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Merck KGaA's (MKGAF) Q3 Earnings and Sales Increase Y/Y

PFE BMRN ANIK

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Merck KGaA reported third-quarter 2016 earnings of $1.20 per American Depositary Share, higher than the year-ago tally of 90 cents.

Net sales in the reported quarter came in at $4.1 billion (€3.7 billion), up 19.7% primarily due to portfolio changes following the Sigma-Aldrich acquisition. Organic sales growth was 0.9% driven by the Life Science segment. However, unfavorable foreign exchange impacted sales by 0.6%.

Segment Sales in Detail

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

The Healthcare division recorded sales of €1.7 billion, down 1.1% year over year primarily due to foreign exchange fluctuations in Latin America and the return of Kuvan rights to BioMarin Pharmaceutical Inc. (BMRN - Free Report) . However, organically, sales at the segment were up 1.3%.

Erbitux’s sales were down 1.8% from the year-ago period to €219 million while Rebif sales came in at €436 million, down 6.8% due to continued competitive pressures and negative currency impact. Gonal-f sales were up almost 9% to €182 million driven by favorable competition in the U.S.

Sales at the Life Science segment amounted to €1.4 billion, up 83.1% primarily on the back of the Sigma-Aldrich acquisition which contributed 77.4% to sales. On an organic basis too, the segment witnessed strong sales growth (up 5.7%). The Process Solutions business recorded organic sales growth of 10.1%, while organic sales at Applied Solutions improved 3.3%.

Performance Materials sales dipped 1.3% to €645 million. Organically, the segment witnessed a 5.8% decline in sales due to destocking by display industry customers. However, inclusion of Sigma-Aldrich’s SAFC Hitech business contributed 3.5% to sales.

Outlook

Merck KGaA has reiterated its guidance for 2016. The company continues to expect net sales in the range of €14.9–€ 15.1 billion. On an organic basis, sales are anticipated to grow moderately from the previous year. The Healthcare segment is expected to witness solid organic sales growth, while organic sales at Life Science are projected to grow in the mid-to-high single-digit percentage range. Performance Materials will, however, witness a moderate decline in 2016. Nevertheless, backed by the Sigma-Aldrich acquisition, the company continues to foresee 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.

Pipeline Update

Merck KGaA is evaluating avelumab in a number of phase III studies for several cancer indications under its partnership with Pfizer Inc. (PFE - Free Report) . In the reported quarter, the company initiated a phase III study – JAVELIN Ovarian 100 – on avelumab as a first-line treatment for ovarian cancer.

Meanwhile, in October, the European Medicines Agency (EMA) accepted to review a Marketing Authorization Application (MAA) for avelumab for the treatment of metastatic Merkel cell carcinoma (MCC).

The EMA has also accepted a regulatory application for Cladribine tablets for the treatment of relapsing-remitting multiple sclerosis.

Our Take

Merck KGaA’s third-quarter earnings were encouraging with the company reporting a year-over-year improvement in both earnings and sales. Backed by the acquisition of Sigma-Aldrich, the company witnessed an encouraging performance at the Life Science segment in the quarter.

Going ahead, we believe that the Sigma-Aldrich acquisition, in addition to the 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 on sales in the coming quarters.

Zacks Rank & Key Picks

Investors looking for a favorably placed stock in the health care sector may consider Anika Therapeutics Inc. (ANIK - Free Report) , which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Anika’s earnings estimates increased from $1.96 to $2.06 for 2016 and from $2.03 to $2.09 for 2017 over the last 60 days. The company has posted a positive surprise in all of the four trailing quarters with an average beat of 33.14%.

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