Merck KGaA flags steeper profit drop on lower orders from drugmakers

FRANKFURT, Aug 3 (Reuters) – Germany’s Merck KGaA (MRCG.DE) on Thursday warned of a steeper earnings decline due to a slump in demand for materials used to produce pharmaceuticals and semiconductors, as its high-tech niche markets get drawn into a wider downturn.

In a statement, it cited “persistently high inventory levels of our Life Science customers, the further delayed recovery of the market for semiconductor materials, an increased cost level due to inflation and an even stronger negative foreign exchange impact”.

Earnings before interest, taxes, depreciation and amortisation (EBITDA), before one-offs, would fall between 3% and 9% this year, when adjusted for currency swings, the diversified company said.

The foreign exchange effects would be an additional drag of between 3% and 6%, it added.

It had previously forecast 2023 adjusted EBITDA would be flat to down 5%, with a negative foreign exchange effect of 2% to 5%.

The company also reported a 12.8% decline in second-quarter adjusted EBITDA to 1.55 billion euros ($1.69 billion) but the stock was up 2.7% at a seven-week high at 0845 GMT as analysts said the market had braced for a worse outcome.

Merck’s business that makes speciality chemicals for microchip production, which had previously been expected to recover during the second half, is now projected to stabilise at a low level for the rest of 2023.

The Life Science unit, in turn, was hit by a slump in COVID-related demand for lab gear and by drugmakers running down excess inventory rather than ordering Merck’s materials.

Analysts have said that higher interest rates are dampening investors’ appetite for risky biotech drug development ventures, which may take a decade or more to turn a profit, also impacting rival lab gear maker Sartorius (SATG.DE) and drug contract manufacturer Lonza (LONN.S).

Germany’s Sartorius in June forecast a bigger sales decline than previously, saying at the time drugmakers were not adding new production capacity.

Switzerland’s Lonza last month also cut its earnings outlook, partly because customers were pursuing fewer projects in early-stage drug development or in the field of cell and gene therapy.

Merck added it still stood by its ambition to generate 25 billion euros in sales by 2025, up from a projected 20.5 to 21.9 billion this year.

($1 = 0.9153 euros)

Reporting by Ludwig Burger Editing by Kim Coghill and Mark Potter
Source: Reuters