Merck Kgaa

Ladies and gentlemen, welcome to the Merck investor and analyst conference call on third quarter 2024. As a reminder, all participants will be in a listen only mode. I am now handing over to Konstantin Vest, head of investor relations, who will lead you through the conference. Please go ahead, sir.

Thank you very much, Heidi. A very warm welcome to this Merck Q3 2024 results call. My name is Konstantin Fest. I'm Head of Investor Relations here at Merck. Today, I'm delighted to be joined by Belen Garrillo, Group CEO, as well as Helene von Roeder, Group CFO. For the Q&A part of this call, Matthias Koldensick and Sebastian Arana, Head of Process Solutions, was in Germany and could join on short notice. We're delighted to have him with us covering process solutions questions. Science and Lab Solutions and Lifesense Services will be covered by Belen and Helene. Also joining for the Q&A of this call, we have Peter Günther, CEO of Healthcare, as well as Kai Beckmann, CEO of Electronics. We would now like to guide you through the key slides of this presentation, and after that, we'll be happy to take all of your questions. And with this, over to you, Belén.

Thank you very much, Konstantin, and welcome everybody from my side to our Q3 earnings call. Please go to slide number five on the deck where I will be starting with the highlights. As you saw, we had a strong Q3 in which we further accelerated organic growth to 4% at the group level. And I am delighted to say that we also generated strong profitable growth in the third quarter supported by all three sectors. Life science delivered organic growth for the first time since Q1 last year. Healthcare continues to show strong performance across the whole portfolio. And the semi-market for AI and advanced nodes continues to perform very well, driving semiconductor solution sales and supporting electronics in achieving organic growth in the quarters. Back to the group, sales increased by 4% organically, while EBITDA pre-achieved an outstanding organic growth of 17% in Q3. Life science delivered 2% organic sales growth in the quarter. And this is a great achievement in a very highly demanding market environment, which, however, is steadily improving. And, as I have said multiple times already, while we no longer distinguish the impact of COVID-related sales, it still represents a headwind in 2024. Healthcare was the best performing sector in Q3, with 6% organic sales growth driven by our innovative franchises, that means Oncology and NNI, as well as by our CM&E portfolio. Electronics showed organic sales growth of 2%, mostly driven by semiconductor solutions, which now showed year-on-year growth for the third quarter in a row at 7% organically. Now, on reported sales, we reached 5.266 billion, which is an increase of 2%, as currency was a 2 percentage point headwind. Reported EBITDA pre of 1.618 billion was strongly up at 12%, including a 5 percentage point headwind from currency. On EPS pre, we delivered 2.30 in the quarter, which is a robust increase of 11%. Therefore, we are happy to confirm our absolute sales and earnings target corridors for 2024, which, as you may remember, we raised with our Q2 results. And I will come back with more assumptions on the guidance later on. Moving into slide number six, we have a bit more color on the performance by business sector. All our business sectors contributed to the 4% organic growth of the group in Q3. In life science, process solutions return to organic sales growth while delivering sequential sales growth in a gradually improving market environment. The sequential increase and the year-on-year growth of our order intake, now for three quarters in a row, raises confidence about the further evolution of our process solution business. Book to build was solid again, staying at a wrong one. SLS, science and lab solutions, achieve organic sales growth in what is still a cautious spending environment for pharma research. Turning to healthcare, Oncology was supported by strong Herbitux sales and all across regions and indications, while Bavencio has slowed on the back of increasing competition in the U.S. market. Our NNI franchise got the benefit from Maven Cloud in Q3 as the product confirmed its record sales performance from Q2 in Q3, now against easier comparables. Electronics showed slight organic sales growth driven by our semi-material business, which grew in the double-digit percentages due to AI-driven demand growth and growth in mature nodes in the Asian markets in particular. Regarding earnings, EBITDA pre came in at $1.618 billion, which represents a strong increase of 12% or 172 million euros. While all business sectors contributed, this was mainly due, in the case of EBITDA pre, mainly due to healthcare, where we saw an EBITDA increase of 151 million in the quarter, driven by robust sales performance, and a temporarily lower R&D spending. In Q3, life science and electronics showed a positive EBITDA growth contribution to the group for the first time in 2024. Now let's move on to slide number seven for a few remarks on our sales by region. Q3 once again demonstrated the advantages of our globally diversified business. with the right mix of business sectors in the different regions supporting our growth trajectory. In Q3, two of the three larger regions, that is Asia Pacific and Europe, were up organically while North America was still slightly down. Europe grew the strongest and was up 6% organically with a strong growth in healthcare, across all franchises, as well as process solutions driving life science sales in the region. Asia Pacific was up 3% organically in Q3, which was mainly driven by the strong growth of electronics and further supported by healthcare. North America was slightly down by 0.6% organically, as The slight growth in healthcare was offset by a slightly lower sales in life science. Looking at the two smallest regions, Middle East and Africa was up 14%, while LATAM also grew strongly at 12%. Both regions were mainly boosted by healthcare, while life science also showed strong growth in Latin America. And with this, let me hand it over to Helene for a more detailed view of our financials.

Thank you very much, Belén, and welcome also from my side. I'm now on slide 9 for an overview of our key figures in the third quarter. Taking into account currency headwinds of minus 2%, net sales increased by 1.8%, to 5.266 billion euros. With EBITDA pre-growth and margin expansions in all businesses, we've achieved strongly leveraged growth. Healthcare was the main driver of this development. EBITDA pre was up by 11.9% to 1.618 billion euros even with a higher FX headwind on EBITDA pre of minus 5% compared with sales. EPS pre increased by 11.1% to €2.30. Operating cash flow came in strong at €1.458 billion, which represents an increase of 16.2% over the year earlier period. This exceeds the increase in EBITDA pre, mainly due to higher operative profitability and improvements in our net working capital. Net financial debt was slightly up compared with the end of December 23, which was mainly due to the acquisition of Mirus Bio, which closed on August 1. Let me also briefly comment on our reported results. And with that, I am now on slide 10. EBIT was up by 11.6% year-on-year in line with EBITDA pre. The financial result was slightly down from minus 46 million euros in Q3 of last year to minus 54 million this year. The effective tax rate came in at 22.2%, which is around the midpoint of our guidance range of 21 to 23%, and actually in line with the effective tax rate from Q1-24. You may remember that the tax rate is showing an increase due to the expected Pillar 2 expenses. And as a reminder, the effective tax rate in Q2-24 was at the top end of the guidance range, as it also reflected the termination of the Xevinapan Program. In the first nine months of 24, the effective tax rate therefore came in at 22.4%, which is in the upper half of our tax guidance range. Reported EPS came in at €1.86, which is an increase of 9.4% year-on-year. And with that, let's move on to the review by business sector, and we're starting with life science on slide 11. Overall, LifeScience delivered on its goal to return to organic growth in the second half of the year and showed the first positive organic sales performance since Q1 23. Sales increased by 2.1% organically in the quarter, and we still expect to stay on the growth path for the remainder of 24. Process Solutions returned to organic growth in Q3 while Science and Lab Solutions has now achieved organic growth for the second quarter in a row. Life Science Services was down, but against a high base. Looking at process solutions first, sales were up by 3.7% organically, once again showing a positive sequential trend and increasing by 3% quarter on quarter. Order intake. continues to improve sequentially as we had expected. I can confirm that we expect process solutions to deliver a sequential improvement in both order intake and sales for the remainder of 24. At plus 4.3% in Q3, science and lab solutions achieved organic sales growth for the second quarter in a row, again driven by high demand from industrial and testing and diagnostics. Excluding the SAP migration effect, which impacted the business by a mid-double-digit Euro million amount in Q3 last year, science and lab solutions would have shown slight growth organically. Demand from pharma companies has remained soft, especially in North America. And as you heard me say at our Capital Markets Day, we are currently seeing a stronger focus on later stage clinical development projects at our customers. And China remains muted. Turning to life science services. Sales were down by minus 17% organically. While sales of a clinical testing business have increased in the highest single digits, sales of our CDMO activities were down. As a reminder, we benefited from an end of contract payment in a low to mid double digit Euro million amount related to COVID in Q3 of last year. Turning to margins, EBITDA pre increased by 7.1% organically in Q3, which is well above organic sales growth with the EBITDA pre margin having improved by 120 basis points year on year, and by 30 basis points sequentially. For the remainder of 2024, let me say the following. First, we expect the recovery and process solutions to remain gradual. Second, the demand from pharma customers remains soft, which impacts science and lab solutions. And finally, you might have noticed that the sequential steps-ups in our EBITDA pre-margin during 2024 have become smaller. The biggest positive margin driver would be volume growth, while at the same time we expect the R&D to sales ratio to increase and startup costs to grow as some CAPEX projects come to completion. I'm now on slide 12 for an overview of the performance of the healthcare business sector. Healthcare continues to deliver robust organic sales growth and was up 6.2% in Q3. By franchise, the two portfolios growing the strongest were Oncology with plus 9% organic growth and CM&E with plus 8% organic growth. Our NNI franchise achieved organic growth of plus 7%. This was driven by strong Marvin Club performance of plus 20% organically against soft comps of last year. Oncology was mainly driven by Erbitux, which showed a stellar performance of plus 14% organically in Q3, driven by growth in all major regions. Tepmedco was strongly up organically at plus 37%. Bavencio was slightly down in Q3 at minus 1% organic performance. Similar to Q2, all regions were up except North America, where increasing competitive pressures led to an organic decline. Turning to our CM&E portfolio, this showed a strong performance against Q3 with plus 8% organic growth, which was supported by contributions across all regions and all segments, especially from diabetes, cardiovascular, and thyroids. Marvin Klatt confirmed the record sales levels from Q2 of this year, with strong growth in demand from the United States as well as Europe. Regarding the pipeline, as announced at the Capital Markets Day, in the cutaneous lupus part of a Phase II study of empaterin, we have seen a positive proof of concept with clinically meaningful efficacy and a good safety profile. In oncology, we are excited about the data that came from the readout of premicotinib phase 3 study in TGCT run by our partner, Abisco, which was announced a couple of days ago. Coming to ibuprofen, we achieved a record margin of 39.2% in the quarter. That is 600 basis points above Q3 last year. This is driven by the decline in R&D expenses, both in absolute terms and as a percentage of sales, and by strong sales growth amid strict cost control. We also experienced the shift of commercial spending from Q3 into Q4, which overall makes the EBITDA pre-margin appear outstanding in Q3. As a reminder, the Baventio repatriation came into force in Q3 last year, with its effect now being annualized for the first time. Overall, EBITDA pre amounted to $836 million in Q3 and was up 27% organically. For modeling, in the absence of a major new R&D in-licensing deal, we expect the R&D to sales ratio to remain at this low level in Q4. while seeing a higher commercial spending in Q4 compared to Q3 in line with a typical season pattern. So let's move on to electronics on slide 13. Electronics showed organic growth of plus 2.4% in Q3. The key driver here was semiconductor solutions, which was up 7% organically. Within semiconductor solutions, semiconductor materials showed a strong double-digit percentage organic growth in the quarter as AI-driven trends and growth in Asia-centric mature nodes persisted. Our DS&S business was down. In our last earnings call in Q2, we explained that an unanticipated increase in demand for delivery equipment compensated for a decline in the project business. As a result, the DS&S business was flat in Q2. The anticipated decline in the project business was not compensated in Q3, which resulted in an overall decline of the DS&S business. Projects have been pushed out into at least 2025. Semimaterials continue to deliver strong organic growth year on year and also grew sequentially. as thin films and other materials for advanced nodes and AI continue to drive growth. However, a wider inflection of mainstream semiconductor end markets has not yet happened. Turning to display solutions, we saw an organic sales decline of 9% against high comps. This is mainly due to continuous price pressure and also declining volumes in liquid crystals in Q3. You will have seen that we closed the acquisition of UnitySC just two weeks ago. We will be consolidating the business into Display Solutions with the goal of developing and delivering new products in the area of optoelectronics with applications in semiconductors. To signify the expanded focus, Display Solutions will be renamed Optronics from the financial year 2025 onwards, starting with Q125. Looking at our EBITDA pre-performance in the quarter, the EBITDA pre-margin increased by 280 basis points to 25.5%. This reflects our operating leverage through higher volumes in semi-materials as well as cost efficiencies, also compared against the low base. For the remainder of 24, the trends I mentioned earlier for our semi-materials and DS&S business are set to continue. Further, display solutions usually benefit from Christmas ordering in Q3, with Q4 being quieter. Regarding EBITDA pre-margins, we said we want to bring capacity expansions online, such as a new plant in Taiwan that supports advanced nodes with thin films and other semiconductor materials. This results in startup costs in a low double-digit million euro amount, which we're only partially booked for in Q3. And while we want to sustain a high level of R&D to benefit from the long-term secular growth of semiconductors, our R&D expenses have also remained stable in Q3. So before handing back to Belen, let me also briefly comment on our balance sheet and cash flow statement. As you can see on slide 14, our balance sheet increased by 1.6 billion euros compared with the end of December of 23. Taking a closer look on the asset side, cash and cash equivalents increased to 3.2 billion euros from 2 billion euros at the end of 23, driven by a strong operating cash flow and proceeds from the issuance of a hybrid bond. Inventories went down, with receivables remaining stable. Property plant and equipment increased as a result of our CAPEX investments. Other assets increased, which was mainly due to the reclassification of surface solutions as an asset held for sale. And lastly, intangible assets decreased, reflecting the net effect of a number of items, including the impairment of Xevinapant. On the liability side, financial debt increased by 1.5 billion euros. This was partially offset by a decline in other liabilities, which were in turn affected by the dividend payments in Q2. Pension provisions were down due to interest rate changes, and payables decreased from 3.4 billion euros to 2.8 billion euros due to in-licensing deals signed in the prior period which then resulted in payments this year. And net equity increased by 1.6 billion euros thanks to growth in profit after tax. As a result, our equity ratio strengthened from 55% at the end of December 23 to 57% now. Now we will turn to cash flows on slide 15. Operating cash flow came in strong again at 1.458 billion euros and was up 203 million euros compared with Q3 of last year. That is higher than the increase in profit after tax of 72 million euros. This was mainly due to changes, first, in other operating activities, which include last year's accounting treatment of the biosimilars divestment, second, in other assets and liabilities, which were in turn driven by lower bonus payers and taxes in the quarter, and third in working capital. Cash out for investing activities increased due primarily to higher investments of excess liquidity in non-financial assets and the acquisition of Myros Bio, which closed on August 1st amid slightly increased capex on property, plant, and equipment. Last but not least, the difference in financing cash flow can be explained mainly by the issuance of a hybrid bond in the nominal amount of 800 million euros during the quarter. The proceeds from the issuance will be used to repay two hybrid bonds in the total nominal amount of 1 billion in December. And with that, let me hand back to Belen for the outlook.

Sorry, I don't know if I have been heard.

Repeat.

Okay, I continue.

Repeat.

So I will start in case this hasn't been heard by everybody because my microphone was off. So I was saying that as you have seen this morning, we confirmed our 2024 target corridors for the group. That is that we continue to expect sales in a range of 20.7 to 22.1 billion, a beta pre in a range of 5.8 to 6.4 billion, and EPS pre in a range of 8.20 to 9.30 euros. However, with three quarters of the year now behind us, We want to offer a more precise view and are happy to point you to the lower half of the sales corridor and around the midpoint of the earnings corridor. Organically, we expect sales towards the bottom end of the range and a beta pre around the midpoint. Now, before you ask us about 2025, let me share confidence. Why is that? In addition to the known positive structural trends in healthcare, we are confident in our ability to continuously benefit from the expected positive end market developments and trends in life science and electronics, and we are confident to keep mark on the profitable growth trajectory that we have recovered in 2024. Having said this, and as I mentioned repeatedly during our Capital Markets Day, we will provide further qualitative guidance during our full year Q4 earning calls in March. Now, for some additional details by business sector, let's move on to slide number 18. As for the group, we leave the absolute sales and EBITDA pre-guided corridors unchanged for all the three sectors, while giving you an indication of where we believe we are currently trending within. For life science, our best estimate to date is that we will end the year slightly above the respective lower ends of the absolute sales and earning corridors and around the respective bottom ends of the organic growth corridors. Keep in mind that organic sales growth turned positive in Q3 amid a still somewhat soft market, and we expect positive organic growth to continue in Q4. For healthcare, we expect sales slightly below the midpoint of both the absolute and organic growth ranges. EBITDA pre is forecasted in the upper half of the absolute range and around the top end organically. Key drivers include strongly leveraged growth, paired with cost discipline, and as mentioned already, temporarily lower R&D cost. For electronics, we currently see sales trending in the lower half of the absolute corridor and towards the bottom end organically remember that we raise our guidance for electronics in q2 evita pre should come in slightly above the lower end of the absolute corridor and in the lower half of the organic growth corridor Allow me before I close to make one additional technical remark on electronics related to surface solutions. While it's too early to guide on 2025, I want to remind everyone that things are progressing well and we are on track to close the transaction in the second half of 2025. At JET, Surface Solutions is still part of electronics, and we are planning to still include a full 12 months of Surface Solutions in our 2025 guidance. Back to Q3 24, and to conclude, please note that all our current guidance ranges remain unchanged. For the group, let me summarize. Growth momentum is strong and allowing us to confirm our guidance bands for net sales, EBITDA pre and EPS pre. And Q3 is a good illustration of our ambition to return to profitable growth in 2024. Now with this, we will be all happy to take your questions. 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 your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for our first question. Your first question comes from the line of Sachin Jain from Bank of America. Please go ahead. Your line is open.

Hi there. Sachin Jain, Bank of America. Two questions, please. Firstly, on life science margins, Helena, in your introductory commentary, you referenced slower sequential growth for life scheme margins. Should we extrapolate that commentary into 25? Three key margin improvement was 20 basis points sequentially. Is that an indicator for 25 over 24? I ask the question as consensus has margins of about 200 basis points. And then the second question is just to try and get a sense of the pushes and pulls for electronics into next year. The commentary is clear that materials is doing very well with some pressure of memory and log DSSNS. I'm just wondering if you'd be willing to comment directly on 25 sales growth relative to midterm. I know we have directional kind of a life ski trending towards midterm. I wonder if there are any comments for electronics from your side. Thank you.

Yes, I don't know you. So on margins for life science, overall, I would like to lead you to what we said at the capital markets and also our midterm guide, which is basically we're saying we used to have pre-COVID margins of 31%. We had in-COVID margins of like 38%. We'd be expecting to go midterm back into somewhere into that range. Now, as I said, it's pretty clear that the more volume we have, the better our margins will become. And I think overall, with Belen pointing towards us looking positively in the future, you can see that this operational leverage should be helping us. I hope that helps you in your model. As you know, we don't give 25 guidance.

I'd like to take this one as a segue into into your question electronic as well. We don't give 25 guidance yet, but if you just do the math on where we land in 2024, we see that with our guidance that we provided today, we will be then for electronic score already at the lower end of the new midterm guidance. That will give you an indication on how we maneuver going forward. and already at the very upper end of our old midterm guidance. We are kind of outgrowing our old midterm guidance already. How is that composed? We have seen the continuous strong performance of semiconductor materials, now with the fifth quarter in a row of sequential growth, and the last two quarters have been in the mid-teens already in the performance. And of course, in DS&S, we are comparing with an extremely strong 2023 and three consecutive years of record performance. This year is obviously a bit softer, but this gives you then kind of the math on how that whole thing is going forward. The market itself will see a continuous gradual recovery. So step by step, we see markets coming back. And of course, driven this year clearly by advanced nodes and AI leading to performance I've just mentioned. So this is a systematic that you can put together in order to get an understanding how markets will develop going forward. Of course, guidance will only be provided one quarter from now. Thank you.

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

Can I ask a bit about the pharma R&D, just to think about the timeframe over which you'll be going back from the lower end of the number, what we saw in 3Q, through to arrange it next year, or is it the year after, just to give us some sense of how quickly you will increase that reinvestment? And in terms of life sciences, I wonder if you could tell us a little bit more, just thinking about the book to bill at one, just some of your thoughts there, please.

Hi, Joe. It's Peter speaking to your question on R&D. So first of all, as mentioned already by Helene, for Q4, of course, we shouldn't expect any material change in R&D spend. given the fact that we haven't done any major licensing deals in that quarter. In 2025 and beyond, I think you have to look at two blocks. The internal blocks of all the products we have in the pipeline and what we know about them. And then, of course, the other, which is a more unknown block, is future and licensing. When does it come? How large will it be? And how many products we are talking about? What I can tell you about the internal R&D that we see a positive momentum both in NNI and oncology in our internal pipeline. I remind you that, as mentioned also by Helena, that we have the positive readout for renflatoran in the CLE cohort, and we will read out the SLE cohort early 2025. We have our cladribin phase 3 study in MG where the recruitment is actually ramping up very nicely. In oncology, we're going ahead with our plans for DDR with, for example, the two receptive combinations. And then also we have a quite exciting pipeline in ADCs where we just started the anti-GD2 and then the anti-SeqM5, our front runner, is moving into phase 1B earlier this year and is ongoing. Everything, obviously, that would be external innovation would be on top of these. So for your modeling, I would say, count for 2025 to a gradual recovery of these numbers and more of a steady state beyond 2025. I hope that helps.

Yes, it does. Thank you.

For your second question here, Sebastian Arana for Process Solutions. Yes, as you noticed, book to bill was again around one, reflecting both the sequential increase in order intake and sales in Q3. But as we know and as we have shared before, we believe in the short term a better leading indicator for now is order intake and the quality of the orders we're receiving. I'm happy to report that we're seeing in both sides sequential improvement. As we have said before, there's an H2-H1 dynamic where we're seeing sequential growth both in sales and order intake in H2 versus H1. but also we're seeing a gradual improvement in order cycle time and order size coming back to pre-COVID levels. So all in all, we continue to feel cautiously optimistic about the recovery of the bioprocessing market.

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

Good afternoon, and thank you for taking my questions. One on life science. How are you seeing the process solution recovery vary by customer group, including pharma, CDMO, larger biotech, and emerging biotech? And how do you expect this to develop going forward? And then just on electronics, what are your latest thoughts on the shape of recovery for the remainder of the semiconductor market into 2025? Can we expect continued momentum in the AI and advanced nodes portion of the market given the strong growth we've seen this year?

Yeah, maybe I can start with the first question regarding process solutions. To create context, right, we confirm again the H2 versus H1 gradual order intake and sales recovery. As we have said before, the CDMO space and customers have recovered faster than originators. Also, regional farm accounts have recovered faster than originators. And having said that, originators' order intake is sequentially now coming back to a positive order intake trend. Regarding emerging biotech, we don't have a big exposure there. So really, a minor percentage of our sales are coming from this segment. So it's not impacting significantly our sales performance for next year. So all in all, as a summary, I would say all major customer segments are in a positive trend, positive trajectory, with order intake sequentially and year-over-year better.

So let me take the electronics question. So given the experience of the last quarter, I'm getting more careful on predicting the exact quarters of recovery in the for the semiconductor market. But I think what's obvious is for AI and AI-related technologies, there are two drivers of growth in next year. One is additional capacity and no transitions of our main customers. And second is the adoption of what is called AI at the edge, so AI compute on end devices. Those two drivers will, at the end, define how fast AI will be driving growth into next year. For the other areas like memory and analog, we will continue to see a gradual recovery. We don't exactly know at what quarter that will get steeper, but I think it will continue on the level that we have seen for the past quarters, at least for the next couple of weeks or months, and then we shall see some more drive in that growth according to market analysts and according to our customers reporting currently as well.

Thank you. Thank you. We will take our next question. Your next question comes from the line of James Quigley from Goldman Sachs. Please go ahead. Your line is open.

Great, thank you for taking my questions. I've got one on process solutions and one on pimicotinib. On the process solutions recovery, can you give us the reasons as to why we're seeing significant growth in Europe and slight declines in North America and rest of the world, and what this means in terms of the recovery going forward? Is it going to continue to be driven by Europe? At what point would the other two regions catch up, such as on bioprocessing? And on pimicotinib, we obviously saw the positive data earlier this week. So what are your initial thoughts on the data that we've seen so far, and particularly with respect to the competitive dynamics? And how does this data influence your decision on the timing around the option exercise for global rights? Thank you.

So I can start with your question around process solutions. Maybe I can start framing regarding order intake, our major leading indicator. we are seeing sequential improvement in order intake across all regions. So behind the EMEA, North America, and APAC results, there's a positive year-over-year on sequential order intake improvement that give us confidence that growth is coming across all regions. Regarding sales performance in Q3, effectively, as you said, EMEA was driving the growth for process solutions. reflecting that the recovery in our major customer segments in EMEA was a little bit earlier than the rest of the regions. But we see this normalizing in the next few quarters as order intake comes back to growth and is coming back to growth as we speak. So pretty confident of the growth projection for all regions across process solutions.

Yeah, James, it's Peter speaking. Regarding your question on Pimicotti, obviously we're very happy with the With the readout that we got very recently, primary endpoint ORRs of 54% at week 25, which looks actually well differentiated if you would look at cross-study comparisons. Moreover, every single secondary endpoint was met like, for example, stiffness, pain, range of motion, et cetera. And then last but not least, we saw actually a very low discontinuation for treatment-related adverse events. We think TGCT is a market with actually very high on medical needs, especially the diffuse forms of TGCT, which actually create for those patients very severe disabilities. Treatments today is actually surgery, which actually where patients relapse very often, and there is actually no global systemic standard of care. In terms of competitive dynamics, well, let's say the The frontrunner, which is pexidartinib, has an FDA approval, but with a black box warning and with a REMS program, has not made it through the EMA. And then we have onseltinib. And then, again, if you compare cross-study comparison, I would say that the ORRs of PIMI seem to be higher. And also, when you look at the in vitro profile of the two products, you will see that Pimicotinib has actually superior potency and selectivity so again very happy about that now in terms of your question exercising the option look we just received the the data 48 hours ago the open label extension is ongoing and we will decide on the option exercise in due course thank you thank you we will take our next question your next question comes from the line of Charles Pittman King

From Barclays, please go ahead. Your line is open.

Hi, thank you very much for taking my questions. Two on life sciences, if I may. Just firstly on science lab solutions, I was wondering if you'd give us a few comments on how you see the funding environment evolving, particularly given your comments around the stabilizing APAC region, and then for the US following the election, how impactful NIH funding could be for your outlook. And then a question on process solutions. I know that we discussed the exit rate of life sciences going into FY25 at CMT, but I was wondering if you could just kind of give us more of an idea of how you feel orders will progress through to FY25 as an exit rate, and specifically on your very appreciated guidance on 4Q, what has changed to provide you that visibility and have that confidence in providing that information today? Thank you.

Okay, so on SLS, let's go through the three buckets. On academia, indeed, NIH funding has been approved in March, but it has been slightly cautious. And what is important for us, it represents less than 10 percent of sales in SLS. If you then look at the U.S. pharma market, indeed, we have seen temporary weakness And we attribute that to the fact that basically people are spending more money in the development part rather than the research part. That is good for Sebastian, but it's not as good for the SLS business. And then, indeed, China, we have seen really at the beginning of the year, the China market bottoming out. Sorry, my English. But what we haven't seen is the recovery that we had projected into going forward. Now, if you look at China, we can see that the market continues to remain muted. And as you know, in our Capital Markets Day, we toned down our midterm guidance in life science as a result of China not expecting to be growing to a double digit going forward.

If I can comment on your second question regarding order progression and 2025 confidence for process solutions. Well, as I said before, the sequential growth in order intake that we are seeing in H2 versus H1 across our portfolios, across our regions, is really giving us confidence in 2025. We see 2025 more of a normal year for us in terms of growth for process solutions. You also asked about our exit rates. Even though we're not guiding 2025, we don't give precise quarter view. Our growth in Q4 should be trending towards our mid-term guidance. So again, we are feeling good with the order progression in 2025 as most of our customers have gone through the stocking period and is part of the past that we continuously confirm in our conversations face-to-face to customers and also during the multiple service we're doing throughout the year.

Great. Thank you very much.

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

Yes, thank you. Just a first question on Science Hub and Solution. You are quite cautious at the CMD and FLAG. flag it as a reason for reaching the bottom of the guidance this year for life science. Even adjusting for the SAP impact in Q3 last year, there was still a slight growth in Q3 this year. So can you just comment on was there any SAP impact in Q4 last year? And is this kind of slight growth in line with the comments you made on the biopharma are in the environment being weak. So this is the type of growth to expect in this environment. Second question on the life science services. You highlighted a large COVID-19 impact in Q3 last year. And Q4 last year was quite strong as well. So is there anything specific we should keep in mind in terms of the comp base in Q4 for life science services? Thank you.

So on SLS, indeed, we had an SAP impact in Q4 also last year. And so we do have a relatively easy Q4. I think what you need to know in SLS is something that when we look back pre-COVID, we had seen pretty clear seasonality across Q3 and Q4, with Q4 a rather stronger quarter and Q3 a rather weaker quarter. So overall, we remain very confident in the business. We are seeing good growth in our lab water business, in our biomonitoring business, and hence, we feel like we're well on track here. If we look at LSS, I think overall, nothing comps-wise that we have to keep in mind. Now, to be perfectly honest, as we've said many, many times, our CDMO business is rather a startup business. And because of the actual size of the startup business, it could be that we have simple batches moving back and forth and we have phasing element. So to me as a CFO, and Matthias, I'm stepping in here for you, so changing sides, I'm rather looking at the annual result of LSS rather than quarter-on-quarter progression.

Thank you. We will take our next question. Your next question comes from the line of Falco Frederic from Deutsche Bank. Please go ahead. Your line is open.

Thank you. Two questions please from me on healthcare. Firstly on Baventio, I think this has been the first quarter where we saw a sales decline for this drug. So could you elaborate a little bit on the reasons for that? and also how we should think about growth next year. Is it plateauing now or is there still further growth potential with that drug? Secondly, on Urbitax, very nice growth again. Maybe you could spend a minute on the drivers behind that and also whether that is something we could expect to continue in 2025. Thank you.

Yeah, Falco, thanks for your two questions. So first of all, let's remind ourselves that the US part of Bavencio is around about 30%. We also flagged a bit of a pricing impact in Japan. And nevertheless, we have an overall stable result. And that is, of course, due to continued growth ex-US and ex-Japan. What we also said is that we see a maturing growth profile, obviously, given the competitive intensity of EV302. and that I think the market is gradually, also in the US by the way, understanding that EV302 is not a one-stop solution for all patients and that it's really on an individualized patient profile that both options, so EV302 and maintenance therapy with Batensio remain actually first-line options. So thinking about next year, obviously we won't see growth anymore next year. but I would reserve a more precise guidance for later during 2025. On Erbitux, actually, we see that strong momentum continuing, and actually there are a couple of reasons for that. I think the most structural fundamental reason is the fact that Erbitux is really a backbone therapy for many other let's say, options, especially in the field of colorectal cancer. So there's a lot of studies ongoing, even some with registrational intent of products that combine with Erbitux. And then the second element is the market expansion in China because of NRDL listing, both, by the way, in colorectal as head and neck cancer. So I hope that gives you a little bit of insight. Thank you.

Thank you. We will take our next question. Your next question comes from the line of Dylan Van Haeften from Stifa. Please go ahead. Your line is open.

Excellent. Good morning, guys. Just two questions from my side. Firstly, just a clarification just on LSS. So if we take the testing business out and really look at CDMO business, X the COVID one-off, did you guys grow year over year? And then my second question just would be on process solutions. So given that you guys are guiding towards another sequential order book growth and, you know, overall growth is pretty good on a soft comp, but the fourth quarter comp is also pretty weak. You know, why are you guys a little bit more, let's say, cautious in affirming maybe a mid single digit exit of the year in process solutions? Thank you.

Thank you.

Let me start with the second question regarding process solutions. Again, we see order intake sequentially improving, H2 versus H1. We expect Q4 to continue that trend in order intake sequentially improving. And we see our, as I said before, right, Q4 trending towards our midterm guidance. What I think it's important to mention here is, as we have said in the last couple of quarters, we see a gradual recovery in the order intake trends. It's not going to be a hockey stick or a huge rapid order intake trend upwards. It's more a gradual recovery that will lead us into this growth in Q4, trending towards our mid-term guidance. We remain positive and confident in 2025 as we continue to see the market recovering back to buyer processing. And again, I would like to reinforce this with the latest survey we did in the market in Q3, where 70% of our customers are saying that this stocking is part of the past. Still, about 30% are navigating the final phase of the destocking in H2 of this year and early in 2025. Again, reflecting this gradual recovery, again, in a very positive trend towards 2025.

And so on CDMO, sorry, we had to do a bit of math here, and the answer is we're more or less flat. So if you Look at the CDMO business. You then take the one timer off. The rest of the underlying business has been behaving pretty flat.

Excellent. Thanks, guys.

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

Good afternoon. Thanks a lot for taking my questions. First one, just a clarification in the process solutions. You made a comment about the Q4 sales as a sequential improvement. Is this comment meant on absolute sales, or do you expect also sequential improvement of the organic growth rate? Second one is on electronics, DS and S. There are different cycles to my understanding. Last year, it was more about the infrastructure, and now it's about equipping all the FAPs. Can you comment about the underlying volatility and where do you see the current cycle now? And the last one is on health care, comment on fertility. So last year you had the strong tail end from the competitor stock out there for very tough comps. You still achieved, in my view, quite decent results. So can you just say a few words about the underlying trends whilst the sales remains on this attractive level? Thank you.

Maybe I can start with process solutions. So building on my previous statements, the answer is yes. We're expecting both sequential improvement, both in absolute values and in organic growth. So again, reflecting the positive trend we're seeing in order intake.

Oliver, on DSMS, so last year we saw the so-called shell-first approach in many new construction projects, and we had multiple projects at the same time, so just defining a bit kind of the starting point where we're coming from. This year it's more equipping, like you said, equipping the fabs with additional equipment, and of course our service, our third part of the DSMS business, our service business revenues continue to grow as volumes continue to grow. These are the three moving parts. The new factory, large projects, turnkey projects, second is equipment, and third is services. And equipment is now continuously deployed, while the FAB projects are a bit more put on the longer timeline.

Yeah, Oliver, on fertility, I think you're exactly right. Of course, we have difficult comps, and we guide it towards stable to slightly growing sales. That's exactly where we are, actually. But of course, the underlying fundamentals remain very healthy in this business. And actually, the main factor is, of course, couples waiting longer to achieve their dream of parenthood, and therefore, infertility rates go up. And we see, indeed, a continued increase in cycles Of course, there are other elements that also support additional tailwinds. For example, I was in Korea the other day, and you see that fertility rates are actually at a record low, 0.73 in this country. And as a result, actually, the South Korean government declared infertility a national emergency, and I think that's absolutely warranted. And we see that then certain subsidies come into play to also make the whole procedure of infertility treatments, not only the drugs, but the whole procedure more affordable. And therefore you see also then a volume increase. So long story short, we remain confident in the mid single digit growth rate moving forward.

Okay, great. Thank you very much.

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. Thanks for taking my question. Just thinking through your 2025 expectations on process solutions, understandably, order books are sequentially improving and you expect a gradual recovery coming to the 7% to 9% growth. I'm assuming towards the bottom end next year and then building from there. I mean, you clearly know more about the supply chain than we do. What is it that you're seeing in either the inventory levels or the patterns that makes you so certain that the growth will be towards the bottom end of the range next year, especially given the soft cons? and potentially the first year of recovery after two years of decline? Or is it a conservative stance you're adopting until you know better by first quarter next year, and then you would revisit this assumption?

Well, thank you for your question on process solutions. Maybe let me start clarifying. a few things. We did not say bottom end next year. We're saying we're bridged towards our mid-term guidance for 2025. But let me give you some color on the reasons why, right? Because that's, I think, it's an important element here. Number one, based on this data we have, we see majority of our customers have gone through the destocking process. So most of the destocking effect is over in the industry. That's number one. Number two, the order intake pattern is coming back to normal. Again, the sequential growth improvement, it's reflecting that across our portfolios, across our geography. And the third element here is the quality of the orders is also improving. The size of the orders is back to normal, and the cycle time reduction, the cycle time of the orders is also coming down, reflecting that lead times are in the industry are back to normal, and for sure in our case. So those are some of the market dynamics that we're seeing as we speak that give us confidence in 2025. But again, 2025 will be more of a normal year for us in process solutions, trending towards our mid-term guidance in terms of growth.

So just to be clear, you do not have a leading indicator that tells you what the Q4 growth would be. So you've made some assumptions there, right?

We have a pretty good view of Q4 based on the order intake we have for the quarter. Can you repeat, please?

Not this quarter, the next quarter, but Q4 in 25. I'm assuming your visibility is to quarter one, quarter two next year. not beyond?

We have pretty good visibility on the order book. Of course, Q4 2025 is way above lead times, right? So the closer the quarter, the more visibility we get. But based on the trends we're seeing in the market, and again, the destocking effect and some of the order patterns we're reflecting, we feel pretty confident that 2025 will be more of a normal year. Having said that, it's also important to mention we don't comment on quarter breakdown in 2025. This time is more of a total year view.

So it could be very well above the range if the recovery is stronger than you are factoring in.

We don't comment on that. I think we're sharing everything we're seeing now in a very, I would say, gradual recovery towards 2025.

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

Of course. Please stand by. And your final question comes from the line of Simon Baker from Redburn Atlantic. Please go ahead. Your line is open.

Hello, this is Shelley speaking on behalf of Simon Baker. Just two questions. If you could just give an update on the partnership with TELIX, that would be helpful. And the second one is, can you update on the time to stabilization in display beyond 25?

Can you repeat the question, please? We didn't get it. Partnership with whom?

Sorry.

The partnership with TELIX.

Do you have context on the question, please?

If you could just update on how you're managing, how you're progressing with that, that would be really helpful.

This is the other Merck.

This is a question for MSD. Sorry to say, we have no partners to be telling.

Wait, wait, wait, wait.

Oh. Look, I mean, you've caught us off guard on this topic. All right. So we need to come back to you on this topic. Okay. Definitely the fact that the board is not yet on the topic is a very early supply-related partnership. That is what we can get. because we are not able to give you an update. We will come back to you on this topic. It's very small and it doesn't really have implications on the quarter and the future, the short-term future.

Okay. And then the second question is from the electronics business. If you could update on the time for stabilization in display beyond 25.

Let's go for display. So we said always in our strategy from 2025 onwards, we start growing again. We're a bit more ambitious at the capital market day by saying 2025 is supposed to be the first year of growth. It is still within the original scope of displays. It doesn't include the recent acquisition of Unity. We just closed the acquisition of UnitySC, a company in the in heterogeneous integration metrology space, very interesting technology for driving the advanced integration schemes for artificial intelligence that is just being done. This is not yet included in the guidance. And the moving parts are increased revenues for OLED as well as increased revenues for the display patterning business, then compensating for the continuous decline of our liquid crystal business. That's what we call the stabilization of display. We are well on track as per those commitments. And I think the development this year was exactly confirming what we have said at the Capital Market Day as well.

Thank you. Thank you. This is, I think, all the time we had for Q&A. Thank you so much for all of your questions. And with this, I'd like to hand over to Belen for some closing words. Over to you, Belen.

Thanks, Colin.

Thank you, Konstantin, and thank you, everyone, for joining the call. I would like to wrap it up with three main messages. One, we have delivered a super strong quarter in which life science for the first time is back to organic growth with excellent prospects in process solutions and very well placed in the other two business units. the other two business sectors performing as planned. Message number two, based on all leading indicators that are available to us to date, as we have been discussing during the call, we have a strong confidence on deliver a very solid 2024. Point number three, and more important, we are also confident to keep our profitable growth trajectory in 2025 and with this more to come in our coming roadshows and conversations in coming days and looking forward to meeting many of you in those roadshows. Thank you so much for your interest in Merck and goodbye.

ladies and gentlemen thank you for your attendance this call has been concluded you may disconnect