Merck KGaA's CDMO unit continues to slide but company sees an uptick coming

Two years ago, when Merck KGaA restructured, forming a new life science business, the goal was to maximize the enticing potential of its contract development and manufacturing organization (CDMO). But achieving success in the post-COVID era has been a challenge for the CDMO industry.  

On Wednesday—amid largely positive news for the German company overall—Merck reported a 17% decline in sales for its CDMO unit, blaming (PDF) “unfavorable project phasing” and a streamlining of the supply chain of one of its customers.

CDMO sales were down from 188 million euros ($203 million) in the first quarter of 2023 to 157 million euros ($170 million) in the first quarter of this year. Sequentially, the decline was much more steep—from sales of 220 million euros ($238 million) in the fourth quarter of last year.

Despite the sales free fall, there’s room for optimism as the CEO of the Life Science unit, Matthias Heinzel said during a conference call that the company is seeing “more normal ordering patterns” from larger customers, as well as “shorter lead times,” which he termed as an “important component.”  

“Indeed, we do have a substantial decline in our margin following the volume drop—losing the COVID sales which had a higher margin profile—so that is kicking in,” Heinzel said. “However, sequentially, Q4 to Q1, we already see a margin improvement.”

The company has shown no evidence of rethinking its CDMO efforts. Two months ago, Merck’s U.S. and Canada subsidiary MilliporeSigma unveiled a plan to invest 300 million euros ($326 million) into a new biologics manufacturing plant in Daejeon, South Korea. The facility will add 300 new jobs by 2028.

Meanwhile, in the first quarter, Merck’s healthcare unit had a 10% year-over-year increase in sales to 2.05 billion euros ($2.2 billion), led by cancer treatment Bavencio, which was up 14%, and multiple sclerosis therapy Mavenclad, which was up 12%.

The company is guiding to an annual revenue increase of between 4% and 7% for the healthcare unit. As for its Life Science unit, which includes the CDMO business, process solutions and science and lab solutions, the company is projecting annual sales to fall between -2% and +2% despite a 13% decline in the first quarter.

“We see Q1 as the softest quarter in 2024,” Merck CEO Belen Garijo said.