Merck (NYSE:MRK) KGaA MKGAF reported second-quarter 2016 earnings of 80 cents per American Depositary Share, lower than the year-ago tally of 90 cents.
Meanwhile, net sales in the reported quarter came in at $4.3 billion (€3.8 billion), up 20.7%. Organic sales growth was 5.1% driven by the Life Science and Healthcare segments.
Segment Sales in Detail
The company reports results under three segments – Healthcare, Life Science and Performance Materials.
Sales at the Healthcare division were down 2.7% year over year to €1.8 billion. The decrease was primarily due to foreign exchange fluctuations in Latin America and the return of Kuvan rights to BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) . However, organically, sales at this segment improved 7.3%. Erbitux’s sales were stable compared to year ago period at €233 million, while Rebif sales dipped to €441 million due to continued competitive pressures and negative currency impact.
Life Science recorded sales of €1.4 billion, up 85%, primarily backed by the acquisition of Sigma-Aldrich which boosted sales by 79.7%. The segment witnessed strong organic sales growth (up 8.1%). The Process Solutions business recorded organic growth of 13.5%, while Applied Solutions posted organic sales of 3.9%.
Performance Materials sales were down 3.4% to €621 million. Organically, this segment witnessed a 2.4% decline in sales due to destocking by display industry customers. However, inclusion of Sigma-Aldrich’s SAFC Hitech business contributed 3.1% to sales.
Pipeline Update
Under its partnership with Pfizer Inc. (NYSE:PFE) , Merck KGaA is evaluating avelumab in a number of phase III studies for several cancer indications. In the reported quarter, the company initiated a phase III study (JAVELIN Renal 101) on avelumab in an advanced renal cell carcinoma setting. The study is evaluating the candidate, in combination with Inlyta, in comparison with Sutent (sunitinib malate) monotherapy in patients with unresectable, locally advanced or metastatic RCC with clear cell component.
In July, another phase III study (JAVELIN Renal 100) was initiated on the candidate, in combination with, and/or as follow-on treatment to, platinum-based chemotherapy in patients with locally advanced or metastatic disease (Stage III or Stage IV) with previously untreated epithelial ovarian cancer.
Outlook
Backed by a strong performance in the first half of the year, the company has lifted its guidance for 2016. Sales are now expected in the range of €14.9–€15.1 billion (previous projection: €14.8–€15 billion).
On an organic basis, sales are anticipated to grow moderately (previous forecast: slight growth). The Healthcare segment is expected to witness solid organic growth sales, while organic sales at Life Science are expected in the mid-to-high single-digit percentage range. Performance Materials segment will, however, witness moderate decline in 2016. Nevertheless, backed by the Sigma-Aldrich acquisition, the company continues to expect 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 the Latin American currencies.
Our Take
Merck KGaA’ second-quarter earnings were encouraging with the company reporting a year-over-year growth in sales. Earnings were, however, down on a year-over-year basis. Backed by the acquisition of Sigma-Aldrich, the company witnessed an encouraging performance at the Life Science segment in the second 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-placed stock in the health care sector may consider Anika Therapeutics Inc. (NASDAQ:ANIK) , sporting a Zacks Rank #1 (Strong Buy).
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