Merck Kgaa

Thank you very much, Sharon. A very warm welcome to this Merck Q2 2023 results call. My name is Konstantin Fest. I'm Head of Investor Relations here at Merck. I'm delighted to be joined today by Belén Garrillo, CEO of the group, as well as Helene von Röder, Group CFO. Also for the Q&A part of this call, we'll be joined by Matthias Heinze, CEO of Life Science, Peter Günther, CEO of Healthcare, Anne Beckmann, CEO of Electronics. In the next couple of minutes, we'd like to run you through the key slides of the presentation. And after that, we'll have our Q&A. Also note that we've reserved about roughly one hour for this conference call, as some of us will have to catch a plane due to road shows. With this, I'd like to now hand over to Belen to kick it off.

Thank you, Dean, and very pleased to welcome everybody to our second quarter earnings call. And please stay on slide number five for the highlights. So first of all, Q2 has once again demonstrated the resilient nature of our multi-industry business model. even as the challenges have increased for some of our business sector and more specifically for life science and to a certain extent for electronics in relation to doctors. Before I start with the highlights of the quarter, please allow me to to her first earnings call as the Chief Financial Officer of Merck. Now back to our Q2 earnings and the highlights. One, organically, group revenues were down by 1% and EBITDA pre-declined by 7%. Currency has now become a true headwind. And this currency impact, negative impact, paired with a minor portfolio effect led to reported sales decreasing by 5%, totaling 5.3 billion euros. had a more diluted effect on EBITDA pre than on sales. Accordingly, reported EBITDA pre of 1.6 billion was down 13% versus late. EPS pre of 2.20 euros was down 17% year-on-year. Healthcare was the best performer with 12% organic stage growth, and that was driven by Mavenclad, Vavencio, and our Fertility franchise. Mavenclad is on its way to reach blockbuster status in 2023. Life science showed a 4% decline in the core business, and this was due to a more pronounced stocking in process solutions, which we have now started to see among our smaller and regional customers. Amid the continuing decline in the COVID-19 business, total sales in life science were now down 9%, that's organic, in Q2. This decline also had a negative effect on the EBITDA pre-margin in life science and consequently the one of the group. In electronics, semiconductor solutions decreased 5% organically, again outperforming a declining market, which as expected became more challenging also in the second quarter. In combination with a continued decline in display solutions, organic sales were down by 6%. While the business environment for life science and electronics is under increasing pressure, healthcare was the star performer of the quarter and they deliver very strong growth i am therefore pleased to say that our multi-industry business models business model continues to demonstrate resilience through this transitional year 2023 in order to reflect the developments in the business sectors and to a lesser extent the adverse currency movements just in our 2023 guidance. Now expecting net sales in a range of 20.5 billion to 21.9 billion, EBITDA-free in a range of 5.8 billion to 6.4 billion, and EPS-free in a range of 8.25 to 9.35, thereby lowering the ranges provided with our Q1 results in May. Nevertheless, I'd like to highlight that the upper half of the guidance ranges still fall within our previous guidance balance. And more details on the assumptions will be shared at the end of the presentation. Moving into slide number six, we will have where we show an overview of our performance by business sector. And as you can see, and we already mentioned, Healthcare was the strongest contributor to the organic sales development in two and largely observed the declines in life science and electronics. Our key growth engines in the quarter were our new product launches as well as the fertility franchise within our healthcare business sector. In fact, healthcare showed excellent organic growth of 12% in a challenging operating environment And this was mainly driven by almost 30% growth from recent launches, ratio up 27% and Mavenclad up by 28% in Q2. Our established portfolio means CM&E, Fertility and Herbitux also contributed with an organic sales performance of plus 8%. From a franchise perspective, Fertility was the highlight. with organic growth of almost 25%, amplified by a competitor stock out, followed by oncology with an organic growth of close to 18%. Life science was down 4% in the core business in Q2, on this more pronounced the stocking in process solutions. As expected, COVID sales continued to be diluted to growth and were significantly down both year on year and sequentially. This resulted in sales decreasing by 9% in life science in the second quarter. As some of you may have noticed already, and just to put the quarterly performance of life science into perspective, regardless of any influence of the COVID period, If we would look at the same period in 2019, the year before the corona pandemic started, our life science business has shown an annualized high single organic growth rate, despite all the recent market challenges. In electronics, our semi-business continued to outperform in a declining market. As the market became more challenging in Q2, as we expected, our semi-sales declined by 5% organically in the quarter. This paired with a significant decline in display solutions, although not as the one we saw in Q1, this led to an overall sales decline for electronics of 6% organically in Q2. A small portfolio effect in electronics, contributed marginally to sales growth for the group. Currency served as a true headwind across the board on sales, with the strongest negative effect on healthcare. Ebitda pre came at 1.55 billion, down organically by 7%, which was mainly driven by life science, where organic EBITDA-free was down by minus 26% in Q2 on lost volumes in process solutions and negative mixed effects in the core and of course also due to lower COVID sales. EBITDA-free in healthcare was strongly by more than 30% organically in Q2, boosted by excellent sales growth, lower gross profit growth comes, and a small upside from portfolio management with no impact of the Babensfield repatriation at all in the EBITDA-PRI of healthcare in Q2. EBITDA-PRI in electronics was down 5% in Q2, and that was supported by patents and cooperation agreement with Universal Display Corporation that Kai may detail later on. Importantly, this gives us access to key intellectual property that spans our materials portfolio in OLEP, supporting our mid-term growth. While this agreement was part of our full-year guidance in electronics, the exact timing and the accounting effect during 2023 go to predict, and as I mentioned already, I may give you further color on this later on in the Q&A. Currency was a stronger set-win on EBITDA-free than on sales, and this is due to emerging market currency and Asian currencies such as the Chinese renminbi and the Japanese yen. Moving into the regional view on slide number seven, what we see is that our three larger regions were down organically. North America declined by 3.2%, and this was due to the sharp drop in lifestyle and sales, while Europe was down 1.5% organically, and this was mainly due to process solution. APAC was down 2.6% organically in Q2, mainly due to electronics. Overall, second quarter demonstrates one of the advantages of our globally diversified business setup, Combined with the right mix of business, or combining, better said, the right mix of business sectors, the regionalized footprint mitigating potential negative impact. Our two smallest regions, LATAM and MEA, Middle East and Africa, increased in the low to mid teens percentage. And with this, I'm going to hand it over to Helene to provide additional insights on our Q2 financials.

So thank you very much, Belen, and a warm welcome also from my side. Let's dive into the numbers. I am now moving to slide nine for an overview of our key figures for the first quarter. We achieved almost flat sales organically in Q2 at minus 1.1%. They're continuing to show resilience in an increasingly challenging business environment. supported by a multi-industry setup. Taking into account currency headwinds of minus 3.7%, as well as a minor portfolio effect from the acquisition of Meccaro, net sales declined by minus 4.8% to 5.302 billion in Q2. EBITDA pre was down by minus 12.8%, 1.5 billion, with the FX headwind of minus 5.7%, stronger here compared with sales. And EPS pre-declined by minus 16.7% to 2.20 euros. The operating cash flow came in at 622 million, which represents a decrease of minus 27% over Q2 2022, mainly driven by the decline in EBITDA pre-declined. and looking at net financial debt, which increased by 1.027 billion compared with the end of December. This is mainly due to investments for future growth and short-term financial investments. However, do bear in mind we also paid the dividend to shareholders due to.

So let me also briefly comment on reported results on slide 10.

EBIT down by 17.6 per Q2. In absolute terms, the decrease was minus 208 million, thereby lower than the decline in EBITDA pre of 229 million. The decline in EBITDA, and therefore also EBIT, was mainly driven by the EBITDA pre-decline in life science. And this, in turn, was driven in particular by the impact of key stocking and process solutions. Financial result was minus 6 million in Q2 versus minus 55 million in Q2 last year, mainly due to additional interest costs from pensions, as well as related party financial liabilities and tax effects. The effective tax rate came in at 21.0% at the lower end of our guidance range and below the 22.4% in the second quarter of last year. The higher negative financial is a stronger effect on net income than the lower effective tax rate. Net income and EPS were down by 18.9% and 18.6% respectively, slightly higher than the decline in EBIT. So with that, let's move on to the review by business sector, starting now with life science on page 11. Sales in the life science core business were down more percent organically in Q2, while COVID-related sales continued to decline and had a dampening effect of minus 5%. Accordingly, sales in life science declined by minus 8.7% organically in Q2. From a portfolio perspective, process solutions and life science services were down organically in Q2, with science and lab solutions having been almost flat organic. So let's look at process solutions first. The core businesses decreased by minus 7% organically in Q2, below the percent in Q1. And this was further amplified by the COVID related decline of minus 5%. The decline in the core business was mainly driven by these, which became visible during the course of Q1. Now, we expected the stocking to fully materialize in Q2, but it turned out to be greater than we had thought at the beginning of Q2, which is now also visible at our smaller and regional accounts. Order intake continued to decline year on year on the back of reduced COVID-related sales, and book-to-bill was again slightly below 1 as expected. Sales in science and lab solutions were flat in the core, organically slightly down by minus 1% in Q2. The moderation versus a strong plus 7% in the core in Q1 is driven by a temporary demand weakness, mainly at our large pharma customers, especially in North America. So let's turn to life science services. Business sales were down minus 7% organically against tough comps, all reflecting batch phasing in CDMO. Amid a sharp drop-off in COVID-related sales to marginal levels, as expected, sales were down minus 30% organically. With regards to earnings, please note that in Q2 2022, the EBITDA pre-margin was at its peak for life science. Against these very tough comps, EBITDA pre-decreased by minus 26.1% organically, while the margin came in at 80.2%, down 780 basis points year on year. The margin decline reflects lower volumes, mainly driven by customer destocking in process solutions and lower COVID sales, as well as negative product mix effect due to the loss of COVID sales and in the process solutions core business. So if we now take a quick look at 2023, I would like to point out two developments. For one, the destocking effect in process solutions is only fully materialized in Q2 and was more pronounced than anticipated in early May. Based on intensified conversations with our customer and other developed analysis, we now assume the trough will be in Q3 and expected trend change towards normalization for sales in Q1 to Q2 2024. Secondly, we had particularly strong organic core sales growth in Q3 last year, mainly driven by process solutions.

So with that, let's move to healthcare on slide 12.

Healthcare delivered organic sales growth of 11.9% in Q2, above the quantitative guidance range we provided with Q1 in early May. Recent launches grew plus 29% organically, while the established portfolio also grew at plus 8%. Oncology increased plus 18% organically, mainly driven by Vivencio, which was up plus 27%. and supported by Urbitax, which grew plus 10% organically. At the end of March, we announced that we would regain exclusive worldwide rights for Bavaria and have now taken full control of the global commercialization effective June 30th. Our NNI franchise accelerated growth in Q2 and is now up by plus 12% organically. Maven Club momentum resulted in a strong performance of plus 28%, while Rebus was only down minus 3%, benefiting from US channel dynamics. By franchise, Fertility was a star performer at plus 25%. Competitive stockouts continued in Q2, driving stronger performance in various regions. This was paired with a strong rebound of our Fertility franchise in China, where the end of the zero COVID policy led to a temporary slowdown in the fertility market in Q1. So regarding our pipeline, for ibuprofen, we are pro towards the readout of a phase three RMS program in Q4. Thinking about the potential of this asset, we recognize the excitement in the medical community about the concept of PIRA, which is getting more and more attention when looking at the BTK inhibitor space. Clevinapant, our inhibitor of apoposis proteins antagonist, we are progressing towards interim analysis. In Trilinks, our event-driven and locally advanced squamous cell carcinoma of the head and neck in cis-eligible population, depending on the accumulation of events. Regarding earnings, EBITDA pre amounted to $704 million, resulting in a very strong margin of 34.3%. Organic EBITDA pre was up 30.4%, driven by operating leverage and lower comps on gross profit. While Q2 was supported by income from active portfolio management of around $70 million, It should be noted that in the year-on-year comparison, this is offset to a large extent by BD income in the prior years, as well as an expected decline in third-party royalty streams. FX unfortunately was a significant headwind of minus 13.9 EBITDA in Q2, higher than the minus 5.4% on sales. This was particularly due to the decline in value of emerging market currencies, including the Turkish Lira. So looking to 2023, we continue to see income from active portfolio management in a mid to high double-digit million euro amount for the full year, hence no significant contribution expected in H2. Regarding the excellent organic sales performance in Q2, And whether this is a good indicator for H2, I would like to say the following. While we generally expect a positive sales momentum to prevail for recent launches, Q2 was indeed also helped by continued competitive stock-outs, which started emerging since Q4 last year. From our current perspective, we include in our model some degree of normalization of supply situation and fertility towards the later part of H2. Regarding the EBITDA pre-margin, the level excluding active portfolio management in Q2 provides a good indicator for the remainder of the year given operating leverage, mix, and the repatriation of Provencio.

On page 13, we will look at electronics.

Sales were down organically by minus 6.3% in Q2, with FX having turned into a headwind in Q2 at minus 3.8%. We did have a very small positive portfolio effect of 0.3% related to the acquisition of Korea-based Macaro. Semiconductor Solutions outperformed a declining market yet again, but still was down minus 5% organically in a more difficult environment. Display Solutions was down by minus 11% organically with negative pricing and mix effects, but already better than the minus 28% observed in Q1, driven by a continued challenging environment in liquid crystals. Surface Solutions was down minus 6% on softness, both in industrials and coatings, but cosmetics are coming back. EBITDA pre amounted to $262 million, implying a margin of 29.1%, down only 30 bps year-on-year. Organically, EBITDA pre declined by minus 5.2%, with FX having turned into a headwind of minus 4.9% for Q2, slightly more pronounced than on sales. Both the decline in display solutions and semiconductor solution sales contributed to the decline in EBITDA pre. The EBITDA pre margin held up to Q2 2022 and was also above the level from Q1. It should, however, be noted that it included a gain from the patent and cooperation agreement with UDC. This agreement will give us early access to their R&D emitter materials which does strengthen our OLA portfolio significantly. Overall, this agreement is a mid-double-digit Euro-million or amount to EBITDA pre- and Q2 and will not recur in this form. That said, let me also briefly comment on the coming quarters. Looking at semiconductor solutions, our differentiated market position in semi-materials and our strong order book in DS&S should help to mitigate some of the market headwinds as we already demonstrated in Q1 and Q2 of this year. However, we are not fully shielded. MSI expectations for 2023 dropped during the course of the year and now stand at minus 13%. And we now expect the market downturn to extend into 2024 as our customers lower their outlook and capacity utilization. Our previous guidance was in line with market expectations of a recovery of the semi-market already in Q4 2023. So turning to display solutions, we believe the inflection point in customer utilization in liquid crystals has been reached in Q2, and note that comps in H2 are getting easier. Overall, we expect slower top-line momentum in semiconductor solutions in H2, with display solutions having the chance to return to growth against easier comps.

So before handing back to Belen, let me also comment on our balance sheet and cash flow statement.

As you can see on slide 14, our balance sheet overall is slightly above the level as at end of December 2022. The main driver behind this development was business growth. So looking at the asset side, inventories increased mainly related to our life science and electronics businesses. Businesses were slightly up on business performance and high sales volumes at the end of Q1. and intangible assets decreased due to FX and amortization. Other assets increased due to short-term investment, with cash and cash equivalents declining accordingly. So then moving on to the liability side. Provision for employee benefits remained stable. Financial debt increased, which was more than offset by other liabilities, in turn affected by the dividend payment in Q2. And net equity increased slightly thanks to higher retained earnings with negative FX effects almost canceling this out. Our equity ratio improved slightly to 55% from 54% compared with December 2022. Turning to cash flow, slide 15. Our operating cash flow came in at $622 million and was down minus 27% compared to Q2 last year. This was mainly due to the decline in profits after tax and changes in other assets and liabilities, in turn mainly due to tax and pension plans. Changes in working capital in Q2 were reduced compared with high growth comps in Q2 last year. While capex increased in line with our mid-term growth ambitions, investing cash flow turned positive in Q2 compared with the earlier year period. This was due to changes in short-term investments of our excess liquidity. So last but not least, the difference in financing cash flow can be explained mainly by the repayment of bank liabilities which took place in Q2 this year. And with that, let me hand back for an update on ESG as well as the guidance.

Thank you very much, Helene. And as a reporter, I would like to provide a very brief update on our ESG initiatives, in this case DE&I, diversity, equity, and inclusion. And for this, please move to slide number 17. So, as discussed with many of you on prior occasions, we have our sustainability efforts and we continue to make good progress. Just last week, we released our first progress report on diversity, equity and inclusion. The report is covering our plans and the progress in 2022, along with our ambitions through 2030, which has been communicated to you in our first Capital Markets Day in 2021. It demonstrates that we approach diversity, equity and inclusion with the same purpose and transparency as our other global business priorities. We set both ambitions and we hold ourselves accountable. If one believes In the positive correlation between being a diverse organization and a high-performance organization, and I believe all of you know that there is a body of evidence behind that, then it seems that we are moving in the right direction at Merck. We now have more than 38% women in senior leadership positions, an increase of 11 percentage points since 2015, and 40% female participation in the executive board. Our engagement brings us closer to our patients and to our communities so that we can be among the first to develop meaningful solutions that address their unmet or emerging needs. I would like to take this opportunity to invite you to discover how we continue to incorporate pride of belonging and our efforts to advance human progress into our first report on DE&I. And with this, let's move on to the guidance. Please move to slide number 19. So as I mentioned at the beginning, we are adjusting our full year 2023 guidance band for the group. in particular on the increasing challenges in life science, but also on the way we see the semiconductor solutions market moving in the coming quarter. In this respect, now we expect net sales in a range of $20.5 to $21.9 billion. EBITDA-P in a range of 5.8 to 6.4 billion and EPS-P in a range of 8.25 to 9.35 euros. While we continue to expect to grow our net sales excluding the COVID-19 business organically by a range between one positive and five percent positive, we now guide to an overall organic sales development of minus two to plus two, with the midpoint implying a flat organic performance and an organic EBITDA pre-decline of minus nine to minus three in the full year 2023. Currency, as several times mentioned, is expected to become a hard headwind of minus 36 for sales and for EBITDA-free respectively, slightly below our previous forecast of minus two to minus five for sales and EBITDA-free. This is due to a somewhat weaker US dollar and a weakening Asian currencies such as the Chinese and renminbi. While we are lowering our guidance that we provided or versus what we did to you in May, there is still a meaningful overlap with the previously communicated guidance bands. The lower half of the old bands now represent the upper half of the new guidance ranges. The new midpoints of the ranges are at the lower ends of the old guidance bands and reflect our current most balanced view. We remain confident of achieving our midterm guidance of 25 billiards by 2025 despite the challenging operating environment in the transitional year 2023. Let me offer some additional color by business sector, moving into slide number 20. So for life science, we are adjusting our guidance and expect an organic stage development of minus three to plus four in the core business. We reiterate our expectation for COVID-related sales of around 250 million in 2023, therefore expecting this to be strongly dilutive to growth in 2023. For life science overall, we therefore expect an organic sales development of minus 8 to minus 2, and an organic EBITDA pre-development of minus 21 to minus 12, amid more pronounced the stocking in process solutions. Please note that we are currently going or planning for a complex SAP migration in life science, which potential impact is already reflected in the new guidance that we are communicating today. For healthcare, we are raising once again our guidance and we now expect organic sales growth of plus six to plus nine, and organic EBITDA pre-growth, we now forecast plus 14 to plus 19. On sales, a number of drivers continue to play in our favor. First, the strong performance of our recent launches, complemented by an upside from the competitor supply shortages in our fertility franchise and CME portfolio. In addition to benefits gaining exclusive worldwide rights to Babensio effective June 30th, EBITDA-PRE now is also getting the benefits from operating leverage and positive, very positive mixed effects. In electronics, we have become more cautious on both organic revenues and EBITDA pre-development in 2023, and now we are forecasting sales to decrease organically or between minus six to minus one, and EBITDA pre to decline organically by minus 18 to minus 10. And this mainly reflects a more pronounced and extended downturn in the semiconductor materials market with industry forecasts delaying the time of the recovery into 2024, as you have heard from other companies playing in this space, and of course, have seen from recent communication from some of our major customers like TSMC. Overall, we continue to expect semiconductor solutions to show great resilience and to continue to outperform in this challenging market. For a group as a whole, I'm pleased to say that our organic sales performance is flat in H1, and this is despite the increasing challenges in life science electronics. And amid the decline, COVID business clearly proving the benefits of our multi-industry business model. With this, I'm going to thank you very much for your attention and we would be very happy to now take your questions.

One remark from my side. It would be very kind if each of you could limit yourselves to two questions. This will allow more of all of you to ask questions in the first place. Thank you. And with this, we'd like to have questions, please.

Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial star 11 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for your first question. Your first question comes from the line of Richard Foster, JP Morgan. Please go ahead.

Hi, thanks for taking my question. A question on life sciences process solutions. You talked about a trough, I think, in revenues in Q3, so revenues getting worse and then improving, I think, in Q1 and Q2-24. Could you clarify that comment and see whether that's right? And also think about the orders. So just thinking about those orders, the visibility you have over the orders, and customer inventory levels, and how you see order intake developing in concert with those or ahead of those revenue comments, if those are correct. And then secondly, maybe just thinking about the improvement in those orders, how should we think about the magnitude of the improvement? Should we be thinking about a gradual improvement in orders and revenues in process solutions or more of a V-shaped change. Thanks very much.

Hey, Richard. It's Matthias here. So let me tackle your question. Indeed, just to confirm, we expect now a trough in terms of revenue and destocking during Q3. And I think you're getting at the right question, if you will. We expect then the orders showing an inflection point during Q4 into Q1, so we see an inflection point on the orders, and then given lead times, right, we expect them to have this translated into an inflection point in terms of sales into Q1 or Q2. And then in terms of how we see the order development Look, I think it will not be a straight line, right? Obviously, we are monitoring order intake very carefully by region, by customer segment. I think it will be a bit of a fluctuating around the line, but it will not be a kind of a straight line. I think it will be a little bit bumpy, right? And I think, as we also mentioned it before, there will be certain customer segments that be early on the wave of recovery, and others will be a bit lagging behind. So I think there will be, at the end, a mix. But overall, we expect that this will be behind us during Q1.

Thanks very much.

Thank you. We will now go to our next question. And your next question comes from the line of Matthew Weston from Credit Suisse. Please go ahead.

Thank you. Two, please. The first, Matthias, is following up on life science order trends. One of your competitors was very helpful in that they provided what they estimated to be the gap between current revenue and actual underlying customer demand. For their business, they gave a number of half a billion dollars. I'm very interested if you were able to share something similar about Merck. as to how much you think you are currently missing from your P&L or your sales demand relative to what your customers are actually using of your product. And then the second question is for Belen, and it's certainly quite high level. You've talked for some time about the firepower. It wasn't really included in today's narrative. But in the past, it also seems that what was very much a focus on a large deal seems to have moved to a discussion of a string of pearls. I'm very mindful that you've got an extremely cash generative business, and Helena made that clear in her commentary. So net debt to EBITDA is probably going to fall below one in 2024. How long should we expect you to operate with such a conservative if you can't find something to buy? And is there a possibility that we could actually see you return capital to shareholders, either through a special dividend or perhaps even a share buyback?

Matthias?

Let me answer your first question. We can't quantify with an exact number, but let me frame it this way. Phenomenon we currently see in the destocking is in a way that there is no issue in terms of outflow, if you will, of customers using our product, i.e. there's not a share issue. It's more really that they work down their inventories. And obviously, we have built a target model, if you will, inventory model, what we believe will be the normalized levels of those customers. And that model, of course, we then use to come up with our guidance in our forecast, which we just shared with you.

So Matthew, for your M&A question, you have followed Merck long enough to understand that our track record is based, our good track record on portfolio management is based right time, right target, right price, right? And we are aiming to continue to deliver on that trajectory that characterizes our company. So when we disclose our capacity during the capital market phase, We were very clear that what the priority in our mind, this hasn't changed. We were also clear that the deal modality is flexible, that we have the capacity to go for more transformative moves as long as those would create value and the transformative approach versus a string of fails can be confined. For the different business units. First of all, our organic outlook is strong enough not to rush. Obviously, as you can imagine, we are closely watching the targets that we believe could be creating value for Merck in the future. We already mentioned we are not going to do a share buyback. This is not what we believe is going to create value for our owners or create most value for our owners and our shareholders. So last but not least, I would like to remind all of you what is our guiding frame when it comes to making decisions on M&A. And this is first and most important, supporting our profitable growth strategy, then having an R which is above what, third, having an option which would be EPS pre-accredited, and of course doing everything that it takes to maintain our credit rating. Something important, as I said, our priorities haven't changed. This is speaking of grooming the big three pillars. So priority life science, optionality for the healthcare pipeline, and eventually looking at new technologies that would enhance the value that we bring to our customers.

Many thanks.

Thank you. We will now go to our next question. And your next question comes from the line of Satya and Jane from Bank of America. Please go ahead.

Hi there. Thanks for taking my questions, too, if I may. So firstly, on process for Matias, any color on China dynamics? Hasn't been mentioned as the delta. I just wanted to check that you're immune from the pressures that others are seeing, and if so, why that would be the case. And the second question, I guess, is for Elena. At 1Q, there was good color given on the variables between the top end and bottom end of your group guide. You've mentioned a number of times today the top half of the latch of the prior bottom. So should we be thinking the top half of the guide is more realistic now and the bottom end is more of a buffer?

Thank you. Let me address your first question around China, maybe just to frame it size-wise. So China is around 10% of the total life science business. And if I look at our Q2 results in China, it's essentially in line with also what we report for life science overall. So actually we see similar dynamics what we see on a goal. Having said that, if you recall, we mentioned in the past that during COVID, us and I think several others, if you will, lost some share because for local competition, because we couldn't supply during the COVID situation. We are now on a good path actually to gain back that share and we are making good progress. At the same time, we also continue our in-region, full-region model, continue to invest. We also announced investment in Wuxi China for our PS business. So overall, yes, while China is kind of in a similar situation like on a global level, I think we are on a decent path towards continued growth going forward.

So on your second question, let me reiterate, this is a highly realistic guidance from our point of view. As you have heard and observed, obviously, there's a number of moving pieces which we are facing. One I would like to highlight is the fact that the FX is a strong headwind which we are facing, and we have no way of influencing that, obviously. So if I were you, I would take the guidance like any other normal guidance that a company gives and not try to read anything into a tailoring or tapering to the up or to the down.

Thank you.

Thank you. I'll go to the next question. And your next question comes from the line of James Quigley from Morgan Stanley. Please go ahead. Your line is open.

Thanks for taking my questions. So one on science and lab solutions. I think in the slide it says a pricing benefit you saw in Q2. So could you quantify what that or whereabouts that was? Should we expect that to develop throughout the rest of the year? Also, what are the drivers of the regional differences in growth noted, particularly Asia, which was flat despite, obviously, the tough environment that we're seeing in China? And then the second question is, Could you give us an update on the data on track? Is the data still on track for the end of the year as you've already disclosed?

Are there any risks? James, it's really hard to hear. You would try and guess your question. I think your first part was around pricing on SLS because your line was really hard to understand. So if your question was on pricing, SLS, we continue to see good pricing momentum actually across life science, but especially also SLS. And we continue and expect that to continue for a while. Then what was your question again on China, if you don't mind?

So it's more about regional differences in growth seen in SLS. Asia was flat. And I think the U.S. declined and Europe was growing. So is there any particular reason for those regional differences, particularly given what we're seeing in China?

Yeah, again, I think I got your question. If I look at – the question was in SLS in North America was weaker and it was tied more to the pharma spending of the larger customers in North America. If I look at SLS in Asia and China, it was pretty solid actually. It was almost flat. And, I mean, the other thing, it's not the regional space, but if I look at biobusiness, we had certain businesses like biomonitoring, lab water, and which were between low and mid-single digit, while our diagnostic regulated materials was mostly down. So, again, I think overall a pretty decent SLS performance, but certainly even better in Asia versus North America for the quarter.

I think there was also a question on Evo timelines, James. So the short answer to your question is yes, you know that this is, of course, event-driven. But for all what we see currently, we confirm indeed a Q4 readout. We continue to see the medical community excitement actually increasing. We are tracking a certain number of things like awareness, like unmet medical need, like the understanding of PIRA. And we see actually all these KPIs or pre-launch KPIs, if you will, trending in the right direction. So we're very excited.

Thank you. We will now go to our next question. And the question comes from the line of Michael Leuchten from UBS. Please go ahead.

Thank you very much. Two questions, please. One for Kai. The updated electronics guidance might suggest that you're better able to control the margin into the second half. Just wondered if that's a fair interpretation, if you could sort of give us the pointers, whether this is just an ability to manage inflation more or whether there's anything else. And then the second question, going back to the destocking, any color you could give us on consumable versus equipment destocking? Is there any major difference, and how has that changed from the first quarter into the second quarter? Thank you.

Yeah, Michael, on your first question on the margins in electronics, of course, we have to still absorb the inflation. As you stated, this will probably last into 2024 since the delayed impact on the P&L. It will first hit the balance sheet and second the P&L. Of course, it will taper off midterm, but it still has an effect. The volumes have an impact on the margins, too, the declining volumes that we had to absorb. And, of course, on the other side, we respond to that with our cost flexibilizations. It's not the first cycle we are experiencing, so flexible cost structure is very important in electronics. And this is how we manage a decline in volumes, inflation that we have right now. So that is maybe the reason for what you called kind of a softening of that impact in the second half. Still take into account the impact of the ongoing decline of liquid crystal. So we are coming back to a better situation as the comps ease based on what I explained in the past quarters. However, it is a continuous negative impact on margins since we have that conformed liquid crystal somewhere weighing on our P&L.

Michael, I know your question on consumers and products. Consumables and equipment, if I look at our product business, which is essentially SLS and PS, the vast majority is actually consumables, so ballpark, 90% consumables, maybe 10% equipment. So when we talk destocking, it's to the vast, vast, vast majority, it's all just destocking, not about equipment.

Thank you.

Thank you. We will now go to the next question. And the question comes from the line of Gary Stevenson from BNP Paribas. Please go ahead.

Hi there, thanks for taking the questions. So firstly, just on life science, you've now got quite a wide EBITDA pre-growth range. So given all the various moving parts, could you just talk to the key bearing hidden, the upper end versus the bottom end, given the process solution sales growth is pretty much off the table for 2023? And then linked to that, could you just give us your updated thoughts on the margin profile of life science moving forward as we move from that COVID peak of, say, 38% and pre-COVID kind of levels? What do you think is a realistic range for that as those midterm pressures ease? And then secondly, on semis, with the delayed recovery into 2024, but the midterm guidance Could you just talk to your level of visibility here and the level of certainty that you have on the timing of that recovery? I'm just wondering kind of how the strong DS&S business that you've had for a few years now might translate into any kind of uptake in materials demand as those CapEx projects come online. Thank you.

Yeah, let me take the first part on the question. If I look at the margin development this year, there's obviously the key drivers are Number one, obviously the COVID decline from last year, obviously that was a known factor and we are kind of on that path towards roughly the 250 million, but that has a margin impact because the COVID product portfolio has had a higher margin profile. And that's the first element. And the second element that obviously the PSD stock now talked about at length has obviously a volume decline. which also has a margin mix impact given the higher margins we have in PS. And then the other element of that is obviously as the volume declines, we obviously adjusting cost. At the same time, we need to keep in mind that we need to be ready for the uptake, right? And we talked about the inflection point. So while we are adjusting and managing costs where we did, we also need to be prepared when it comes to staffing in the plans to be ready, if you will, to catch the uptake. And that's obviously then balancing, kind of protecting the margins shorter term, but also then, if you will, be ready for the uptake. That leads then obviously to the other part of your question. Our ambition is clearly to get to the kind of the corridor which we laid out before for margins where we said between the pre-COVID levels, which we are roughly in the 31% and the peak levels, which Helena mentioned right last year, peak 38%. We will get to this kind of, if you will, corridor post this transition year, which obviously we are still currently in, but we are having the clear ambition to get there.

Okay, I'll take the second question on SEMI. So on the short term, of course, we are very dependent on the capacity utilization that our customers, especially the leading edge segment, announce as a date kind of changed quite on a short notice. So here, and this is why we have changed now our assumptions for Q4 since the latest news there did not give us any confirmation that there will be a recovery in Q4. It will be more flattish in the second half this year, but we all believe we have seen the worst in Q2. However, it will be more sideways for the rest of the year. And their statements confirm the assumption that in 2020 we'll see that recovery. On the midterm, and thanks for referring to DSNS, on the midterm, our confidence is still as high as it always was because the capacity that is being installed right now will be used at some point. Still, on the short term, it is a shelf-first implementation, so we will sell our equipment. However, the rest of the FAB is not being outfitted to a point where it can already consume materials. However, the appetite of our customers to build capacity is unchanged, and this is supporting our DS&S business on the project side, but as well on the equipment side, and our order book here is very strong. Our visibility here is very strong.

Thank you. We will now go to the next question. And your next question comes from the line of Peter Sadalt from Citi. Please go ahead.

Yeah, thank you, Peter Sadalt, Citi. Just two quick ones for Peter. Just on EVO, just quickly, as it relates to the partial clinical hold, we've seen FDA widen their review, but is there anything you can say as it relates to BTK and MS? And then on Zivinopan, Peter, maybe just with the data coming up, could you just set the scene for us? I mean, if we see a signal similar to what we saw with that new data or the three and five year updated data, would you be emboldened to raise peak cell expectations or talk about zivinopant being a blockbuster drug potential? So a question on Evo and setting the scene on zivinopant, thank you.

Peter, thanks for the questions on Evo and Xavier. Let me take first Evo. I won't comment on the exchanges which are ongoing with the FDA. It's a very good and fluent dialogue. And we will provide you with an update when we have meaningful feedback from the FDA. And you may understand that at this point in time, I cannot really give you further guidance on the exact timelines currently. On Xevinapant, obviously, we're very excited. You see a very solid data set in the phase two. You have seen probably the five years follow-up of the phase two which are quite impressive. We have indeed guided blockbuster potential if the two indications hold, and we remain committed to that. I don't know if you asked also on the timelines, so also this trial is event-driven, and it may be that if we look at the accumulation of events, that it may slip from end of this year into early next year, but that's really a question probably of a couple of weeks. What I would remind you, though, is that, of course, this is an interim analysis, and unless the interim analysis is strikingly positive, the study will remain blinded and continue until primary analysis, which is, of course, the main point for the readout of the primary endpoint. Thank you very much.

Thank you. We will now take the next question. And your next question comes from the line of Oliver Metzger from OdoBHF. Please go ahead.

Yes. Good afternoon. Thanks for taking my questions. The first one on lifetimes. So regarding the destocking, some competitors described six-month inventory level of customers as a kind of normal level. So first, do you agree and – What's your view if the inventory potentially goes below that because everybody is able and willing to deliver even short-term? Would this bring some more downside risk to the bioprocess solutions market? Second question is on healthcare. At fertility, very good momentum. You commented also from the competitor's issue. Apart from that minus thing comes also from China. So how would you quantify both effects relatively? Thank you.

Hi, Oliver. It's Matthias. You bring up indeed a good point, right? The lead times are a key element in terms of the destocking because now customers can place orders. They get the products much quicker than before. Hence, they don't need to hold so much inventory. So, yes, the effect we see, and that's factored into our, if you will, modeling. Modeling, I mentioned the target inventory models, and that's really factored in also when we provide now the guidance. Six months, I heard that before, right? I think it's something which is, I think, quite common. Obviously, it depends and varies quite widely, right, by customers. But the key point is three times, getting shorter, and that's now part of the factor where customers are now readjusting their target inventory levels.

Yeah, Oliver, on fertility, obviously we don't have the exact crystal ball to know exactly what's going to happen with the competitor stock out, but of course we have some data points, and I would say that it's fair to assume that the stock out will continue into half two, although we see that some markets selectively are resupplied by the competitor. I would say that the stock-out component of the Q2 results is higher than the China component of the Q2 results. Obviously, the rebound in China post-COVID is something that we have seen also in other parts of the world when we went through the initial COVID waves, so nothing really unexpected there. What I think is important to remind you is that when those, let's say, atypical effects would wane out, we remain confident in a mid-single-digit growth care for the fertility business.

Okay, great. Thank you very much.

Thank you. We will now take our next question. And your next question comes from the line of Simon Baker from Redburn. Please go ahead.

Thank you for taking my questions. Two, please. Firstly, going back to life science, I know this has been touched on, but not in this precise form. So can I just ask how your visibility on the outlook has changed? The increased range would imply it hasn't improved, but that may just be simple conservatism. So any color on that would be helpful. And then moving on to display, I wonder if you could give us your thoughts on the impact of Panasonic dissolving its LCD production units, not in terms of whether or not they're a customer. I know you won't answer that. To the market by removing that capacity in terms of pricing.

Yes, on your first question. So, yes, certainly visibility has improved, especially since we talked in the last call. I think we have... a good view around the scope, if you will, of the destocking, meaning now including all the smaller regionalized customers, the depth of the destocking. Do we have full visibility? I don't think so. I think nobody in the account industry has the full visibility, but I think we are gradually kind of navigating through that. And also given the more intense now conversation with customers, et cetera, and obviously we mentioned before already the the targeted inventory model. So I think we are putting our arms around the issue, and again, based on that, we provided the updated guidance.

Simon, let me take the display question. So you're talking about the Panasonic line that was focused on industrial and automotive displays. The decision dates back to 2019, and the last panel already in 22. So more than a year ago, March 22, was the last produced panel. And it's a very small capacity. So this is of the overall LC capacity globally. We are talking about much less than 1% of the overall capacity. So this doesn't move the needle anywhere in terms of overall global capacity and readjustment of volumes. Great. Thank you.

Thank you. We'll now take your next question. And your next question comes from the line of Dylan Van Haften from Sievel. Please go ahead.

Excellent. Hi, guys. Thanks for taking my questions. Just on Crivenipant, given the interim is particularly being flagged, will we get an update or maybe also just purely pass the interim with no news if it doesn't meet the early stoppage or futility criteria? Yeah. And is there, obviously we'll hear something in the equity, but, and secondly, is there anything else you can tell us about the statistics required for early stoppage and could it be stopped on a repeat of the phase two data?

Thanks for the question, Dylan. So obviously if futility would be hit, of course we would communicate that, obviously. That's obviously not the base case scenario. As I said before, the bar to hit the interim analysis and then unblinding the data is a very high bar to meet. So I think the base case scenario should be that we will go until the primary analysis. I remind you again, event-driven, what we measure is event-free survival. This is a time-to-event endpoint that is measuring treatment success when therapy is given typically with a curative, like it is the case here in locally advanced head and neck cancer with Xevinapant. This endpoint includes both progression and death, but also, for example, the appearance of a second squamous cell cancer and also salvage surgery in the event definition. And then, of course, in the secondary endpoint, we have overall survival, we have PFS, we have local regional control, we have a duration of response and so on and so forth.

Sharon, I think we have time for one last question, please.

Thank you. We will now take your last question. And the question comes from the line of Rajesh Kumar from HSBC. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. First is on the, you know, the demand coming from bioprocessing. Obviously, you've got COVID-19 inventory, de-stocking effect, but can you run through what the impact of early biotech funding cuts have been, or is that something you would probably expect to see a bit later in in the coming quarter, and you've built that headroom in your guidance range towards the lower end. The second one is, you know, touching on one of the earlier questions on M&A. What is your criteria of success for M&A? How do you define that, okay, this M&A looks like it should go through, and this is how we would define success? Is it growth? Is it returns? Is it a product fit or a combination?

Let me start by giving an example. If you don't mind, Matthias, I have already mentioned that to a question of one of your colleagues before. So first of all, we have a very strong track record on right time, right target, right price. Second, we have very clearly defined portfolio rails. Three strong growth drivers, processing and life science services. Life science overall, because SLF is gaining tons of traction and we believe this is an attractive market. But no business sectors being marginalized, so that means Increasing optionality for healthcare in the areas that are within our focus leadership approach and Peter has mentioned this several times, mainly oncology and immunology and I will not detail this. I'm looking for emerging technologies and participating of the next frontier of innovation in electronics. Second or third, better said, what is our financial frame? guiding a successful transaction first of all that the target is supporting our profitable growth strategy second that the IRR is above WACC that acquisition is EPS accredited and that once closed we can maintain our credit ratings. So those are basically the frames that we use.

Rajesh, on the biotech question quickly, overall our exposure to biotech for life science is less than 10% for early biotechs, even smaller. And then if I go by business, it's smaller than the 10% for PS and SLS. And it's much bigger, obviously, than for our LSS business, namely the testing business, where we do a lot of testing for the early biotechs, and also for the CDMO, where we act as a CDMO for them. But by and large, and again, compared to the e-stocking topic and issue we talked before, life science and also for PS, the biotech funding issue, if you will, is a rather smaller one. It has a bit of an impact, obviously, on the LSS business, but to your question around the guidance, all of that is fully baked into our guidance.

Thank you very much. Belen, any closing words from your side?

Well, Konstantin, I will be brief because you mentioned already that there are several of our colleagues, including yourself, taking a flight. So, first of all, many, many, many thanks to... everyone for your continued interest and support to our company, to Merck. I think you have heard it many, many times, not only in calls, but also in the phone shows, that we firmly believe that our multi-industry business model is associated with very strong resilience, and this continues to be illustrated quarter after quarter in 2D2. in which the company has delivered solidly in a market that is really challenging and full of headwinds. Obviously, I need to say that we remain fully committed to executing our study, and most importantly, to delivering on our commitments to you for a Profitable growth, sustainable value maximization, and of course, 25 by 25, as you already heard from me at the beginning of the call. We look forward to meeting you in our coming Capital Market Day. We will definitely keep you informed of any major developments until then, and I wish you all a very good summer break.