Merck KGaA (MRK) Earnings Call Transcript & Summary

Are we ready? Yes? Okay. Welcome to the 38th JPMorgan European -- JPMorgan Healthcare Conference. I'm a European and my name is Richard Vosser. And it's my great pleasure to introduce Merck KGaA from Darmstadt at the conference and the CEO, Stefan Oschmann. So before I hand over to Stefan, all I've got to say is that the breakout following this presentation is in the Olympic Room. Stefan, welcome to the conference.

Thank you. Thank you, Richard. And good morning to all of you. For those of you who are new to us, just a couple of words of introduction. In terms of name, for legal reasons, I'm obliged to refer to us, when I'm in the U.S., to Merck KGaA, Darmstadt, Germany. Our -- what you know is MSD or Merck & Co. used to be our subsidiary, our U.S. subsidiary until 1917. And sort of historical events, the company split. We have friendly relationship with MSD, which doesn't prevent us from suing each other over name rights at times. So in order to save money, I will refer to things like we or our company when I refer to us. We are a company with a fairly diverse business model. We have 3 businesses that are industry leaders in their fields. We have a very important and industry-leading Healthcare business that is focusing on oncology, on immuno-oncology and on immunology. Our Life Science business is an industry leader in tools and services for biotech and everything basically a scientist needs in a laboratory. And we have a third business, we're just coming from the CES in Las Vegas. We have made major acquisitions in this field and we are the world's leading Electronic Materials company. We think that there are very interesting synergies between these businesses. Before I go into strategy, a couple of numbers. As you see, we have a fairly balanced portfolio. We have strong margins in our businesses. And we have strong growth. Healthcare and Life Science are contributing about the same. And the Performance Materials business is going to rise after the acquisition of Versum Materials. In terms of growth rate, Life Science is the shining star. Performance Materials is going -- has been going through a trough year. I'll talk more about that later on. Our strategic road map that we had defined a couple of years ago is visualized in this chart. And we are -- basically, we are at a turning point, 2019 has been the turning point after investment period in which we go back into profitable growth. So for the group, the priority is to deliver on sustainable -- to deliver sustainable profitable growth and we are very active in terms of constant portfolio evaluation. We are -- for a company like ours, we have a market cap of roughly EUR 50 billion. Whenever I mention numbers, it's euro. And we have moved something like EUR 50 billion over the past decade plus in our portfolio. In Healthcare, it's about now fully leveraging on our exciting pipeline potential. In Life Science, we continue, we must continue to grow at levels above the market and market growth is very attractive in the life science field. And in PM, we are harvesting on the mega trends in semiconductor with the [ latest view ] growing 30% per year. If you look at the environmental factors. As you see, our businesses are well positioned. But yes, there are all sorts of factors that have an influence. And I'm not going to pontificate about healthcare reform or the Chinese -- or the China situation when it comes to health care. We see several factors also impacting our -- potentially impacting our Life Science business, and the same applies to semiconductor. We are very confident that we can grow actually substantially amid these challenges. And I will go into more details now regarding the individual business. And let me start with Healthcare. Healthcare, what we should memorize about our Healthcare business that is often underappreciated is that we have a highly resilient core business. And we have the ambition to keep this core business at least stable until 2022. And within this core business, the key word is geographic expansion and life cycle management. For instance, to give you examples, it's the rollout of the prediabetes indication to manage the Glucophage, metformin life cycles, and we have -- we're delivering growth through life cycle management across all regions in our innovative Fertility business. But this was just a couple of words about the mature businesses. Let's get into the novel business, into the launches. We are on track, as we had indicated a couple of years ago, to deliver EUR 2 billion -- on our EUR 2 billion pipeline sales ambition. The main factor for this is our MS drug. Mavenclad that was launched in the U.S. in April last year, it's now approved in over 70 countries, and it's ramping up well and it's on track to achieve peak sales of EUR 1 billion to EUR 1.4 billion. Bavencio, our PD-L1 antibody is approved for RCC in Europe, in the U.S. and recently in Japan. And we have just a couple of days ago, actually, we have received very, very uplifting, positive news on achieving our primary endpoint in bladder cancer. More about that later on. When I look at our Life Science business this -- sorry, this is an update on the Healthcare pipeline. We feel that we have a very attractive late stage and a very attractive early stage -- early stage pipeline. I would encourage you to go into more depth on this with the CEO of our Healthcare business, with Belén Garijo, in the breakout sessions. The main components in our pipeline are Bavencio, where we're expecting 2 new readouts for 2 new major indications that is in this year, in addition to the bladder cancer that I just mentioned. It's the readout for the first line lung Phase III study. As well as in 2021, the head and neck data. Tepotinib, an exciting precision medicine compound. There was a lot of positive -- we received a lot of positive feedback following ASCO. We have -- we will also go into more detail about this in the breakout session. Bintrafusp alfa is our first-in-class fusion protein, PD-L1 TGF-beta trap fusion, bifunctional fusion protein. We have announced the alliance with GSK in February. We have a major clinical program ongoing in lung, in biliary tract. And we will expand to other indications. We have evobrutinib, a BTK inhibitor, which is in Phase III in multiple sclerosis. And we're expecting readouts for RA and lupus in the first half of 2021. So we feel that this is a very attractive pipeline. And again, I would encourage you to go into more depth with my colleagues. Coming to our Life Science business. The life science market is a highly attractive -- the life science tools market is a highly attractive market. It's a market size of about EUR 170 billion, and it has a long-term growth rate of 4% to 6%. Our Life Science business has managed to outperform this market in terms of growth and in terms of margin, too. We see the key driver of this business is our Process Solutions unit with a CAGR of 8% and more due to the increases in the biologics pipeline, novel modalities and a trend toward more production outsourcing. On the next slide, you see some benchmark data, we believe that we're actually setting the benchmark for industry performance with our business. These 3, comparing ourselves here with 2 leading competitors in terms of growth and in terms of margin. And I think that this speaks a very clear language. In the life science tools markets, there are very -- there are several very important mega trends happening, one is complex biologics. The monoclonal antibody market will continue to grow in the low teens for a couple -- for several more years. And novel modalities is growing at a rate of 30% and more. We see also other trends, the expansion of single-use technologies, end-to-end facilities and we see a trend toward digitization like in any other industry and we are, with our e-commerce platform, with sigmaaldrich.com, we are the leader in e-commerce in the life science field. Thirdly, we see this huge trend of growth in Asia. If you listen to some of the presentations during this conference itself, it's self-evident. We see that more than 50% of new biologics projects are based in China. These are different type of customers compared to our traditional -- some of our traditional big pharma customers. These are customers that require fully fledged end-to-end solutions, and we are very well positioned to capitalize on this trend. Just -- I know this is a health care conference and not a semiconductor conference. But since it's part of our business, and I find it so exciting, just a couple of words about this. We have just completed the acquisition of Versum Materials. And we are now the leader in electronic materials. We've just been at CES, and we've been discussing exciting trends such as neuromorphic computing, DNA storage, et cetera. And we see that we're one of the few companies in the world that has expertise in biology and in semiconductor, and we see exciting possibilities. Our business, the largest business is the semiconductor business. We have a display solution business. We are the inventors of liquid crystal. So basically, when you look at -- when you click your cell phones, you have most of the materials that have been used to making these cell phones, display logic, memory packaging, whatever, there's our company inside. We also have a Surface Solution business, which caters mostly to the needs of the automotive and the cosmetics industry. We have defined a strategic road map for our semiconductor business. We basically believe that technology trends in semiconductor will depend much more on chemistry and much less on physics. We're reaching sort of physical limits to go beyond, let's say, a wavelength of 1.5 nanometers. That's 15 angstrom, basically 8 atoms wide and we need novel materials for this, and our chemistry expertise makes us very, very excited about that. And also the innovation process in semiconductor is becoming a bit more similar to the, let's say, a biotech process where players work together at a very early stage. Let me come to the 2019 guidance. It's always a little bit weird to present 2019 guidance at a 2020 conference. But that's how this industry is regulated. So we're confirming our organic growth ambitions for 3% to 5% for sales and 10% to 13% for EBITDA pre. As we announced on our Q3 calls, we are generating profitable growth and are entering this strategic expansion phase. And let me close on the strategic outlook. We have this 2016 to 2022 agenda and things are rolling out according to our expectations or maybe even better than our expectations. In Healthcare, it's really about reaping the fruit of the investment phase and keeping the base business at least stable. We have very little risk in terms of patent cliffs. So anything of that kind, and we believe that the incremental business that is coming out of our pipeline will actually turbocharge our growth. I was talking about Life Science, a highly attractive business, attractive industry growth. We are performing above industry. We are highly innovative in this market. We have something like 300,000 products, and we're launching thousands of products every year. We are highly involved in novel modalities, be it gene therapy, be it ADCs, be it CAR T. We are a leader in precision gene editing. We own foundational patents. And we have a very bright future also for our Performance Materials business, which has gone through some -- through a period of adjustment given the trends in the display industry, but we're very, very confident that this will have a -- that the semiconductor market will go back to growth in 2020. So in summary, we believe that we are a company that delivers steady earnings at high margins at a low-risk profile. And we assume that this is quite an interesting proposition during turbulent times. My colleagues, Udit Batra and Belén Garijo will soon -- hope to see you for an in-depth review during the Q&A, which is happening at which room, Richard?

The Olympic Room.

The Olympic Room. What a fitting name. Thank you for your attention.