due to the acquisition of Sigma-Aldrich (NASDAQ:SIAL) in late 2015. Organic sales at the segment climbed 8.9%. The Process Solutions business generated organic growth of 15.9%, while Applied Solutions posted organic sales of 3.6%.

Performance Materials sales inched up 0.9% to €622 million backed by the inclusion of Sigma-Aldrich’s SAFC Hitech business and a positive currency impact. However, organically, this segment witnessed a 2.4% decline in sales.

Under its partnership with Pfizer Inc. (NYSE:PFE) , Merck KGaA initiated a phase III study (JAVELIN Renal 101) on avelumab, in an advanced renal cell setting. The candidate is also being evaluated in a number of phase III studies for several cancer indications.

Outlook

Sales in 2016 are expected in the range of €14.8 billion to €15 billion. On an organic basis, sales are anticipated to grow slightly. The Healthcare segment is expected to witness a slight increase in organic sales, while organic sales of Life Science are expected in the mid-single-digit percentage range. Performance Materials segment is expected to be organically stable in 2016. Backed by the Sigma-Aldrich acquisition, the company expects a positive portfolio effect on sales in the low double-digit percentage range.

Sales are, however, expected to be hurt by foreign exchange impact of 3–5% due to continued devaluation of Latin American currencies.

Our Take

Merck KGaA’ first-quarter earnings were impressive, with the company reporting a year-over-year growth in both earnings and sales. Backed by the acquisition of Sigma-Aldrich, Merck KGaA recorded impressive performance at all three business segments in the first quarter of 2016.

Going ahead, we believe that the Sigma-Aldrich acquisition, along with the company’s collaboration with Pfizer in the field of immuno-oncology, will pave the way for future growth. However, we remain concerned about the impact of negative foreign exchange fluctuations that are expected to hamper sales in 2016.

Investors looking for a well-ranked stock in the health care sector may consider Bristol-Myers Squibb Company (NYSE:BMY) , sporting a Zacks Rank #1 (Strong Buy).


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