Germany’s Merck flags steeper drop in earnings

By Ludwig Burger

FRANKFURT (Reuters) -Germany’s Merck KGaA (ETR:) on Thursday warned of a steeper earnings decline on 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%, 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 to slip between 0% and 5%, with an additional negative foreign exchange effect of 2% to 5%.

Its business that makes specialty chemicals for microchip production, which had previously been expected to recover during the second half, is now projected to just stabilize at a low level for the rest of 2023.

The Life Science unit, in turn, was hit by a slump in COVID-19-related demand for lab gear and by drugmakers running down excess inventory levels rather than ordering Merck’s materials.

Analysts have said that higher interest rates are dampening investors’ appetite in risky biotech drug development ventures, which may take a decade or more to turn a profit.

Sartorius, a rival maker of gear and substances to operate bioreactors for drug production, in June forecast a bigger sales decline than previously projected, also slumping back from highs during the COVID-19 pandemic.

It said at the time that drugmakers were using existing production capacity, rather than adding new capacity.

Merck also reported second-quarter adjusted EBITDA declined 12.8% to 1.55 billion euros ($1.69 billion), slightly above the average estimate of 1.5 billion euros in an analyst poll on the company’s website.

($1 = 0.9153 euros)