With Russia’s war in Ukraine raging and fresh COVID-19 lockdowns rolling out across China, Darmstadt, Germany’s Merck KGaA has warned its financial forecast for the year could fall victim to “increased uncertainty and volatility.”
For fiscal-year 2022, the company expects sales growth between 6% and 9%, with much of that rise tied to increased life sciences momentum, the company said (PDF) in its first-quarter earnings release published Thursday. Specifically, Merck KGaA is predicting net sales in the vicinity of 21.6 billion euros ($22.5 billion) and 22.8 billion euros ($23.75 billion), versus the 19.7 billion euros ($20.5 billion) it collected in 2021.
Problem is, current economic and geopolitical circumstances—namely a renewed COVID-19 outbreak in China and Russia’s continued aggression in Ukraine—have put a squeeze on global supply chains and prompted a spike in operational costs, Merck KGaA said.
“Owing to the geopolitical situation, the increase in energy and raw material prices in particular has accelerated,” Merck said, adding that its current forecast “reflects the continuation of a correspondingly high price level, which will be mitigated by countermeasures as far as possible.”
Meanwhile, Merck KGaA’s predictions in China hinge on expectations of a “short, locally restricted lockdown with imminent relaxations."
In an investor presentation, Merck KGaA elaborated (PDF) on the situation and the steps it’s taking to surmount the hurdles. The company's life sciences unit sells chemicals and equipment for labs and biopharma companies. The global conglomerate also has a contract manufacturing arm, plus a pharmaceuticals unit and an electronics business.
Both the war in Ukraine and COVID-19 lockdowns in China have fueled a spike in inflation rates worldwide, plus “global production bottlenecks,” Merck KGaA noted. The company also flagged an increased risk of “stagflation,” in which rising prices and a slow economic growth rate are joined by relatively high unemployment.
At the same time, freight costs “remain elevated,” energy costs are higher and more “volatile,” labor markets are tightening and selected materials are suffering further price increases and “very minor shortages,” Merck KGaA added.
As for the situation in Ukraine, Russia’s aggression against its neighbor presents a “high degree of uncertainty,” the company explained. Sanctions on Russia have the potential to increase, and there have been increased calls to “stop ‘financing’ war with oil and gas,” Merck KGaA said.
As the conflict roils on, Merck KGaA assumes there will be continued energy shortages throughout 2022. It expects no outages, meanwhile, and says the effects will mostly be felt in Europe, Asia and the Middle East.
Regarding the lockdowns in China, Merck KGaA expects the situation to yield a “limited duration of sales and production impact,” with normalization expected by June at the “latest.” The company pointed out that only a few Chinese provinces, not the entire country, have been affected.
To deflect the blows from China and Ukraine, Merck KGaA is taking several mitigation steps. The company will rely on higher stockpiles for critical raw materials and actively keep tabs on its supply base. Further, it plans to evaluate and adjust pricing on a “case-by-case” basis.
Merck KGaA also plans to leverage more e-commerce and “additional channels” in areas hit by lockdowns, primarily as it pertains to its life science business. Finally, Merck KGaA says it will make use of production sites outside of lockdown-affected areas “wherever possible.”
Merck KGaA is just one of many drugmakers forced to adapt or suspend operations in Russia following the country’s invasion of Ukraine in late February.
“We condemn the Russian invasion as well as any act of violence,” Merck KGaA says on its website. “We stand with the global community in calling on the Russian state to end this war immediately and return to a peaceful coexistence in the region.”
In the meantime, the company has restricted Russian operations to “essential healthcare-related business in order to continue serving patients in need.”
Merck KGaA is making certain it complies with all international sanctions and says it will reassess its position regularly to adapt to the situation.
Merck KGaA’s forecast caveat came as the company tallied 5.2 billion euros ($5.41 billion) in first-quarter revenue, signaling a 12.2% increase over the same period in 2021. The company’s growth story “continues to materialize” as Merck KGaA reported “high margins in all three businesses despite challenging economic headwinds and increasing global uncertainty,” the company said.
In life sciences specifically, Merck KGaA foresees (PDF) sales growth between 7% and 10%. Its process solutions business will do much of the heavy lifting, though the company has lowered its sales forecast for COVID-19-related contract manufacturing from up to 900 million euros to upward of 700 million euros.
Separately, Merck KGaA on Thursday noted that its $792 million buyout of CDMO Exelead closed Feb. 22.
“The aim of the acquisition is to use Exelead’s capacities and expertise to expand the service range for mRNA contract development and manufacturing and to provide a fully integrated offering across the entire mRNA manufacturing process,” Merck KGaA said.