Merck Kgaa

Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the third quarter 2023. As a reminder, all participants will be in a listen-only mode. I am now handing over to Konstantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Thank you, Sharon. Dear ladies and gentlemen, a very warm welcome to this Merck Q3 2023 results call. My name is Konstantin Fest, I'm Head of Investor Relations here at Merck, and I'm delighted to have here today with me Belen Garrio, Group CEO, as well as Helena von Bröder, Group CFO. Also joining me for the Q&A part of this call are Matthias Heinze, CEO Life Science, Peter Günther, CEO Healthcare, as well as Kai Beckmann, CEO Electronics. In the first few minutes of this call, we will guide you through the key slides of this presentation, which will then be followed by Q&A. With this, I'd like to directly hand over to Belen to start the presentation. Over to you, Belen.

Thank you, Konstantin, and welcome everybody to our Q3 earnings call. I'm going to start on slide number five. Q3 has again shown the benefits of our multi-industry business model, with the temporary challenges having continued, of course, to affect some of our business sectors, especially life science, during this transitional year. Organically, group sales were down 4% and EBITDA pre-decline by 13%, mainly reflecting the temporary challenges affecting life science. The strong performance of healthcare partially compensated for life science and for electronics. Looking at Q3, the currency has become more of a headwind versus previous quarter, and this was as expected. And this paired with a very minor portfolio effect lead to reported sales decreasing by 11% and totaling $5.2 billion. FX had a similar dilutive effect on EBITDA as on sales. Accordingly, reported EBITDA pre of 1.4 billion was down by 20%. EPS pre of 2.07 was down 23% year on year. Healthcare has been once again the best performer delivering 7% organic sales growth And this is driven by our Wave 1 product launches, in particular Vavensio, and also related to the growth of the fertility franchise. Our oncology franchise performed strongly, also supported by Herbitux in Q3. Life science registered an 8% decline in the core business, mainly in relation to these stocking-in-process solutions for which we saw the trap in Q3 as we communicated before. This was amid a softer market environment in China and a major SAP migration project which turned out to be complex, affecting mainly SLS. Against the backdrop of a continuing decline in the COVID-19 business, Total sales in life science were down 13% organically in Q3. This decline also had a negative effect on the EBITDA pre-margin in life science and consequently that of the group. In electronics, display solutions increased by 12% organically in relation to a recovery in liquid crystals materials volumes against easy comparables in 2022, partially offsetting a decline in semiconductor solutions, which decreased by 9% organically, continuously outperforming the growth of the semiconductors market. Overall, organic sales were down 4% in electronics in the quarter. While the temporary challenges for life science and electronics persisted in Q3, healthcare performs very strongly. Therefore, our multi-industry business model continues to demonstrate resilience through this transitional year, 2023. I'm therefore pleased to say that we are living at our absolute sales and earnings target corridors for 2023 and change, using the full flexibility of our guidance. We have added more color in order to reflect the developments in the business sectors and to provide more transparency to all of you as we are heading towards the end of the year. We continue to expect net sales in a range of 20.5 billion to 21.9 billion, trending slightly below the midpoint. We are also leaving our guidance ranges for EBITDA-free 5.8 billion to 6.4 billion, and for EPS-free of 8.25 to 9.35 and change. On our target earning corridors, we expect to trend in the lower half of the ranges, and I will provide more details on our assumptions later in the presentation. Turning to slide number six, For an overview of our performance by business sectors, you can see that healthcare contributed strongly to the organic development of sales in Q3, and healthcare was able to partially offset the declines that we have seen in life science and electronics. Our key growth engines in the quarter were our oncology franchise, including both Bavencio and Herbitux, and the fertility franchise within our healthcare business sectors, but also display solutions within electronics, which benefited from a volume recovery in liquid crystal materials. Taking a closer look at the business sectors, healthcare showed strong organic growth of 7%, mainly driven by 13% growth from Wave 1 launches, in particular Babencio, which was up by 22%. From a franchise perspective, oncology was the highlight, with organic growth of almost 18%, driven by Bavencio, paired with a strong performance of Herbitux, particularly in China. That was followed by fertility, with organic growth of 14.14%. Life science was down 8% in the core business in Q3 on the pronounced stocking in process solutions, immediate softer market environment in China, and the major SAP migration project, as I mentioned before, mainly affecting science and lab solutions. As expected, COVID sales continued to be highly dilutive to our growth and were significantly down both year on year and sequentially. This resulted in sales decreasing 13% organically in life science in Q3. On China, I would like to say that our exposure is lower than that of our major life science peers. In electronics, our semi-business continued to outperform a declining market. As the business environment continued to be challenging in Q3 as expected, our semiconductor sales declined by 9% organically in Q3. The display solutions performed strongly with organic growth of 12% thanks to a recovery of volumes in liquid crystal materials, partially compensating for the performance of semiconductor solutions in Q3. Overall, sales in electronics declined by 4% organically in Q3. FX served as a headwind across the board on sales, with the strongest effect on healthcare and on electronics. Regarding earnings, EBITDA pre came in at 1.45 billion, down organically by 13%. And this was mainly due to life science, where the organic EBITDA pre was down by 32% in Q3 on underutilization and associated idle costs resulting from lower volumes in process solutions. EBITDA pre in healthcare was up strongly, again at 17% organically versus last year in Q3, mainly driven by a very good cost consciousness, so lower SG&A, which also reflects the new AVENCIO deal structure with Pfizer, as well as lower R&D costs due to our focused leadership approach. Evita Pre in electronics was down 18% organically in Q3, mainly reflecting lower volumes in semiconductor materials during the downturn in the semiconductors industry, having resulted as well in underutilization and associated idle costs, as we mentioned, for life science. The currency was a slightly lower headwind on Evita Pre than on sales for the group, Looking at the business sectors, FX was more of a headwind on EBITDA-PRI for self-care and electronics with less impact on life science. And this was balanced by hedging gains in our corporate and other segments. Moving to the regional view on slide number seven, In Q3, our three larger regions were down organically. North America declined by 8.7%, while Europe was down 6.8% organically, both mainly in relation to the drop in life science sales. APAC was down by 2.6% organically in Q3, mainly due to electronics, but also life science. Q3 once again demonstrated the benefits of our globally diversified business setup with the geographical diversification adding to our resilience of our tool. The smallest regions, Latam, grew strongly at 21 organically, mainly thanks to healthcare, with Middle East and Africa declining slightly by minus 1%, mainly due to life science. And with this, I'm going to hand it over to Helene for additional details on our Q3 financial results.

Thank you very much, Belen, and also a warm welcome from my side. I am now on slide 9 for an overview of our key figures for the third quarter. Our sales declined organically in Q3 by 4.1%, thereby continuing to show resilience in a challenging business environment, thanks to our multi-industry business model. Taking into account currency headwinds of minus 6.8%, as well as a minor portfolio effect, Net sales declined by 10.9% to 5.173 billion in Q3. EBITDA pre was down by 20.2% to 1.446 billion euros, with EFX hit wind of minus 6.6%, slightly less pronounced than for sales. EPS pre declined by 22.8% to 2.07 euros. Operating cash flow came in at 1.255 billion euros, which represents a decrease of 19.1% over Q3 2022, mainly driven by the decline in EBITDA pre. Net financial debt increased slightly by 1.2% to 8.426 billion at the end of Q3. However, keep in mind that this compares with the net debt of increase of about €1 billion at the end of Q2 2023. This improvement in net debt during Q3 was driven by operating cash flow generation and lower investing cash flow. We as management are monitoring very closely the quarter-on-quarter performance of the group and you will find more details in the appendix of this presentation. So let me also briefly comment on our reported results. So I'm now on slide 10. EBIT was down by 20.3% in Q3. In absolute terms, the decrease was 251 million euros, hence lower than the decline of 365 in EBITDA pre. This was mainly due to lower DNA and higher adjustments on EBIT in Q3 22. 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 destocking and process solutions. The financial result was minus 46 million in Q3 versus minus 47 in Q3 of last year. You may recall from Q3 22 that we had an improved financial results driven primarily by the buyback of our hybrid bonds. The effective tax rate came in at 21% at the lower end of our guidance range and below the 22% in Q3 last year. In fact, the effective tax rate has been at 21% year-to-date, pointing to the low end of our guidance range. Now, allow me to say a few words on the Global Minimum Taxation Initiative aligning to the OECD model rules, which is the so-called Pillar 2. It will be applicable for Merck Group, and we've already started comprehensive actions in this regard to fulfill the necessary reporting obligations. If we assume that the draft legislation will be adopted until year-end, We currently estimate an additional Pillar 2 tax expense for 2024, which would increase our effective tax rate by roughly one percentage point. As Merck Group currently meets bottom end of our tax rate guidance of 21 to 23 percent, we do not expect an adjustment of the tax rate guidance for 2024 from today's perspective. Due to the improved effective tax rate, net income was only down 20% and EPS was down 19.8%, slightly less than the decline in EBIT. So that said, let's move on to the review by business sector, starting with life science on page 11. Sales in the life science core business were down 8% organically in Q3, while COVID-related sales continued to decline and had a dampening effect of minus 5%. Accordingly, the sales in life science declined organically by 13.2% in Q3. From a portfolio perspective, all three businesses in life science, which are process solutions, life science services, and science and lab solutions, were down organically. So let's look at process solutions first. The core business decreased by 15% organically in Q3 from a 7% decline in Q3. This was further amplified by the COVID-related decline of 8%. From our perspective today, we see this as a trough quarter for process solutions as we already shared with you in early August. The pronounced decline in the core business was mainly driven by destocking. Order intake continued to decline year-on-year in Q3, but on a meaningfully reduced scale compared with Q2. Book-to-Pill improved slightly. We reiterate our view of an observed inflection point for order intake in mid Q4-23 to Q1-24, and an inflection point for sales, hence in H124. So with that, let's turn to life science services. Sales in the core were up 12% organically, in line with our mid-term growth ambitions. Amid a significant drop off in COVID-related sales, as expected, sales were down minus 10% organically. Now with that, let's take a closer look at science and lab solutions. Sales were down 4% organically in the core, declining from the flat performance observed in Q2. This was mainly driven by softer demand from pharma companies in North America, as well as softness in China in Q3. In addition, a major SAP migration project temporarily affected our production and distribution capabilities, in particular in North America. The SAP migration impacted our science and lab solutions business by a mid-double-digit euro-million amount in Q3. Excluding this effect, the performance of science and lab solutions in the core would have been similar to Q2. Overall, science and lab solutions declined by 5% organically, including a small 1% COVID headline. EBITDA pre was down 31.5% organically in Q3, and the margin decreased from a still high level of 36.4% in Q3 last year to now 28.1% in Q3 this year. The margin decline reflects lower volumes, mainly due to lower COVID sales and destocking and process solutions, as well as negative mix effects. So if we now take a look at the remainder of 23, I would like to make two comments. First, you heard us mentioning the trough in process solutions in Q3 due to the pronounced destocking and our previously communicated expected timelines for an inflection point in order intake in process solutions, both of which we confirm. We expect our sales in science and lab solutions to be impacted by a residual low to mid double-digit Euro million amount from the SAP migration in Q4. And with that, let's now move to healthcare on slide 12. Healthcare delivered organic sales growth of 7.4% in Q3, in line with the guidance range from early August. Wave 1 launches grew 13% organically. The established portfolio was up 6.1% organically. Now let's look at this by franchise. Oncology was the star performer at 18% plus organically, which was mainly driven by Bivensio, up 22%, and supported by Herbitux, which grew 13% organically on strong performance in China, driven by a post-COVID catch-up effect, and the National Reimbursement Drug List Expansion. At the end of March, we announced that we would regain exclusive worldwide rights for Baventil and have now taken full control of global commercialization, effective June 30th. Fertility performed strongly again at plus 14% organic sales growth. Competitive stock-outs continued in Q3, driving stronger performance in various regions. This was paired with a strong underlying performance. Our NNI franchise was down 12% organically in Q3. Mavenclad was up 3% organically. The continued uptake in the US was partially offset by pricing pressures and increasing competitive intensity in Europe. Rebiz declined by 25% against high comps of last year, which benefited from positive one-off channel dynamics. So regarding our pipeline, for Empaturan, we have reached an important milestone by completing a futility analysis in Willow, our Phase II program in systemic and cutaneous lupus. The study will continue without modification, and the final results shall be available in late 24, early 25. So Evoprutinib. We have shown at ECTRIMS 23 very compelling Phase 2 open-label extension data, with 9 out of 10 patients on Evoprutinib treatment having no evidence of clinical worsening in Year 5. Our Phase 3 RMS program will read out in Q4 as planned. For Xevinapant, the next step is the interim analysis and trialing, likely to take place in the first few months of 24. And then finally, last week we announced a strategic collaboration with Hungary to develop, manufacture, and commercialize a next-gen selective PARP1 inhibitor, which bolsters our DNA damage response portfolio via external innovation. So regarding earnings, EBITDA-free amounted to $685 million, resulting in a strong margin of 33.2%. Organic EBITDA pre was up 17.2% driven by operating leverage and, in general, good cost control of operating expenses. However, FX was a significant headwind of minus 20.8% on EBITDA in Q3, significantly higher than the 8.5% on sales. This was mainly due to the decline in value of the US dollar and Asian currencies, which had a pronounced effect on our EBITDA pre. On top of this, emerging market currencies added to the headwinds. So looking to 2023, we generally expect the sales momentum to prevail for our Wave 1 launches. Q3 was again helped by continued competitive stockouts, which started emerging in Q4 last year. From our current perspective, we do not expect a meaningful change in the situation for the remainder of 2023. Regarding the EBITDA pre-margin, bear in mind that launch preparation costs for ibuprofenib will start to kick in Q4, and on income from active portfolio management, we expect no significant contribution as well. So I will continue with electronics on slide 13. Sales were down organically by 4% in Q3, with FX having becoming a significant headwind in Q3 at minus 7.9%. We had a small positive portfolio effect of 0.3% from the acquisition of Korea-based Macaro. Semiconductor Solutions was down 9% organically in a difficult environment, but performed slightly better than the market. Display Solutions was up 12% organically with a partial recovery in liquid crystals driven by volume against low comps. Surface Solutions was up 3% organically mainly due to strong growth in cosmetics amid weak demand for automotive coatings. EBITDA pre amounted to 208 million, implying a margin of 22.7%, down from the 29.1% in Q3 of last year. Organically, EBITDA pre declined by 17.8%, and FX was a stronger headwind on EBITDA than on sales, with a negative effect of 12.6% in Q3. The EBITDA pre margin reflects idle costs caused by lower volumes, negative mix effects, and inflationary pressures, mirroring in particular this down cycle in semiconductors. Ramp-up costs for new sites and FX movements also affected the EBITDA pre-margin. As a reminder, the EBITDA pre-margin in Q2 23 included a mid-double-digit Euro million amount from the patent agreement with UDC. Excluding this effect, the EBITDA pre-margin in Q3 was actually comparable to Q2. So that said, let me also briefly comment on Q4. Looking at semiconductor solutions, we continue to expect an equally difficult market in Q4 compared to Q3. MSI expectations for Q23 now stand down by a mid-teens amount and we continue to see the market downturn in semiconductors extending into Q24. On display solutions, please note, panel makers have been adjusting down utilization in the first weeks of Q4, and seasonally Q4 tends to be a lower following Q3 Christmas demand. The recovery in liquid crystal volumes will be pushed into 24, and price pressure does continue. This brings me to EBITDA PREED. In order to be ready for the end of the down cycle, we have ramped up new sites which started to impact the EBITDA pre-margin in Q3. This also creates idle costs in Q4. All other factors having an impact on our EBITDA pre-margin in Q3 will hence also remain in Q4. 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 total is above the level as at the end of December 22. The main driver behind this development was actually business growth. On the asset side, inventories increased in all three business sectors driven by lower sales volumes in life science and electronics and by increased safety stocks in healthcare. Receivables were slightly up. And intangible assets decreased during FX and amortization effect. Other assets increased due to short-term investments. With cash and cash equivalent having gone up proportionally to the increase in financial debt. Let's look at the liability side. Provisions for employee benefits are lower, driven by actuarial gains due to higher interest rates. Financial debt increased. However, more than offset by a decline in the other liabilities, which was affected by the dividend payment in Q2. And net equity increased thanks to higher retained earnings. The equity ratio improved to 57% from 54% compared to December 22. So with that, turning to cash flow on slide 15. Operating cash flow came in at 1.255 billion euros and was down 19% with Q3. This was mainly due to the decline in profit after tax, changes in provisions, and changes in other assets and liabilities. In turn, mainly due to lower provisions for personnel expenses. Working capital outflow in Q3 was reduced compared with Q3 of last year. While CapEx increased in line with our mid-term growth ambitions, Investing cash flow was lower compared to Q3 of the year earlier period. This is mainly due to increased proceeds from the disposals of other financial assets, while at the same time purchases of financial assets decreased. And last but not least, the difference in financing cash flow can be explained mainly by the repayment of bank liabilities in Q3 of last year. And with that, let me hand back to Belen for an update on ESG as well as the guidance.

Thank you, Helene. So let me give you a snapshot on the progress we continue to make in sustainability, this time focused on our energy management. I am on slide number 17. So as discussed with many of you in prior occasions, we continuously stepped up our sustainability efforts, and I am pleased to report that we continue to make good progress. Here you have some of the achievements in increasing the sourcing of electricity from renewable sources in order to further improve our share of renewable energy consumption. Just to remind you once again, we are aiming to gain 80% of our electricity from renewable sources by 2030 on our way to climate neutrality in 2040. This year, we have taken important steps towards this ambition. We signed a 16-year virtual power purchase agreement for a solar park in Texas and have announced just last week a 10-year virtual power purchase agreement for a wind and solar park in Spain. These agreements add to the BPPA from 2021 for a wind park in Texas. In order to give you some additional color on what this means for Merck, Once these virtual power price agreements are up and running by 2025, we will be able to increase our consumption of purchased electricity from renewable sources to 100% in the European Union and Switzerland, 90% in the US, and 70% globally based on our current energy consumption. With this, let's move now into our guidance on page number 19. We leave our full year 2023 guidance corridors for the group unchanged, as I already anticipated during the introduction, and continue to expect group net sales in a range of 20.5 to 21.9 billion, EBITDA pre in a range of 5.8 to 6.4 billion, and EPSP in a range of 8.25 to 9.35 billion. Euro. Sorry, Euro. As we mentioned, as our Capital Markets Day, this guidance ranges from early August, included opportunities and challenges. In early August, the balance was very much in the middle. Now the scale is tilting more towards the challenges. The stocking-in-process solutions amid continued cautious spending behavior by pharma companies in combination with the temporary disruption caused by our SAP migration tilts the scale more towards challenges in life science, specifically This cautious spending behavior is now also more visible in China and is impacting our science and lab solution business in particular because the percentage of our business in China within life science is higher for SLS. The same holds true for electronics, where mainly the extent of the down cycle in the semiconductor market is tilting the scale also towards the challenger side. Accordingly, we have become more precise and see the group net sales trending slightly below the midpoint. We expect organic net sales growth for the group to trend towards the lower end of the range, both for group sales overall and also ex-COVID. FX is during Q3 versus the guidance we gave with Q2 in early August, and we expect currencies trending in the upper half of the corridors for net sales and EBITDA pre from today's perspective. We see EBITDA pre trending towards the lower half of the 5.8 to 6.4 billion range with the organic EBITDA pre-development at around the bottom end of the range. EPS3, we see trending towards the lower half of the range. In summary, I'm happy to say that we confirm our guidance ranges in net sales, EBITDA, and EPS3 supported by our multi-industry business model. For some additional color by business sector that I'm sure we will further discuss during the Q&A, please move to page number 20. We confirm our guidance ranges for life science and expect net sales between $9.1 billion and $9.95 billion. Due to the challenges I already mentioned to you on the slide before, we are trending to the lower half of the absolute corridor with the organic development trending towards the low end. On FX, we saw slight easing during Q3 versus our guidance assumptions. with currency pointing towards the top end of the respective guidance range for life science, which is, by the way, also the case for electronics. We reiterate our expectation for COVID-related sales of around 250 million in 2023, dash 600 million less than in 2024, Therefore, expecting this to be diluted to grow in 2023, obviously. On EBITDA pre for life science, we also anticipate being in the lower half of the absolute guidance corridor with the organic development trending around the lower end of the range. For healthcare, we leave our guidance ranges unchanged on both sales and EBITDA pre, guiding for sales of between $7.75 billion and $8.30 billion and EBITDA pre of between $2.45 billion and $2.6 billion. For healthcare, the scale tilts towards the opportunity side with a number of drivers continuing to play in our favor. These include the strong performance of our Wave 1 launches, also complemented by an upside from these competitor shortages in our fertility and endocrinology portfolio. In addition, our EBITDA-PRI now benefits from regaining the exclusive worldwide rights to Aventio, which became effective in June 30th of this year. By contrast, cost for the launch preparation for Evobrutinib will start kicking in in Q4. We therefore see sales in healthcare trending slightly above the midpoint of the absolute corridor and towards the upper end of the range in organic terms. EBITDA pre is trending towards the top end of the absolute corridor and is trending towards the upper end of the range organically. For electronics, we continue to guide for net sales of between 3.5 billion and 3.8 billion, and for an EBITDA pre of between 870 million and 980 million. We are trending around the midpoint of the absolute range for net sales, and towards the low end on an organic basis, reflecting support from projects and equipment in the DS&S business, as well as a pronounced downturn in the semiconductor materials market, which is very well known to you. On EBITDA Pre for electronics, we have also become more precise and see the EBITDA Pre trending in the lower half of the absolute range. slightly below the lower end of the guidance bands on an organic basis amid negative mixed effects due to the semiconductor market challenges. For the group as a whole, let me summarize it again. I'm very pleased to confirm our guidance band for net sales, EBITDA-PRI and EPS-PRI, once again illustrating the resilience of our multi-industry business model. And with this, I'm going to stop it here and open for your questions. Thank you very much.

Thank you, Belen. Sharon, first question, please. Thank you.

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 directly If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for your first question. And your first question today comes from the line of Sophia Graf from JP Morgan. Please go ahead.

Good afternoon, and thank you for taking the question. Firstly, on process solutions, you highlighted that you're expecting to see an incremental recovery in orders in mid-Q4. What have you seen so far here? and how have orders developed in October? How are you thinking about the timelines that you're stocking to be largely complete? And based on that, how are you thinking about 2024 process solutions for us? And then just secondly on healthcare, what are the pushes and pulls around the development of the Dara Healthcare as we look forward into the coming year? How should we think about top-line growth given the potential turn of competitors to two of your franchises and development in R&D given the need to invest in pipelines?

Sophia, thank you very much for the question. Would you be so kind to get a little bit closer to your microphone? It was hard to understand your question. Just ask again and then we'll get you. The first one was understood, Matthias got you, but the second one on healthcare, I think, that would be kind.

So on healthcare, I was just asking about the pushes and pulls on the development of EBITDA and how we should think about that in the coming years. Also in terms of the development of the top line with the return of two competitors, but it's competitive in the franchises and the need to invest in R&D. Excellent.

Thank you. Hey, Sophia. It's Matthias, Life Science. So let me address your questions. So first of all, we're exactly in the corridor when it comes to order intake, book-to-bill, which we've explained before at our CMD and actually also in the prior call, earnings call. So we're seeing an improvement quarter-by-quarter for order intake, and book-to-bill ratios in process solutions. We're also seeing that the decline versus prior year is declining. So with that, we're really making progress towards kind of our goal. And we are confirming also, because you asked about inflection point, we're expecting the inflection point, and it will be more than just one day, obviously, during Q4 to Q1 in terms of orders. and then getting those orders translated into sales. We're expecting that to happen between Q1 and Q2. But again, the key messages, all trend lines, what we are seeing is exactly confirming what we have outlined before. And that, of course, then translates into the 24-year, which also kind of asks, expect like an H1, H2 dynamic, 4PS, kind of the H1 kind of impacted by this Q1. one carryover from the destocking and then gradually ramping up, certainly H2 being stronger than H1.

Yeah, Sophia, on your question around how to think, looking forward to development in healthcare, whether it is top line or EBITDA, of course we are not here to give you long-term guidance on this call, but obviously we're very happy with the performance so far during this year. You have heard Belen say that we are looking at the upper end of the guidance, both in top line and bottom line for healthcare. But obviously, it's also fair to say that there are some elements that will change moving forward. Obviously, the out-of-stock situation of some competitors will ease. We will have to spend in the pre-launch investments, especially for ipibrutinib, The R&D that is a little bit on the low side this quarter will normalize to what we guided you to mid to long term, which is low 20s. So I think the way you should think about healthcare moving forward is that we will see, I would call it, the normalization of the situation, probably both in top line and bottom line, if you think about all these different elements in the mix.

Great, thanks very much. Thank you. We will now go to our next question. And the next question comes from the line of Sachin Jain from Bank of America. Please go ahead.

Thank you for my question. Firstly, from Matthias on the same topic, just to try and push you a little bit further. You've reconfirmed order inflection from mid 4Q into 1Q. We're in the middle of the fourth quarter. Just wondering what you're seeing now. And you've tantalizingly said process book to bill is improving. Is it greater than 1 at this stage? So just any color on those two points. And then one for Peter on evabrutinib. As we approach headline efficacy data, I wonder if you could remind us of the benchmarks that you're hoping for to define the benefit-risk debate you've had with regulators on relapse rate and progression. Thank you.

Yeah, hi, Sajay. Matthias here. Yeah, look, indeed, we are confirming what we discussed at the CMD, right? We're exactly on that trend line. So quarter over quarter, progression in the book-to-bill, good progression in the order intake, certainly moving in the right direction. And again, we are expecting mid of Q4 to Q1, kind of starting the inflection point, and we are moving towards that direction. I think I said it before, we need to see a trend line to call it trillion inflection, and I think we're exactly in that phase, but overall exactly trending in the right direction.

Yes, Sachin, thanks for your question on evobrutinib. I won't give you any concrete quantitative data. We've always said that on the, you know, the uniqueness of evobrutinib is that it tackles really the relapses due to the peripheric inflammation as well as the smoldering disease. So we are looking obviously at many endpoints in the study, ARR obviously, also CDP. And what we would expect to see is ballpark anti-CD20-like efficacy. You may have seen at ECTRIMS in Milano that we delivered, again, very strong ARR in the open label extension of the Phase II, so we remained at 0.11 on ARR, which is very reassuring to see. And obviously, in the press release, we are inclined towards sharing those data, those key efficacy data in the press release. Obviously, we have to balance that with protecting the full presentation at the key congress and also the publication.

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

Thank you, Peter Fedult, Citi. Two sets of questions, please. First, Peter, stay on MS. Just as it relates to this press release we see on EVO in December, over and above the primary endpoint, should we expect you to attempt to address the FDA concerns on the little signal that led to a partial clinical hold when you release that top line data. And then staying on MS, just latest thinking on the outlook for Mav and Cloud in Europe in light of the pricing and competitive pressures that you called out in today's release. And then separately for Belen or Peter or Danny, I'm not sure who, all three of you are, just a little bit more, interested to hear a little bit more about the Hengary assets you in-licensed. I mean, we know Part 1 and Cloud and 18 are interesting targets, but the competitive landscape is intense. So just latest thoughts on areas of potential differentiation, and then more broadly, Belen, just thoughts on getting further deals of size done across the group in the current macro backdrop. Thank you.

Yeah, let me start, Peter. Look, on MS, partial clinical hold, it comes as no surprise that the FDA will look holistically at the data, right? So at the end of the day, it's all about benefit-risk of any product. And we have now to wait a couple of more weeks to see the final numbers on that. On Mavenclad in Europe, actually, there are probably two elements at work here. First, of course, and that comes as no surprise to you, like all pharmaceutical companies, we have been hit by a couple of price cuts in Europe, or I should say tax increases in Europe. So talking about the increase of the VPAS in the UK, the increase of the mandatory rebate in Germany and some additional reference pricings that hit Mavenclad. So that's on the pricing part of the equation. On the volume part of the equation, there is indeed, as you know, increased competitive pressure from the anti-CD20s essentially. Kesimpta has now full reimbursement also in the late pricing and reimbursement countries like France, like Italy, like Spain. And that, of course, decreases somewhat the year one opportunity for Mavenclad. Now, the good news is if you look at the overall performance of Mavenclad year to date, it's up 17 percent. And this six years after the launch. And I think that's also testimony to the commercial capabilities of our teams in MS, which, of course, bodes well for the Evo Brutinib launch. We're very happy with performance in the U.S., and we think if we take all elements into account, we are confident that we will continue to see growth for Mavenclad also in 2024. On Hangry, so... You know that the promise, of course, of the selective PARP inhibitors is to be able to combine it with more products than the non-selective PARP inhibitors, so basically based on the lesser hematological side effects. you know that we have a quite impressive DDR portfolio in-house, and we are looking, of course, at plenty of such combinations, number one, and, of course, also combining with other drugs. And this is a little bit the same principle for the 18.2-claudine ADC. which indeed will also play a lot in combination therapy. So I think it's more a question on how to stratify, how to play strategically in which indication you pick, which combination you pick, and to find your place in that market.

Hi, Peter. It's Belen. I think Peter gave you some details on the bill. I think in my view, this is a great illustration of the focused leadership approach that is now being operationalized by the healthcare team in licensing actively molecules that fit very well the tumors in which we believe we have extensive presence. I mean, this is an in-licensing agreement that is going to give us rights to commercialize outside of China and potentially co-promotion in the Chinese market. And as Peter mentioned, an option on an antibody drug conjugate, which is very complementary to our DDR portfolio. More broadly on M&A, you know, since I saw you at the Capital Markets Day, I have no news to disclose. So we continue to be very much on track with what we have mentioned before. And once again, I want to take this opportunity to reassure you that it can be done in any form. We will stay very disciplined to our financial requirements. framework and basically we will provide more information to you as soon as we have something relevant to tell you and once again we are not in a hurry very clear thank you thank you we will now go to our next question and the next question comes from the line of

James Quigley from Morgan Stanley, please go ahead.

Great, thank you for taking my questions. I've got one follow-up on Satya's question on the book to build. Maybe I missed it, Matthias. Did you confirm that the book to build is now at one, or are we still sort of hovering slightly below one? Then, again, in process solutions, how are you thinking about capacity in the key parts of the bioprocessing supply chain? So, Belen highlighted lower utilization and idle costs. and many of your peers have stepped up CAPEX and continue to invest. So what are your views on industry capacity across single-use media filtration, purification, etc., and how could this impact the trajectory of your margin recovery in life sciences? And maybe one more on Baventio for Peter. Now that you've seen the updated data for PADSERV plus Keytruda and the reaction to the data at the ESMO conference, Has this changed your perception of the competitive risks to the Bivencio franchise in maintenance bladder? Thank you.

Hey, James. Yeah, let me take your question, obviously, on the book to bill. Without repeating myself, right, we made good progress. Obviously, we're coming from below one, right? We're coming from that side of the field, and we're making good progress, as I mentioned before, quarter by quarter. and we're really in our corridor towards our goal. So I think from that standpoint, take it as a reconfirming message to what we explained to you before around CMT and prior calls. Then on your bigger strategic questions, look, our capacity rollout plans were really based and built on our long-term perspective on the growth drivers of the market, right? The underlying growth in maps, in novel modalities, and the regional growth that really triggered and is the basis for our expansion plans. And nothing has changed in our fundamental belief in the long-term growth trends. And of course, as we go live with those new facilities, it's impossible and not intended to really fill them up right away with 80%. So there is a ramp up, and we also explained before that part of our margin progression is based on those kind of costs to really staff those plans and to really get them up and running. If there's some small adjustments to be made, of course we are doing that. We are monitoring obviously the underlying trends, but by and large and for the midterm, we clearly see no indication of a concern.

Yeah, James, on your question on Bavencio. So, well, first of all, I think, you know, having additional therapeutic options for patients with metastatic cancers, of course, by definition, a good thing for patients. Nevertheless, there's a couple of considerations I would like to put forward here. So, first of all, in the comparator arm of the EV302 study, there were very few patients in the comparator arm that got chemotherapy followed by Avelumab. and actually relatively close to the end of the study. So basically the efficacy of Varelumab in that comparator arm will not have meant a lot in that study. Second, if you think about the exposure, quote-unquote, to cytotoxicity, don't forget that in the maintenance treatment with Bavencio, you basically have the upfront exposure to the chemotherapy, and then you're done with chemotherapy. Whereas in the EV302 treatment scheme, you are exposed, I would say, as long as you have the treatment, you are exposed to the side effects of the cytotoxicity. And that leads me to a very important element about sequencing. You all know how important it is in the treatment of oncology in general, and metastatic UC is no exception to that, is to get the sequence of treatment right and to give all possibilities to your patients to have a first line, a second line, and eventually a third or a fourth line treatment. And it's clear that given the data of EV302, where two-thirds of the patients were affected by neuropathy previously, And by the way, also two-thirds of the patients were experiencing skin toxicity. But to come back on the neuropathy, once you have had that neuropathy, especially if it's irreversible, it's very difficult to be exposed in second line, if not impossible, to second line chemotherapy. Whereas if you do it the other way around, you can have the full benefit of chemotherapy plus abelumab and then patients that progress to you can still treat them with a second-line therapy, for example, with PADSF and monotherapy. So please, when you think about overall survival efficacy, think also about the totality of overall survival you can add or you can offer to your patient if you have the sequencing right. Safety, you know that PADSF comes with a boxed warning, so it can cause severe and fatal adverse events, including Steven Johnson syndrome and toxic epidermal necrolysis. So that is definitely something from a quality of life perspective that has to be taken into account. Next element, of course, the budget impact, right? I mean, we don't really think that will be an issue in the U.S., We do think it's going to be a bit of an uphill battle, especially in Europe, to get indeed to pricing and reimbursement, given the fact that that combination will cost at least twice as much as Avelumab. So think about countries where, for example, cost-effectiveness is an important consideration to reimburse or not to reimburse a drug. Last, you know that Japan is an important market to us. Japan is a market where 90% of patients get chemotherapy, followed then in the large number of cases by Avelumab, obviously. And you know that Japanese physicians, and in this case, urologists, are very risk-averse and very sensitive to safety. So we do think that we will have a strong position to start off in Japan. So in summary, and that's perhaps also an element that is important to mention, and we kind of frame that also in the CMD, in terms of numbers, the Merkel cell carcinoma and renal cell carcinoma make up around about 15% to 20% of our cells. And of course, these two will be unaffected by the recent news. And then when I look at the share of the U.S. in our total Bavencio sales, it is below 30%. So I think if you take all these elements into account, it gives some food for thought to then try to imagine what could be the impact and what could not be the impact.

That's great. Thank you very much.

Thank you. We will now go to our next question. And our next question is, comes from the line of Michael Friedrichs from Deutsche Bank. Please go ahead.

Thank you very much. My first one is on semis. Can you just share your latest thoughts on when we should see that potential inflection point there? Then secondly, I noticed that both your LSS and SLS businesses, they did that much better in Europe versus the US. Can you share a bit of color on the reasons there? And then, thirdly, Matthias, based on your comments so far, is it fair to say that we should see continued sequential positive step changes in 2024 and from quarter to quarter when it comes to orders and revenues? Thank you. End of science.

Thank you, Falco, for the question. I take the Semis question. It's Kai speaking. Semis, it's already good news that our messaging since the capital market day hasn't changed at all. So the inflection point is projected by the industry analysts being in the second half of next year. That's good news. It's stable. It's very stable information on this one. We see the first indicator such as a gradual reduction of inventories in the memories and in the logic segment. The first reduction of inventory is happening. We are not yet at healthy levels, but gradually we are kind of approaching healthy levels. It's a good signal of a stable outlook on the inflection point in H2.

If I could, Matthias, so to address two of your questions in terms of the regional performance, SLS, it ties back to what Glenn said in the beginning, and I think you also indicated at CMD, we had this SAP migration essentially in our US hub in St. Louis supporting the SLS business. Hence, we had supply issues given the complexity of that rollout so that, if you will, hampered our ability to ship and basically create the sales, and that was kind of limiting our SLS business in North America versus Europe. As LSS, I would say it depends more on the batch phasing, so I would not over-interpret regional differences too much. Overall, we had a very strong testing business, but certainly on the CDMO side, there's more batch phasing, which creates a more fluctuation quarter by quarter. Then, of course, regarding your question, the way I would frame the answer is certainly look at H1 to H2. I think it's too early to look in the individual quarters, and what I said before obviously still holds in terms of inflection point for orders and then sales, but I rather would take the view on H1, H2, whether we were strong dynamic towards H2, getting us more than overall for life science towards a path towards our midterm ambition. That's the way I would look at it.

Okay, thank you. And Matthias, a quick follow-up, just making sure I understood it properly. Process solutions orders in Q3 were still sequentially down, right? Or were they up sequentially?

What I said before, the order intake for process solutions in Q3 was positive from a momentum standpoint, so sequentially up, so the answer is yes to your question. And in addition, which I think is also an important reference point, if you look at the year-over-year rates, although they were still negative, the reduction rate was less in Q3 versus Q2. So take both of those factors as a trend line in the right direction.

Okay, thank you.

Thank you. We will now go to the next question. And your next question comes from the line of Dylan Van Haften from Stifel. Please go ahead.

Thanks, guys. Just two questions for me, one for Matias, one for Peter. So just if we look at life sciences this quarter, clearly the mix is negative, but could you flesh out this mix? Is this business lines? Is this products in process solutions? Is there perhaps also a more competitive process in the market right now? And the other question is, maybe talking about CDP, I didn't actually catch that from your earlier question, Peter. So what is the benchmark there? Should we be thinking about CD20s versus teraflunomide or CD20s versus interferon or perhaps beyond? So is it sort of within that 25% to 35% sort of relative corridor? Thanks.

Hi, Dylan and Matthias. So on your mixed question, and I think the question was mixed effect on EBITDA. Indeed, it has a portfolio effect in terms of thinking about coming – Or looking at PS as a higher margin business, so the decline, the ongoing decline, obviously, from COVID. And then, of course, in addition, this e-stocking, right, that has an impact in terms of mixed effect on the EBITDA margin. I would say that's the main driver and answer to your questions.

Yeah, Dylan, so for your question on what are we expecting, so basically, you know, of course, our trial is against terflunomide, so what we would expect and, you know, we would be happy, of course, if indeed the differentiation versus terflunomide on CDP would be in the ballpark or similar to the ones that the anti-CD20 provided. ARR, you have seen data from the phase two. If we would be in the same ballpark as these data, this would be very satisfactory. Excellent.

All right, thanks.

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

Hi there, thanks for taking the questions. First one just on SLF and the SAP operational impact. I think, you know, given its impact in order processing, presumably you've got customers, you know, who are going elsewhere to order what they needed over Q3. So the question really is how much of a risk is there that customers who purchase from some of your competitors over Q3 in order to get what they want and customers who you expect to purchase from competitors over Q4 don't come back and kind of what gives you confidence from here that that's not the case. And then a follow up on Evo as well, please. You mentioned launch costs are expected to begin to ramp from Q4 of this year. So could you outline what kind of launch timeline is supported by that comment on whether there's been any incremental change to your level of confidence in the asset? And then also whether that timeline includes the use of the priority review voucher that you picked up a little while back. Thank you.

Hey, Gavin, Matthias. Obviously, you are spot on with your question. And just, again, to frame it right, we mentioned the double-digit impact in Q3 and low to mid-double-digit in Q4. There's obviously all hands on deck, and we try to minimize and ship whatever we can to our customers. And you're right. Of course, the intent is to minimize any longer-term impact from that. and obviously we need to regain and take efforts to regain at the same time. There are, like you said, customers. It's a quick-turn business, right? If you can't ship it within three, four days, you have the risk that you'll miss it, and with that also you may lose the customer for a while. I can reassure you the team are working hard to regain it, but it's an effort, and you're right, there might be a residual impact as we go into next year.

Yeah, Gary, on the ramp-up of the launch costs, we have had actually a very successful Actrims, which, of course, took place in Q4. We will have Actrims, which will be a very important congress for us early next year. We have an American Academy of Neurology. And then, of course, we have the increased activity in our customer-facing teams, which will all contribute to an increase of the cost. On the timeline, so I think you can do the math, right? If we have the readout now in a couple of weeks, obviously we will go as fast as possible thereafter to the FDA. And then depending if we use our PRV or not, I think you can do the math on the timeline. On the use of the PRV, obviously we have to look first at the data and then we will decide whether we file with the PRV or not.

Thank you.

Thank you. We will now go to our next question. And the next question comes from the line of Florence Espelers from Societe Generale. Please go ahead.

Good afternoon. Thank you very much for taking my questions. Two quick ones, please. First for Peter on fertility. Despite the fact that there is less shortage from competitors, we still see a quite nice double-digit performance this quarter. So could you maybe elaborate a bit on how you see the trend going forward? And my second question for Kai, on display solutions, could you give us a bit on how you see the trend there, because the core was pretty dynamic, was from a favorable comparison base, but still, any color would be great. Thank you.

Yeah, Florent, thanks for the question. So on fertility, look, Of course, we don't have a crystal ball when it comes to the future out of stock of the competition. But what we do see is that they come selectively back to a certain number of countries. So we logically expect that they would probably come back to full supply anytime soon in the future. So that's number one. The other element you shouldn't forget, we had a bit of a depressed Q1 in China for fertility. And of course, there is a catch-up post-COVID. So that's a second element that helps. So I think the most pragmatic thing I can do is to guide you towards the mid-single-digit CAGR for the fertility business that we have consistently given to you. I'm not saying that that mid-single-digit CAGR is necessarily going to happen every single year, but over the period, I think that's a fair assumption for your modeling.

Thank you, Laurent, on your display question. So in Q3, the volume recovery was at the end overcompensating the negative price trend. It's kind of fair to model that a bit more cautious into the future. In Q4, Q4 is traditionally a very weak quarter in the industry. And on the long run, you will see us coming back to the midterm guidance where, of course, the underlying price trend will kind of take over. So this is what you could carefully model into the future.

Thank you very much.

Thank you. We will now go to our next question. And the next question comes from the line of Oliver Metzger from OdoBHS. Please go ahead.

Good afternoon. Thanks a lot for taking my questions. Most have been answered, but still some on LSS. LSS is 12% organic growth in the core business. It's, I think, quite positive after all the weak quarters. Simultaneously, we also had in Q3 last year a significantly lowered comp. So can you comment about the performance? Was it more comp-driven or really some underlying improvement? In this context, do you also expect, as the comps in Q4 should be even lower, that the positive underlying trend should continue? And also in this context, Basically, you made some positive comments on your CDMO activities, which are in contrast to many other players out there. So can you highlight what were the real differences which created these outperformers versus some peers? Thank you.

Yeah, hi Oliver. Let me address your question. So in the LSS business, we do have those two two groups. We have our testing business, which is really a steady growth, well diversified regionally, hundreds of customers, right? And we've seen here a really good continued momentum, good growth rate, and also sequentially up. Our CDMO business, with a special focus on novel modalities, is coming from a really smaller base, and I think also compared to some of the larger players in the industry, we are certainly coming from a smaller base, and as such, are much more dependent on individual customers, customer orders facing, do I get this batch in this production line this quarter, next quarter? So I really would look at it less so on a quarter-by-quarter basis, and I think that's really fluctuation could go up, plus X percent this quarter could be even higher. maybe going slightly negative even in the next quarter and then up again. I think I've said it a few times also in this call at the CMD. If you look at it from the outside, I think you just need to look at it, I think, more in terms of over multiple quarters. And again, our confirmation is that we see a really good long-term momentum. So I don't want to compare it now versus any of the peers who are operating on a much, some of them at least, on a much bigger base. So this quarter was certainly influential there.

Aaron, would you consider Q3 more as the positive outlier in the overall trend, or are you also a notch more optimistic for Q4?

Look, again, I don't want to call now Q3 a positive outlier, and I don't want to even call it Q4. I think I explained the volatility, and with that, I think we will deal with for several quarters. But overall, we confirm our long-term a growth ambition, and I think there's a strong demand, sure, in the long term for that business.

Okay, thank you very much. Sharon, I think we have time for one last question, please.

Thank you. We will now take your final question. And your final question for today comes from the line of Simon Baker from Redburn.

Great, thank you very much for squeezing me in. Two questions, if I may, please. Firstly, on Provencio, I wonder if you could give us an idea on any changes in marketing and promotion levels and intensity since you took full control of the product. And secondly, on semiconductor solutions, You rather modestly described it as slightly better than the decline in MSI. It looks a bit better than that. So I just wonder if you could give us a bit more color on which end markets are outperforming for you within the semi space. Thanks so much.

Yes, Simon, on Baventio, so obviously when we took back the product 100% under control, we did some increases here and there on the infrastructure and on the indirect spend, but significantly less than it used to be within the context of the Alliance. So, obviously, that gives you a significant jump in profitability of the product. And we did that because we really thought we had to resource the product adequately, but not over the top either, right? And we really had the feeling that the combination of Pfizer and Baventio together was probably a little bit over the top, and we kind of, you know, right-sized the marketing and sales investment behind Baventio.

Simon, thanks for the semi-question. Maybe the notion of slightly better than the decline of MSI was a humble way to acknowledge the hard work of the team in a tough market. So we were outperforming the MSI by quite a bit. Of course, driven as well by our delivery systems and services business doing a great job and taking advantage of the investment of our customers. Secondly, we won quite a significant number of qualifications, so-called PORs, in the industry that give us quite the confidence on the way forward that we have more Merck materials per wafer benefiting from the new technologies that will be introduced by our customers. This outperformance comes from different areas and underscores our already ninth consecutive quarter outperforming the MSI, I think which is a pretty good signal. Thanks so much.

I'd like to hand over to Belen to close this call.

Thanks, Konstantin, and thank you so much to everyone that participated in the call and that follows us for your continued interest in our company and for the confidence that you placed on us. Make sure that this Executive Board is absolutely committed to stay on track managing the business as we have shared with you through this challenging environment. We have confirmed our guidance corridors. We have confirmed our... on the assumptions that we have shared with you several times this year. I mentioned during Capital Markets Day you have to give us some credit for the guidance that we have been putting forward in these challenging and volatile circumstances. As I said, we remain very committed to... execute our strategy delivering on our promises for profitable and sustainable value maximization. So we look forward to meeting many of you in person at the upcoming meetings and roadshows and of course we will be very pleased to update you as the year draws to a close. Thank you so much and goodbye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.