Having begun twenty years ago, the transformation of the German pharmaceutical group, which is over 3 centuries old, continues.
Good things take time. Merck KGaA shareholders, not to be confused with those of its American namesake, must indeed be patient, even though the group's quarterly results, published this morning, confirm the direction that it has been pursuing for some time.
The life sciences segment, which designs and markets equipment, consumables and solutions for laboratories, and its electronics components segment are driving meaningful growth in consolidated revenue, while the pharmaceuticals segment remains sluggish and is even expected to decline over the full fiscal year.
It must nonetheless be acknowledged that progress has been laborious. Adjusted for inflation, revenue growth has been weak for the past decade, as has profitability, which has plateaued for five years.
Over the past decade, Merck invested €10.6bn in its external growth strategy, while also completing €4.1bn in asset disposals, for a net €6.5bn invested in acquisitions.
The two major acquisitions completed were Versum Materials in 2019 for €5.8bn, and SpringWorks Therapeutics last year for €3bn. The main disposal was its consumer health division in 2018, for €3.4bn.
Behind income statements that sometimes obscure the company's true earnings power because of amortization charges or other supposedly "exceptional" items, free cash flow distributable to shareholders has barely moved over the decade. This undoubtedly explains the stock market disappointment of recent years.
However, to its credit, Merck has nearly doubled its dividend over the decade-long cycle, while maintaining a well-controlled debt load throughout. This, too, probably explains why the share price has nevertheless edged higher over the past decade.
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