Legacy Pharmaceutical And Chemical Businesses Will Decline As Regulations Tighten

Key Takeaways

• Underperformance in legacy segments, slow R&D, and overreliance on blockbusters threaten competitiveness as innovation and patent expiries reshape the market.
  
• Tightening regulation, geopolitical risks, and operational headwinds add sustained pressure on margins and revenue stability.
  
• Strong growth in key divisions and high-margin innovation, supported by prudent financial management, positions Merck KGaA for sustainable revenue expansion and earnings resilience.

Catalysts

Operates as a science and technology company in Germany.

• The accelerating shift toward biotechnologies and digital health is expected to erode the competitiveness of Merck KGaA's legacy pharmaceutical and chemical businesses, leading to a risk of capital misallocation and slowing top-line growth, particularly as large investments in conventional segments underperform relative to rapidly advancing peers. This trend threatens long-term revenue streams as the market increasingly rewards innovation in gene therapy and next-generation biologics.
  
• Intensifying regulatory scrutiny worldwide, including potential tightening of global health laws and drug pricing controls, is likely to constrain Merck KGaA's future revenue growth and compress profit margins. The company faces increasing headwinds from FX movements, portfolio effects, and significant exposure to markets where cost-containment legislation remains a persistent threat.
  
• Heavy reliance on a narrow group of blockbuster products, with upcoming patent expiries such as Mavenclad's anticipated loss of exclusivity in the United States in 2026, raises the prospect of substantial revenue declines and increased earnings volatility. The near-term entry of generics and biosimilars in core therapy areas would rapidly erode net margins and destabilize Merck's healthcare portfolio.
  
• Lagging pace of R&D and underinvestment in high-growth areas, as suggested by gradually rising R&D costs that will reach around 20 percent of sales in healthcare, threatens to weaken the company's innovation pipeline. Should these investments fail to yield differentiating late-stage assets, Merck KGaA's long-term competitiveness and net margins could materially deteriorate versus more agile biotech-focused rivals.
  
• The persistent risk of operational disruption from geopolitical instability and protectionist trade policies-exemplified by continued project delays and weak visibility for recovery in the Electronics segment-could drive higher input costs, operational inefficiencies, and sustained margin pressure. Delays in major customer projects, backlog risk, and a protracted downturn in critical areas like DS&S suggest future EBITDA and free cash flow may structurally underperform expectations.

Merck KGaA Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Merck KGaA compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Merck KGaA's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.2% today to 13.9% in 3 years time.
• The bearish analysts expect earnings to reach €3.1 billion (and earnings per share of €7.18) by about August 2028, up from €2.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.0x on those 2028 earnings, up from 16.7x today. This future PE is greater than the current PE for the GB Pharmaceuticals industry at 16.9x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.76%, as per the Simply Wall St company report.

Merck KGaA Future Earnings Per Share Growth

Risks

• Robust organic growth continues in the Life Science and Healthcare divisions, with Process Solutions delivering double-digit sales growth and strong order intake, supporting the potential for recurring top-line revenue expansion.
  
• The SpringWorks acquisition has immediately accelerated the growth of the Healthcare unit, with launch brands like Ogsiveo and Gomekli showing strong quarter-on-quarter sales increases, creating a new growth pillar that can help sustain and elevate mid
• to long-term earnings.
  
• Merck KGaA's exposure to high-growth secular trends-such as advanced semiconductor materials driven by artificial intelligence and digitalization-is underpinning a resilient and expanding revenue base for its Electronics segment, especially as portfolio composition shifts toward high-tech materials with higher margins.
  
• Advances in Merck's innovation pipeline-including late-stage compounds like pimicotinib and anti-CEACAM5 ADC-alongside the company's strategic focus on high-margin specialty drugs, are expected to improve long-term net margins and support durable earnings growth.
  
• The group's consistently strong equity ratio and prudent balance sheet management, combined with disciplined cost control and margin improvement efforts in core businesses, help create financial resilience and enable reinvestment for future growth, supporting stable or rising long-term earnings per share.

Valuation

• The assumed bearish price target for Merck KGaA is €105.5, which represents two standard deviations below the consensus price target of €152.71. This valuation is based on what can be assumed as the expectations of Merck KGaA's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €191.0, and the most bearish reporting a price target of just €100.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €22.5 billion, earnings will come to €3.1 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 4.8%.
  
• Given the current share price of €108.1, the bearish analyst price target of €105.5 is 2.5% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.