Merck Kgaa

Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Report on First Quarter 2024. As a reminder, all participants will be in a listen-only mode. I am now handing over to Constantine Vest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Thank you very much, Heidi, and a very warm welcome to this Merck Q1 2024 results call. My name is Konstantin Fest. I'm Head of Investor Relations here, and I'm delighted to be joined by Belen Gariot, Group CEO, as well as Helene von Roeder, Group CFO. For the Q&A part of this call, we will also be joined by Matthias Heinze, CEO of LifeScience, by Peter Günther, CEO of Healthcare, as well as Kai Beckmann, CEO of Electronics. In the first couple of minutes of this call, we'd like to run you through the key slides of this presentation, which will then be followed by Q&A. With this, I'd like to hand over now to Belen to start. Over to you, Belen.

Thanks, Konstantin, and welcome everybody to our Q1 earnings call. I am now on slide number five of the presentation, and we'll start with the highlights. So as you have seen earlier today, we delivered a very solid quarter despite the observed slight organic revenue decline, and we are trending in the right direction with two of our three business sectors having shown a very strong performance in Q1. And we expect growth to continues to improve from here. Organically, group sales declined by 1%, and EBITDA pre went down by 5%. This, paired with a two percentage point currency headwind, leads to reported sales of 5.120 billion, which is a decline of 3%. The currency had a slightly diluted effect on EBITDA pre, which was down by 8% to 1.454 billion. EPS pre of 2.06 decreased 13% year-on-year. Healthcare was the top performer with 10% organic sales growth driven by Herbitux, by Mavenclad, and Babensio. Electronics also showed a positive organic sales development in Q1 of 6%, and this was driven by semiconductor solutions, which returned to growth year on year at an increase of 8%. As expected, life science showed an organic sales decline against a particularly high base, as you may remember, we have not yet seen the full impact of the customer de-stocking in our process solution business in Q1 last year. Therefore, life science was down by 13%. While we no longer segregate the effect of COVID-related sales, it still represents a headwind for life science, as well as for the group in 2024. In life science, we also saw positive signals from order intake in our process solution business in quarter one. Order intake grew both sequentially and year on year. Book to build went up to around one, reflecting the sequential increase in order intake. With the presentation of our financial results last year, we confirmed our goal of returning to growth in 2024. Q1 shows an overall positive business momentum and confirms our previously anticipated trajectory for the remainder of the year and the guidance. And talking about the guidance, and as usual at this time of the year, we are further specifying that. We now anticipate net sales in a range of 20.6 billion to 22.1 billion, a Beta Pre of 5.7 to 6.3 billion, an EPS Pre of 8.05 to 9.10, thereby confirming our qualitative guidance with a slightly more positive tonality on a Beta Pre. We will share more details on our assumptions later. Turning to slide number six, we will provide a bit more color on our business sector. As you can see, healthcare and electronics contributed positively to organic sales growth in Q1, largely offsetting the decline in life science. Our key growth engines in the quarter were, first, our new healthcare products, our new launches, as well as semiconductor solutions within the electronics business sector. In fact, in a still challenging operating environment in Q1, healthcare took the lead with a strong organic growth of 10%. And this was driven by 15% growth from recent launches, with Aventio up by 14% and MavenClub up 12% in Q1, and further supported by a strong performance of our established product portfolio, with a stellar performance of Herbitubs. Our established product portfolio increased by 9%. From a franchise perspective, oncology was the highlight, again with an organic growth of 19%. Life science showed the decline of 13% organically against a strong base as we flagged already in March. with all three business being down in the quarter. Process solution declined organically by 19%. Science and lab solutions was down by 7%, both against very tough comparables in Q1 2023. In electronics, our semi-business was up 8% in the quarter, driving the growth of the sector, which was up 6% organically in Q1. Display solutions and surface also showed positive organic growth in Q1. FX was a headwind across the board on sales with a minus 2% impact on sales at group level in line with the guidance that we provided in March. On earnings, EBITDA pre came in at 1.45 billion, down organically by 5%, or minus 82 million in absolute values. And this was due to life science, where organic EBITDA pre was down by minus 30% in Q1 against high comparables. EBITDA pre in healthcare was up strongly by more than 28% organically, in quarter one, driven by a strongly leveraged growth, as well as the positive impact of the Babensia repatriation. Evita-3 in electronics was up by 4% organically due to positive mix in advanced nodes in semi-materials and in DS&S, combined with volume effects. FX was a stronger headwind on EBITDA pre than on sales, and this is mainly due to healthcare. And with this, let me hand it over to Helene for a more detailed review of our financials.

Thank you very much, Belen, and a warm welcome also from my side. I'm now on slide eight for an overview of our key figures in the first quarter. Let me emphasize. We had a solid start to 2024 in a still challenging business environment. Taking into account currency headwinds, net sales declined by 3.3% to 5.120 billion euros. EBITDA pre was down by 8.4% to 1.454 billion with a slightly higher FX headwind on EBITDA pre compared with sales. and EPS pre declined by 12.7% to €2.06. Operating cash flow came in strong at €1.035 billion, which is an increase of 21.4% over the year-earlier period. Now, that's attributable mainly to lower bonus payments, lower tax payments, as well as a lower cash outflow from net working capital. Net financial debt was stable compared with the end of December, mainly due to short-term investments in non-financial assets. Let me also briefly comment on our reported results. So with that, I'm now on slide nine. EBIT was down by 10% year-on-year. This was above the decline in EBITDA, mainly due to the high level of DNA. the financial result was down by 11 million euros, mainly driven by lower income from financial investments. The effective tax rate came in at 22.2%, which is in line with our guidance range of 21 to 23%, but above the effective tax rate of 21% of the earlier year period. Now, as mentioned previously, this was mainly due to additional Pillar 2 tax expense having increased our effective tax rate by roughly one percentage point. Reported EPS came in at €1.60, which represents a decline of 12.6% year-on-year. And with that, let's move on to the review by business sector. I'm starting with life science, which is on slide 10. As we mentioned, in our qualitative guidance from March, H1 compares against a high base. Hence, overall sales in life science were down 12.6% organically in Q1. We do expect Q1 to be the softest quarter for our life science business sector in 2024. In fact, it also had the toughest comparative quarter in Q1 of last year. Also, bear in mind that while we no longer specify the effect of COVID headwinds, COVID-related sales still represent a headwind for life science in 2024. All three businesses in life science declined organically in Q1. So looking at process solutions first, sales were down 19% organically in Q1, which is actually a similar level compared with Q4 2023. We are comparing against tough comps as we only started to see the first effects of customer destocking during Q1 last year. But as we already mentioned in March, we're seeing positive signals from order intake. Order intake this quarter was solid and went up sequentially as well as year-on-year. I am happy to state that book-to-bill increased to around one. Now taking a closer look at science and lab solutions. year sales were down by 6.9% organically. That is because of demand from pharma companies remaining soft both in North America as well as China. China overall has remained a challenge, but we saw signs of stabilization sequentially. In addition, academic research spending was impacted in North America by Q1 in the delayed signing of the NIH budget. And do not forget that Q1 last year was unaffected by the temporary headwinds, such as the muted spending behavior by pharma companies and the macro environment in China. We have been experiencing since Q2 2023. Notably, sales in science and lab solutions were up sequentially, underlining our expectation of a gradual recovery during 2024. Turning to the third sector, which is life science services. Our third and smallest business, which is within life science. Sales were down 16.6% organically, driven by the streamlining of the supply chain by one of our CDMO customers and an organic sales decline in our CDMO activities, which was mainly due to negative project phasing. EBITDA pre-declined 30% organically in Q1, mainly due to lower volumes and negative mix effects. Q124 had the highest margin comparator also. Sequentially, EBITDA pre-increased slightly with the margin having moved up by 220 basis points, which was mainly on positive product mix effects driving the gross margin. So I'm now on slide 11 for an overview of the performance of a healthcare business sector. Healthcare did deliver strong organic sales growth of 10.1% in Q1, which is above the level we have guided for the full year in our qualitative guidance from early March. Wave 1 projects grew by 15% organically, and the established portfolio was up 9% organically. By franchise, Oncology was the star performer with 19% increase organically, which was mainly driven by Herbitox growing 19%. Here, China in particular stood out positively with prior year sales impacted by a spike in COVID infection rates, while supported by continued strong commercial uptake. Aventia was up 14% in line with our expectations. Our NNI franchise was also up by 9% in Q1. That was driven by Mavenclad, which actually increased 12% organically. Rebiz grew as well by 4% organically in Q1. That was due to channel dynamics, which led to a low base. On the latter, I do want to reiterate that we are not seeing a trend change for the interferon market. Fertility performed strongly again, with an 8% organic sales growth against a lower base in China. In general, and as projected, we are also seeing that stock-out effects of our competitor products are beginning to moderate. We are also very pleased with the performance of our CM&E portfolio, resulting in 4% organic growth supported by a positive contribution across all segments. Within endocrinology, the strong growth of the past quarters was driven by stockouts of a major competitor. As we are at manufacturing capacity for SIZEN, we do not expect a continuation of double-digit growth rates, even if the market supply remains constrained. Now regarding our pipeline. For Xevinapant, we are on track for the interim analysis of Trilang's, our Phase III study in locally advanced squamous cell carcinoma of the head and neck in cis-eligible population. In addition, we have seen positive momentum built in our early oncology pipeline for ADC and DDR assets. We will present new data at ASCO, and in addition, I can recommend that you join our R&D update call on June 3rd, which will focus on early oncology assets. The strong organic sales growth in Q1 helped us to achieve an even stronger performance on EBITDA Pre. EBITDA Pre was boosted by higher operating leverage and benefited from the repatriation of Baventio, which came into effect only as of July 1st, 2023, and amid ongoing cost discipline. Overall, EBITDA Pre amounted to €708 million in Q1, which resulted in a margin of 34.6%, which is 370 basis points above Q123. As a result, organic EBITDA pre-increased by 28.3%, which is well above the organic increase in sales. So moving on to our third sector, electronics, which is on slide 12. The electronics sector had a strong start to the year, with all business having performed positively. Organically, sales increased by 6.3% in Q1. The key driver was the core business within electronics, semiconductor solutions, which was up by 8% organically. Both our DS&S and our semi-materials businesses contributed to this development. In DS&S, we generated revenues towards the end of a large project in the US. We have seen customers push out the timing of new fabs, but we are already building a strong pipeline for 25 and 26. Our semiconductor materials business has now delivered three quarters of sequential growth in a row, driven by thin film applications in advanced logic nodes in semiconductors. Mainstream semiconductor end markets, particularly 3D NAND and analog, have, however, remained weak in Q1. There was early buying behavior from some customers, which has yet to become a broader trend. Therefore, we did see an encouraging start to the year, but we do not call it an infliction yet. Our display solutions business also saw a sales increase of 4% organically. That was mainly due to volume growth, having overcompensated continuous price pressure against low comps for Q123. And surface solutions was up by 2% organically, driven by increased demand for cosmetics pigments and automotive coatings, which overcompensated weaker demand for the industrial pigments. While the EBITDA pre-margin went down by 19 basis points year-over-year to 25.5% compared to a still high base in Q123, we did see a 370 basis point margin increase sequentially. The sequential margin increase was mainly driven by positive mix effects from advanced semiconductor nodes and the sales increase especially in semi-materials and the resulting positive leverage amidst strict cost discipline. For the further margin evolution during 2024, please do have in mind that we continue to have ongoing price pressure in the liquid crystal business and higher underutilization costs due to the ongoing side ramp-up in semi. As we continue to be convinced of the long-term secular growth of semiconductors, we also sustain higher R&D and are continuing with our capacity expansions. So before handing back to Belen, let me also briefly comment on our balance sheet as well as cash flow statement. As you can see on slide 13, our balance sheet increased by 1 billion euros compared with the end of December 2023. Now let's take a closer look on the asset side. Cash and cash equivalents increased by 2.2 billion euros from 2 billion at the end of December 2023, and that was driven by strong operating cash flow in this quarter. Inventories went slightly up, as did receivables. Property, plant and equipment increased driven by investments. And lastly, intangible assets increased due to FX effects on our goodwill. Turning to the liabilities side. Financial debt increased slightly. Pension provisions were down due to changes in interest rates. Payables decreased from 3.4 billion euros to 3 billion euros due to in-license deals which were signed in the prior period. and resulted in payments in Q1 of this year. And net equity increased by 1.3 billion euros thanks to growth in profit after tax and higher gains recognized in equity, mainly driven by FX. As a result, our equity ratio strengthened further from 55% at the end of December 2023, now to 57%. So turning to cash flow on slide 14. Operating cash flow came in strong at 1.035 billion euros and was up more than 180 million compared with Q1 last year despite a decline in profit after tax. This was mainly due to changes in other assets and liabilities in turn driven by lower bonus payouts and taxes in the quarter amid a slower increase in working capital. cash out for investing activities decreased primarily due to lower investment of our excess liquidity in non-financial assets. CapEx on property, plant and equipment went down slightly, while we do continue to invest for capacity expansions. And last but not least, the difference in financing cash flow can be explained mainly by proceeds from bank loans in the year earlier quarter. Now with that, Let me hand back to Belen for the outlook.

Thank you, Helene. So let's take a look at our guidance on slide number 16. Let me emphasize that back in March, when we provided qualitative targets for 2024, we also confirmed our confidence to return to organic growth in 2024. I am happy to confirm this goal with our first quantitative guidance for We are now expecting group net sales in 2024 in a range of 20.6 to 22.1 billion, EBITDA-PRI in a range of 5.7 to 6.3 billion, and EPS-PRI in a range of 805 to 910. And this is based on organic sales growth to plus 5% in line with our qualitative outlook provided in March. Regarding organic EBITDA pre-development, we have become slightly more optimistic than we were in our qualitative outlook for March, and we expect plus 1 to plus 7%, and this is mainly driven by the strong performance of our healthcare business sector. We continue to expect to have an impact of minus 3 to 0% on revenues and minus 4 to minus 1% on EBITDA pre. For some additional detail by business sector, please take a look at slide 17. Our Q1 performance is providing increased confidence in the 2024 period. Therefore, we broadly confirm our qualitative guidance from March for life science and electronics, and we have become more optimistic about healthcare. So, for healthcare, we now guide for organic sales growth of plus four to plus seven, slightly above the qualitative guidance from March, with a number of drivers playing in our favor, including the continued strong performance of our established product businesses. We raise our guidance on organic EBITDA growth to plus 13% to 18%, and this is mainly in relation to the strong leverage growth combined with continued cost discipline in the healthcare business sector. Moving on to life science, we confirm our guidance for organic sales growth and expect an organic sales development between minus 2% and plus 2%. For organic EBITDA PREED, we guide to an organic year-on-year change of minus 6% to plus 1%, thereby broadly confirming our qualitative guidance from March. We continue to expect a gradual recovery during 2024 with organic sales growth turning positive in the second half of the year. We see Q1 as the softest quarter in 2024, both in absolute terms as well as on a year-on-year basis, given the high comparables in 2023 that we mentioned several times. For electronics, we forecast an organic sales development between 0% and 4% and an organic EBITDA pre-development between minus 3% to plus 4%. Once again, broadly confirming our previous qualitative guidance range. We have had a positive start to the year, but the general market inflection is yet to come in semiconductors, and you know that we continue to base our guidance on the semiconductor market returning in early H2. Overall, I'm very pleased to say that Q1 is providing increased confidence in our return to organic growth in 2024. And as a group, we also have the ambition to return to profitable organic growth in 2024 as our guidance ranges imply. With this, let me thank you for your attention, and we will be happy to take your questions.

Hello, Heidi. First question, 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 the first question. Your first question comes from the line of Richard Vosser from JP Morgan. Please go ahead, your line is open.

Thanks very much for taking my two questions. Two, please. Firstly, on process solutions, when we're thinking about the pace of recovery, how are you seeing the consumer consumables ordering?

Excuse me, Mr. Foster, your line is cutting out.

Thank you, Heidi.

We shall move to our next question. Please stand by. Your next question comes from the line of Sachin Jain from Bank of America. Please go ahead. Your line is open.

Hi there. Thanks for taking my question. Sachin Jain, Bank of America. First one from Matthias. Just wondering if you'd be willing to quantify some of the positive commentary. So book to bill around one. Has that been above one at any point? And then order intake growth in 1Q sequentially. Again, are you willing to quantify low single digit, mid single digit sequentially? Some of your peers have made comments. And then the second question is just for Peter. Obviously a very strong quarter from a sales perspective at 10%. Just wondering if you could touch on factors you see through the rest of the year from a phasing perspective that means that guide is 4 to 7. I think you've called that rebate and size then, but anything else we should bear in mind? Thank you.

Yeah, thanks for your question. I don't want to quantify at this point. I mean, we certainly see the positive momentum, right, both in terms of water intake sequentially year over year. We see also the absolute number going absolutely in the right direction and steering us towards the guidance for the full year. So I think that's sending, I think, a clear signal.

Yes, Sachin, I would agree with you. Very strong quarter across the board in all product lines or franchises and geographies. It is true, though, that beyond this very good structural performance, we had a bit of one-timers. Helene already mentioned in her speech, so some channel dynamics that will not repeat itself in the quarters to come. And then you should also bear in mind that, as also mentioned already in the prepared remarks, that there was a spike in COVID in Q1 last year, which benefited especially Herbitux and fertility. And then, of course, there is the yet-to-come effect of PADSEF in the U.S. for Barencio. I think these are the big, let's say, moving pieces for the rest of the year. But again, overall, structurally, very strong performance. If you think about Herbitux and the growth rate, bear in mind that this is also – Real real performance, you know orbit is becoming more and more the backbone in several combinations We have the head and neck performance in in China post NRDL and so on and so forth So I hope that gives you a little bit more color Thank you Thank you, we will take our next question and

Your next question comes from the line of Richard Tucker from J.P. Morgan. Please go ahead. Your line is open.

Thanks very much. I hope you can hear me now, and apologies for that line drop. So just a question on process solutions. When we're thinking about the pace of recovery, how are you seeing the improvement in consumables ordering? Is this more sort of a pace going forward? And then a second question on display. Could you give us context? important the conversion of iPads to OLEDs.

Hey, Richard, it's Matthias. Your line was still a bit out, but I think I got your question about consumables sales trending for PS. Look, the way I see it unfolding is that Q1 certainly was the lowest quarter in PS for the year. We will see a gradual improvement quarter over quarter throughout the year. Certainly what I mentioned before, the order intake, absolute increase from last quarter to this quarter, expected to continue, will drive that. So now how much quarter over quarter, that's hard to predict, but I would see a gradual improvement and certainly then come age to having and demonstrating for PS again positive growth year over year.

Yeah, Richard, on the OLED question. Of course, we don't disclose any specific customer interactions, and that's why I can't comment on the specific point on the iPad. But as a leader in the OLED material space, I think there's always a pretty high likelihood that we are involved in the most sophisticated end products. And I think this confirms the validity of our assumptions in the OLED technology development. And it's good news for us all, yes.

Thanks very much.

Thank you. We will take our next question. Your next question comes from the line of Colin White from UBS. Please go ahead. Your line is open.

Hi. First question for me is Colin White from UBS. First question was about the upcoming interim analysis for Zivirapan. Clearly, we've not had it yet. It's still on track for the threshold of events, perhaps, to be met. in the second quarter. What I wanted to do is to ask what the current best estimate is of when the interim analysis is carried out, when we might hear from that, after you've had the interactions with IDMC, and when the best guess still is for the full final readout. And then a second question on bioprocessing, please. Last quarter, you heard about the customer survey that you had done and the expectation that CDMOs would reach their target level and start ordering earlier. And so just any update on what you've seen in terms of that and if you've already seen evidence of this and CDMOs reordering and your latest thoughts on how that's likely to progress. That's it. Thanks.

Yes, Colin, thank you. I will take the Xevina Pan question. So I can confirm to you that we have the number of events that we need to go for the interim analysis. We have those events accrued. So now there are a couple of steps to be taken, database log, data cleaning, and then the DSMB will look at the data. There are two scenarios. I remind you that the base case scenario is that the study continues. And the upside scenario is that, indeed, we have overwhelming efficacy, according to the DSMB, then our teams, a Chinese world team would be unblinded, and then we would have a conversation with the FDA. So, in other words, in the base case scenario, no news is good news, and the study continues. It's only in the upside scenario that we will communicate. In terms of timing, to completely answer your question, we do expect to have, let's say, a view on that by the end of the second quarter or early third quarter, so end of June, early July.

Yes, and on your BioP question, indeed, we see the ordering patterns unfolding more or less in line with the survey we took a couple of months ago. So, yes, we do have CDMOs kind of going back to more normal ordering patterns, but also other customers. So, the answer is yes.

Thank you. Thank you. We will take our next question. Your next question comes from the line of Peter Virdold from Citi. Please go ahead. Your line is open.

Thank you. Peter Virdold, two questions, please. Peter, just can you dig into the venture a little bit more? I know you don't disclose by geography, but I would like to understand the dynamics. Could you do any soft commentary on that sort of U.S. versus Europe and Japan? So basically what I'm trying to get at is, is this pan-serving Keytruda playing out as you expected, and being fully offset by what's going on in Europe and Japan, or is the U.S. actually holding up better? So that's question number one. And then number two, on the M&A environment, it's almost two years since management started articulating a message that, you know, your appetite had increased and the firepower that you were willing to deploy. Now, I realize you're not going to identify targets on a Q1 conference call, but can you at least characterize the current M&A environment and whether you think conditions are more conducive than they perhaps were in 23 to actually see that balance sheet deployed. I'd just be interested in your latest thoughts there. Thank you.

Yeah, Peter, let me take the Baventio question first. So just if, again, if you take a step back, you will remind that we have always characterized, without giving precise numbers, actually the U.S. part of Baventio is less than 30%. So that's number one. And what we see is what we anticipated is that if you look at internal sales in Q1, we don't really see an impact yet. We slightly grew our sales even in Q1 in the U.S. But, of course, that is more a factor of what was initiated in Q4 by platinum-based chemotherapy. And then, as you know, the maintenance therapy with Bavencio and the responders is then started a little bit later. So, What we do see is indeed a decrease of platinum-based chemotherapy in Q1, so we should anticipate indeed some impact in Q2, but we need a couple of more data points to really try to quantify that impact in the U.S., but of course there will be an impact. What I can also tell you is the brand continues to grow very strongly in Europe and Japan. so that from an overall guidance for this year for Baventio, we still are confident that the brand globally will continue to grow. Now, perhaps one or more qualitative points. First of all, we always said, and we stand by that, is that it will take time and effort for EV302 to get priced and reimbursed in Europe. That's number one. In Japan, chemotherapy is really extremely well embedded, and the market is very sensitive to toxicity. And talking about toxicity, you know that, of course, many patients treated with EV302 got pretty nasty side effects, very burdensome for the patients. So thinking about skin toxicity, thinking about neurotoxicity, which also led a lot of editorials and comments by KOL, that we have to be careful and also take into account quality of life considerations, preferences of the patients, and so on and so forth. Last but not least, you will remember that we also published at ASCO-GU the sequencing data where we had a real-life cohort coming from France where we actually demonstrated that if you start with maintenance with Baventio followed by Pazarin second line that you also come to more than 40 months of overall survival. So we are battling very hard to get these messages across and I would say so far so good.

Hi Peter. On your M&A question you know us very well. We have discussed this several times. First of all As you know, we are a cash buyer, preferably, and our cash situation is good. It's allowing for us to allocate our capital according to our priorities, which we have outlined many, many times with a top priority on life science, both SLS and PS. Obviously, continuous in-licensing In healthcare, as you have seen, we have progress on that late last year and early this year, and obviously identification of potential technology opportunities in electronics. So the environment is in terms of multiples for life science. became a bit more accessible, multiples coming down a bit. Number of targets is really not a problem, but as you know, confirming a timing, right, for our portfolio moves and mainly for acquisition is almost mission impossible because It takes two to tango, and you know that we have a very good track record on right time, right price, right target. So we aim to keep that. We have a very clearly defined financial frame, which is as well as a strategic frame. So first of all, supporting our profitable growth strategy is our main priority, followed by keeping our credit ratings high. Delivering an IRR of the acquisition, which is above our work. And then, obviously, EPS pre-accretion. So, that goes as a high-level frame and have no doubt that we will keep you informed whenever we have relevant news to communicate. Thank you.

Thank you. Enjoy your time. Thank you.

Thank you. We will take our next question. Your next question comes from the line of Emily Field from Barclays. Please go ahead. Your line is open.

Hi. Thank you for taking my questions. I'll ask two. The first is a follow-up question on the earlier answer to the ZivinaPAN scenario. Peter, you mentioned two scenarios. I think continuation of the study or early stoppage, but you didn't mention three. And obviously, that would be the bad one of that study being futile. So, you know, is that still a plausible scenario that the drug could fail at interim? If you could just clarify that. And then secondly... In the prepared remarks, going back to life sciences, sorry, you mentioned the impact of softness in China is impacting SLS in the quarter, but that you saw some signs of, I believe, stabilization sequentially. Could you provide some more granularity on what you're seeing here, you know, and what sort of that path is expected for China, and also if you could confirm that China is 10% of the life sciences business overall? Thank you.

Yes, Emilie, so on Xifinapant, of course, you are totally right. In this unlikely scenario that futility would be hit, of course, then that would be the worst-case scenario, and we would then also communicate. So you are totally right.

Hi, Emilie, it's Matthias. On your China question, yeah, indeed, total China sales for total life science is below 10%. Obviously, we are very active in China and we wanted to have the situation. We are still down year by year in sales for the first quarter. At the same time, what we see in our sales is somewhat stabilizing. So if I look at quarter by quarter, I see a stabilizing trend. Now the question is how will that unfold throughout the year. We do believe that things will progress positively throughout the year, but obviously that depends on the macro situation in China.

Thank you. Thank you. We will take our next question. Our next question comes from the line of from Morgan Stanley. Please go ahead. Your line is open.

Yeah, thank you. First question is on the negative product mix impacting the margins in life science in the first quarter. Just if you could tell us if this is about the shift in mix between the sub-segment of life science or if you're talking about product categories within segments. The second question is on the healthcare growth. So solid outlook on top line this year without new launches, but also some positive one-offs or base effects. Just conceptually, when we think beyond 24, do you have a strong confidence in the ability to grow the portfolio X pipeline, so basically it's kind of base portfolio and wave one, on the next couple of years, at least until the loss of exclusivity on Marine Cloud?

Let me try to answer your first question. And I was not sure on what reference you're taking. So year-over-year, first quarter was last year. Indeed, we do have a substantial decline in our margin following, if you will, the volume drop, right, losing the COVID sales, which had a higher margin profile. So that is kicking in. However, I think sequentially, and we mentioned that before, Q4 to Q1, we already see a sequential margin improvement, about 220 base points. That, if I look at the sequential improvement, is also partially due to mix, but on a positive side, if you will, because the share of our PS and SLX business is a bit higher in Q1 versus Q4, because LSS is a bit weaker. So, I hope with both answers, I address your question, because it's a bit, whether you look at Q1 last year or sequentially.

Thank you. Thank you both. Sorry. Yeah, Thibault, on your outlook beyond 2024, we actually already characterized that, and I think Belinda did in the last call, that if we include Xevinapan, that we're still confident to be at the lower end of the mid-single-digit growth, so without Thibault putting it. But, of course, obviously, you see the pipeline maturing. You see the pipeline getting larger. We will have readouts of Empatoran coming up. in SLE and CLE later this year or early next year for SLE. We have the R&D update call on the earlier oncology portfolio, so lots of news there on the DDR portfolio, on the ADCs. You have seen that we have been quite active in the in-licensing space. We have added a phase three asset to our pipeline. So we are confident, of course, in the long-term outlook for our product. We will start cluttering in NG and phase three and Q3. So as you can see, we are working hard and making a lot of progress to further enhance the growth profile of the company.

Thank you. Thank you. Thank you. We will take our next question. Your next question comes from the line of Oliver Metzger from Oda BHF. Please go ahead. Your line is open.

Yes. Good afternoon. Thanks for taking my questions. The first one is on SLS. So you mentioned in your comments weaker pharma spending and also governmental funding delays in the U.S. Can you give us your view of the situation, whether you see it rather as a temporary, means Q1, effect or potentially more prolonged, And also in this context, do these delays trigger some pent-up demand afterwards in your view? That's number one. The second one is on your guidance. So if I look on the midpoints of the segmental guidances and compare it with the group organic growth guidance, the midpoint of the group guidance appears a notch too high. Mathematically, range is rather 0 to 5%. which would describe this some better. Can you therefore elaborate for which segment you see a more positively-succeed outcome of your guidance range? And my last one is a strategic question on healthcare. So the guidance for 2024 looks pretty good, in particular on the bottom line. I understand that the healthy top line provides some attractive funding and the leverage for existing portfolio is quite good so i don't want to focus too much on the evil failure but can you make a comment whether you're looking more intensified on strengthening the over the portfolio outlook for the internal or external innovations so that also from a pure portfolio perspective the segment does not become smaller versus the other segments over time so it's basically also an active decision not growing affected not so aggressively in future anymore and therefore it can become smaller. So these are my questions. Thank you.

Yeah. Hello, Oliver. It's Matthias on your first question around SLS. Indeed, we have experienced somewhat softer market situation for SLS, especially in North America. and in China for the last several months or even a couple of quarters. Q1 was also somewhat impacted due to the delayed release of the NIH funding, which came a little bit later during Q1. All of that, I would say, is more temporary, and we expect also here gradual improvement. And if you look at SLS of the year sequentially, our business grew from Q4 to Q3, and now Q1 to Q4. quite nicely and we expect that trend to continue. If there is a catch up effect, it's hard to predict. I probably would not bank on that, but a solid continuous improvement with the market conditions also going in the right directions.

On your guidance question, let me basically emphasize that we are offering our best view of expectations and we capture the business assumptions that are visible to us as accurately as possible for the three sectors. And then something that you have to take into consideration is that the three sectors do not need to add up very precisely. So you need to understand that when we talk about healthcare, for example, we are now raising the guidance versus the qualitative guidance that we gave in March simply because we have further visibility and expectations on the way our base portfolio is going to move. Take this as an example. You know, in the slide 16 of your presentation, you can see all the details and the drivers and behind our guidance and do not expect that everything adds up.

Yeah, Oliver, on your third question, we've actually already introduced the concept that we want to become and we have become much more aggressive on the in-licensing front. And again, I don't want to repeat, but we have seen actually a flurry of deals end of last year, early this year. And the aim is really to have a pipeline that is at least 50% coming from external innovation to increase our shots on goal and to live up to the expectation to launch at least one new product or one major indication every 18 months. So this is very high on our agenda. And we are convinced that by doing that, we will continue to drive growth in healthcare, as I mentioned earlier.

Okay. Thank you very much.

Thank you. We will take our next question. Your next question comes from the line of Ed Hall from Stifel. Please go ahead. Your line is open.

Perfect. Thanks, guys. Just a couple of questions on life sciences. So firstly, more on the process solution science. You touched on China market slowdown, but could you necessarily talk about the U.S. and Europe ordering patterns, especially in the U.S. in terms of the Buy Secure Act uncertainties? Did this play any sort of impact in customer ordering patterns? And then second question would be you mentioned book-to-bill of around one. I was wondering if you could qualitatively talk about Q2. in what you've seen so far? Is this tracking in line with expectations and is this above Q1? Thank you.

All right, so on your first question, There was a few things mixed in. Maybe I'll start with the BioSecure Act. Obviously, we are monitoring that very carefully. There's a lot of dynamics there. I think it's really too early to assess the real impact. What I certainly can say, we feel we are very well positioned. Our in-region, full-region supply chain model works well, and I think it's positioning as well, our broad portfolio as well. Also, none of our customers has more than like 2% of sales. the same time and maybe you're pointing also to that direction what could it mean on the upside it's too early to tell and for sure we don't see it yet in order patterns or in sales what i can say that there's probably more inquiries coming in around the topic but we need to see the next few months how that really unfolds broader questions from you around the order pattern i think i talked about that before in general we see us The trend unfolding as expected that come Q2, the majority of our customers should be having the destocking behind them, both on the CDMO, but also on the other customers or the large customers. And yes, we see already larger customers already going back to an ordering pattern. They're also anticipating and seeing for much shorter lead times. That's an important component. So by and large, we are seeing things unfolding as expected. And I think then your question around the book to build, look, it's around one, right? We are monitoring carefully every week, if you will, every month. It's not the right time now, obviously, to talk about Q2. I think I gave enough indications based on the Q1 dynamics and the momentum. And our expectation is that, as I mentioned before, the momentum continues and we will see a strong QH2 versus H1.

Thank you, guys.

Thank you. We will take our next question. Your next question comes from the line of Gary Stevenson from BNP Paribas. Please go ahead. Your line is open.

Thanks for taking the questions. A couple on life science, please. So first one, just on science and lab, you noted that customer orders were impacted by the SOP migration back in the second half of last year. So the question is more about what you're now seeing in that customer base, whether you're seeing those customers who needed to go elsewhere coming straight back to order or whether you think there could be a longer lasting impact from those lost sales. And then secondly, actually just on life science services, you made a comment in the slides and remarks as well about one of your CDMO customers streamlining their supply chain. So could you provide a bit more colour here? Is this a customer that's moving away from you as a dual source of supply? Is this something you're generally seeing a bit more of now as supply chain pressures ease? And then linked to that, is that something that could also potentially impact dynamics in process solutions if there are changes to supply chain? So your thoughts around those kind of points would be helpful. Thank you.

Yeah, thank you. Great questions. So on the first one, SAP, look, the issue is behind us, right? Some of the customers who needed their products within 48 hours, obviously those sales are gone in that period last year, but we are not seeing an impact anymore. So, if you will, the SLS dynamics is independent from the SAP situation we had last year. Then the other point, and I think it's very specific, which you picked up, let me explain that. It was a specific customer situation where during COVID, we helped the customer to organize their supply chain, essentially to purchase raw materials, and we had it like a pass-through. And we kind of phased out that specific situation because it wasn't needed anymore. So it was very specific. We wanted it to be transparent, but it's not a, if you will, a trend or whatever. To be clear in LSS, and we talk especially about the CDMO part, not about the testing part, the CDMO part, it's more volatile, right? We are focusing on more the customers in the novel modalities, which are by nature in the early phases, right? depending on their, if you will, win as they go through their development phases. And that's what's driving a lot of the volatility. We have not lost customers, and that's not driving that volatility. And as such, that has not any, if you will, parallel effect on what we see on the PS side.

Perfect, Claire. Thank you.

Thank you. We will take our next question. Your next question comes from the line of Brian Bolchin from Jefferies. Please go ahead. Your line is open.

Hi there. Sean Hammer from Jefferies. I'll be asking on behalf of Brian. So just two from me, please. On electronics, can you help us understand which type of chips you'd expect to lead the early 2H recovery? Is it early pickup in logic? Is it likely to drive a greater rebound alongside memory? So that's the first question. And then secondly, I understand there's been quite a few questions on reordering and life sciences. But perhaps could you give us a percentage on the customers that have begun to restock? Thank you so much.

Well, let me take the electronic question. So the recovery is typically defined by a return of the mainstream technologies, and this is predominantly 3D NAND that define volume in our industry. as well as mainstream logic, as well as analog. These are the three technologies that we need to recover volumes and to set the inflection point. The current early trend is defined by high-end AI-related technologies where we are specifically benefiting from. This is an atypical cycle where one technology is leading the pack early, and this is all related to the current trend towards AI.

Yeah, and on your PS question, look, we already have a substantial base of customers who are in the kind of reordering trend. We have others which are kind of getting there. As I mentioned before, by and large, we expect that the majority of the customers are the broad base of customers we have in PS will have D-stocking behind them come end of Q2, right? Some of them will still come in Q3, but by and large, I would say we are exactly in that pattern which we expected. Some are back to normal already and some are kind of in the process there. So I think that's exactly what we have anticipated and also what we communicated in our prior call.

Thank you. We will take our next question. Your next question comes from the line of Rajesh Kumar from HSBC. Please go ahead. Your line is open.

Hi. Good afternoon. The first question is on process solutions guidance. If we look at your guidance, how much of it requires the demand to sequentially improve from the current run rate? versus the comps in the second half being softer. You could choose to answer it at the life sciences group level and process solutions, or if process solutions is a more helpful answer, please share that. And then the second question is around the margin improvement in electronics. You clearly have said that there are capacity ramp-ups and therefore expect the operational gearing more second-half rated. Can you characterize the nature of the gearing? Do you expect the incremental margins to be similar to previous periods of growth, or can it be a little higher or lower? I know you've given a full year guidance range, but not just for this year, going forward beyond 2024. How should we think about the incremental margin in electronics? Thank you.

Yeah, on your first question, indeed, the guidance, if you will, reflects a mix, right? I mean, first of all, indeed, like second half last year obviously provides a lower base than first time last year because in Q1 we still had the lack of the effect of the destocking all the stuff we discussed a lot. So that's one component, but indeed the bigger component and I think more relevant is the expectation that gradually we're going back to the more normalized order pattern several of the topics I mentioned already before. And think about the momentum we are building, which I explained before, with a book to build around one, with order intake sequentially increasing, quarter over quarter, some more, some less, that will get us into the range of the guidance. So I think that's the way I would look at it. That's the math and how it works. But certainly we're expecting a solid book to build around one, including order intake to increase, and also including that customers are acknowledging our shorter lead time so that the orders we are getting in a quarter are delivered sooner than during COVID times when we had much longer lead times. So that's kind of our issue if you look at it holistically.

Sorry. In that context, can you sort of give us some color on what proportion of that business is driven by order books versus bot business? Because, you know, if we look at one, then we might be tempted to assume the whole business is order book driven, but surely that's not the case.

Well, look, I mean, I'm not sure I fully understand your question. Of course, there's run rate business, right, but still customers play a So maybe I'm happy to follow up with you, but I'm not exactly sure I'm clear about the question.

Okay. So your margin question for electronics. So the midterm guidance of around 30% is intact. So this is what we always communicated on the midterm margin development. Now we're talking about short term, what happens in 2024. You see on the positive side a positive mix effect of the symptoms technology for advanced technologies, advanced nodes. That is a positive mix effect. You see the volume leverage kicking in over the quarters this year, especially after the inflection of the mainstream technologies, middle of the year. And then on the more conservative side, we see, of course, additional ramp-up costs coming in as we ramp up new capacity for our semiconductor materials. And that new capacity impacts the margin negatively. So don't extrapolate from Q1 because then you would exclude the ramp-up effects in your calculation.

Thank you. Thank you. We will take our next question. Your next question comes from the line of Simon Baker from Redburn Atlantic. Please go ahead. Your line is open.

Thank you for taking my questions. Two, if I may, please. Firstly, on electronics, I'm just trying to triangulate performance and guidance here. So 6.3% organic growth in Q1, guidance for the year nought to four, guidance also for a second half inflection. You did talk about DS and S phasing. But that would suggest that Q2 would be considerably lower growth than we saw in Q1. Is that the case? Is there any other factor at play? Or is this simply prudent guidance at a still relatively early stage of the year? And then secondly, a quick question on healthcare. Amongst the drivers, you cited strong growth of Tepmeco. I couldn't see a sales number in any of the releases. I wonder if you could possibly give us the Tepmeco sales number for Q1. Thanks so much.

Simon, let me start on electronics. So first of all, I think you have to take into account a bit the low comps that we had in Q1 2023 in terms of factoring in the growth trajectory for the coming quarters. Second, the market reports, the recent, very recent market reports, as well as our customers communicating on their quarter, have shown a more cautious outlook into the rest of the year. which we had to take into account looking into our guidance. And you already mentioned the DS&S shift of one or the other invoice from one quarter to another or potentially even at the end of the year into early next year, that could have impact on our growth. So this defines a bit the lower end of the guidance. And the upper end of the guidance is defined, of course, by the current adoption of new technologies and especially our involvement here in AI and highest end technology that gives us the confidence on the positive side, that defines the full frame of the guidance and depending on what comes when, then we see us landing within those different boundaries.

Yes, Simon, to your question on Tepmedco, we have never disclosed it, but I guess you can calculate it by subtracting total oncology minus Herbitrix and Bavencio. So it's a little bit shy of 30 million in the first quarter. It's growing strongly. You know, it's our first endeavor in the targeted therapy space, and we have actually very good performance in Japan, also picking up seriously in the U.S. and also in the European countries where we have reimbursement. I've also told you in the past that I think that the potential of the drug is somewhere around 150 million. I can now say that very confidently. And when I see the development, it may even go a little bit above 150.

Perfect. Thanks so much.

Thank you. We will take our next question. Your next question comes from the line of Florent Cespedes from Prudence. Please go ahead. Your line is open.

Good afternoon. Thank you very much for taking my questions. Three quick ones. First, for Pierre, on the pipeline, please, could you give us a little bit more color on what we should expect for the sort of June call on early oncology, and is it an area where we should still see some inlay sensing activity? And the second question on pharma and fertility, could you give us, please, a little bit more color on how we should see the rest of the year? We see the self kind of plateauing on the fertility. Do you see more pricing pressure or some volumes are slowing down due to the competitive environment? And my third question, if I may, is on life science services. It's just a follow-up to make sure that We understand on the CDMO business, you cite on your slide that there is an unfavorable batch phasing. So is it a kind of one-off impacting this quarter, and we should see some recovery in Q2, or is it something that should impact also the rest of the quarters? Any clarification on this one would be great. Thank you very much.

Yes, thank you, Florence. So, your first question on the R&D call. So, what you can expect is really early oncology in focus, no focus on Xevinapan this time around. So, it's about our very, very nicely advancing ADC technology with NTC-CAM5 as a frontrunner, as you know. And we will talk about the DDR portfolio with Tubu-Sertip, as you have seen in the R&D Catalyst slide, moving into Phase 2. In combination, of course, also updates on the selective PAP1 inhibitor that we enlicensed from Hungary. And we'll also give you some more color on Pimicotinib. So I think it's going to be really interesting to get that better. And, of course, we will also talk there about the future continuation of enlicensing strategy Your question on fertility, I think the way you should think about it is that the stock out of the competitors is really fading out relatively quickly now, and that the growth that you have seen in Q1 is largely driven, largely driven, not exclusively, but largely by the low comparators in Q1 in China. In other words, moving forward for the rest of the year, I think you should think about a flat to slightly growing fertility business for the year to go, And then we think that as of 2025, we will resume a quote-unquote normal situation with competition back, and then we would return in principle to a mid-single-digit growth rate. Thank you very much.

Thank you very much for all of you. Sorry, continue on the LSS question. One more, apologies.

Yeah, let me give a chance to explain that. Indeed, thanks for your question. So look, in the CDMO business, we are serving, compared to other businesses, we have a much smaller set of customers. Those are much more in the early phases, right, early biotechs, which are developing those novel modalities. So by definition, we are depending, and I mentioned that before, a bit more on how their development goes through the different phases, right? Will they hit the milestone? And that triggers then what we call the batch phasing, right? Do I get some of their batches in this quarter? If they have a delay of six months, it will come two quarters later. That's why the way I would look at the LSS business, especially the CDMO portion, is much more volatile. It could go up a quarter, right? If you get a batch in, it could go down. Then the next quarter, the batch is kind of delayed. So you will see that business a little bit more volatile quarter over quarter. We're still expecting towards certainly the midterm as the business grows, getting a little bit more stable. But that's kind of the dynamics of that business.

Thank you very much.

Thank you for all of your questions. Dylan, any closing words from your side?

Yeah, very briefly. So thank you very much and thanks everyone for your continued interest in Merck. I think we can say very firmly that 2023 has confirmed indeed as a transition year. And with Q1 2024, we have begun our journey to return to organic sales and EBITDA pre-growth now in 2024. So we remain highly committed to continuously execute our strategy and, most importantly, to delivering on our commitments for profitable growth and sustainable value maximization. So, we look forward to meeting many of you at the upcoming roadshows and conferences, including ASCO 2024 and, as Peter mentioned, our R&D update call in early June. Please also note that we will be hosting our Capital Markets Day on October 17th and it will be here at our beautiful headquarters in Darmstadt as you might have already seen on our webpage. So Constantine will send an invitation with all details and we would be absolutely delighted to welcome as many of you as possible here in our headquarters. With this Thank you so much for your attention and support and goodbye.

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