Merck KGaA (MRK) Earnings Call Transcript & Summary

Welcome to day 2 at the JPMorgan Healthcare Conference. I'm Richard Vosser, European pharma analyst with JPMorgan, and it's my great pleasure to host in this session, Merck KGaA from Darmstadt in Germany and the CEO of Merck, Belen Garijo. Before I hand over to Belen, I'd just point out that if you would like to ask questions during this session, please post them to the conference portal, and then I'll read them out for you, and we can ask Belen that way. With that, welcome to the conference, Belen. Good to see you, and over to you.

Thank you, Richard. Good to see you, too, and many thanks to JPMorgan for the invite. Ladies and gentlemen, a very warm welcome from my side, and a happy and healthy New Year to all of you. It's a real pleasure to be here with you today, and we kindly appreciate your interest in our company. As usual, I will spend the first 15 minutes walking you through a couple of key slides. And after that, I will be happy to take your questions. For the sake of good order, you will find the disclaimer on Page number 2 of the presentation. I will definitely not cover that. And on Page number 3, you have an overview of my agenda for today. So let's go straight into Chapter 1, starting with some remarks on the strong setup of the group and our strategy for sustainable value creation going forward. Over the years, as you know, we have established a very strong position as a global leading science and technology company. This has been mostly led by very mindful portfolio choices, and we have achieved in that process combined sales of close to EUR 20 billion and EBITDA pre of over EUR 6 billion. We are operating 3 business sectors, Life Science, Healthcare and Electronics, all of them supposed to highly attractive macro trends and all of them uniquely relevant combination to drive growth and impact on human products. In Life Science, we had top 3 industry players supporting our customers in speeding up scientific breakthroughs and providing better access to Healthcare by making precision research simpler, analysis more accurate and, of course, contributing very actively to the development and the production of medicines in a very efficient way. In Healthcare, we are working at the forefront of enabling personalized medicine for chronic diseases like cancer and multiple sclerosis and our fertility portfolio is market leading. In Electronics, we are advancing digital living with our materials and solutions and we are poised to improve the way we generate access store, process and display information and data everywhere around us. Note that our 3 sectors are not just the sum of the stand-alone businesses with a great growth outlook. In fact, my view is that our 3 sectors hold the promise to become increasingly connected as we move ahead to support and to boost each other and to be further diversified and synergistic at the same time. And a great example of our cross-sector potential and cross-sector fertilization includes our new bioelectronics innovation fields or our recently launched Syntropy initiative, a joint venture with Palantir, which is now progressing, helping scientists to access data, available data in Palantir to help or enable their research and it's a perfect illustration of our efforts to building truly digitally driven business models. Our strategy is very clear. We are -- we have what I said mobilized the organization for efficient growth with a very shared focus on the so-called BIG 3, our key growth engines, namely Process Solutions in Life Science, our Healthcare pipeline and the Semiconductor Solutions business in Electronics. We are now focused on accelerating our science and technology leadership with innovation as the backbone and the key driver of sustainable value creation. The key enabler to do that will be a very focused and disciplined capital allocation which is based on a very well-structured approach, putting the enterprise view and not only the sector view at the center of our decision-making process. We will continue to be guided by our well-known values and most importantly, we will step up our sustainability efforts consistent with our long-term orientation as a family-owned business. Last, not the least, we will put even greater emphasis on leadership and cultured organizational agility and cost efficiency as well as diversity and inclusion as key enablers of a very diligent execution of our growth strategy. Now I would like to provide a bit more color on our growth outlook and our capital allocation priorities. Over the last few months, we have already made remarkable progress in 2021 to continue to transform our company in order to deliver on our long-term ambition. As you can see in the chart, we believe we are uniquely positioned to capture some of the most important growth trends of the 21st century. All our end markets are growing structurally above global GDP and our focus market segments are expanding at an even faster rate. One of the key pillars of our transformation is to continuously strengthen our capabilities and to continue to evolve our culture to maximize productivity and to gain share in those selected growth segments. In addition, our priority investment focus, as I mentioned already, will be mostly centered on our so-called BIG 3. Those which -- those businesses, which we expect to drive, most of the growth of the company in the years ahead. Let me remind you briefly of our midterm growth ambition, which can be summarized to 25 by 25. This means we are confident to deliver around EUR 25 billion of sales by 2025. More specifically, we aim to add EUR 1 billion sales per annum organically every year from 2021 to 2025, or over EUR 5 billion in total, which is equivalent to organic sales CAGR of over 6%. About 80% of digital will come from Process Solutions, the new Healthcare products and Semiconductor Solutions. And please keep in mind that our 2025 target includes a modest -- a very modest contribution from potential bolt-on M&A. So this growth is mostly organic. Of course, this doesn't mean that we are ruling out completely potential larger deals, but we'd rather see limited need for bigger moves at this stage given the major growth opportunities across significant parts of our business. And as such, we are considering complementary small- to medium-sized deals with high impact as more likely to be part of our midterm strategy. The acquisition -- the recent acquisition of Exelead that we announced at the end of last week is a great example of what I'm saying. It underscores our ambition to become a leading a leading multiple dilated CDMO and allows us to accelerate innovation in Process Solutions. With the addition of Exelead, we are complementing our existing offering in this rapidly growing mRNA space and can now provide unique and a truly integrated service for mRNA API manufacturing to final drug products. Summing out, again, you may wonder how much of the top line growth that we envision will fall to the bottom line. Well, as in the past, we are not going to provide specific guidance on margins. However, let me reiterate once again that we are firmly committed to efficient growth as we like to name and this goes beyond profitable growth and means that we are aiming to very, very vigorously managed every cost line with a goal to combine attractive near-term earnings growth with sustainable long-term value maximization. Our growth in coming years will be fueled by major step-up in our investments, which has been already initiated, as you may have seen in the public domain in 2021. In total, we are ready to invest over EUR 30 million in CapEx, R&D and M&A over the period 2021 to 2025. Of course, actual spending on M&A will be more opportunity-driven, and we have communicated firepower in the high single-digit billion euros by the end of this year. In contrast, our CapEx and R&D plans are very tangible and already in motion. Group CapEx will increase to about EUR 2 billion per annum by 2023, and the R&D ratio in Life Science, for example, will increase from 4% in recent years to around 5% of sales in the midterm. Importantly, and as mentioned already, we will follow a very structured approach to these strategic capital allocation decisions by focusing on the so-called enterprise planning units. And by doing so, we ensured that decisions are taken at the right level in the organization and that all the trade-offs are considered with a very accurate level of detail. More than 70% of our total investment between 2021 and 2025 will be behind with the behind and in 2021, we have already announced several important projects in key growth portfolios, including single-use, bioreactors, filtration and antibody drug conjugates. Moving into some additional perspective on Life Science and Healthcare as well as quickly into sustainability. Starting with Life Science, the market in which we operate is highly attractive. COVID is obviously a major driver for the industry and we are very actively participating in the Life Science. This comes on top of very healthy underlying dynamics and momentum, favored by very strong and sustainable trends. In fact, while the COVID tailwinds should fade over time, we expect the base market to slightly accelerate post-2021. We have our modest suggesting growth in a range of 5% to 7%. We see growth coming from all important dimensions. Portfolio, customers and also geographies. Process Solutions, the pharma segment and China clearly stand out in that respect. These are the areas where we are already having a strong presence and that will play a major role also in our growth journey moving forward. Same value processing as an example, we are an industry leader and continue to remain at the forefront of innovation. To fuel the growth of key portfolios, such as single-use and filtration, we are expanding our capacity and network very, very significantly. Since early 2020, we have announced capacity expansions more than EUR 400 million. We are also aggressively scaling up our service offering across traditional and novel modalities. And our focus is on establishing differentiated A to end CDMO services as we have seen for M&A, including monoclonal antibodies, high-potency APIs, biofactors, ADCs and nucleic acid therapies. In Research and Applied, we will selectively strengthen the offering, and we would evaluate the focus on innovation and digital, including the successful launch of [indiscernible] to our leading e-commerce platform and emerging markets, especially China. Targeted bolt-on acquisitions as recently seen with Exelead are also very high in our agenda to further add to our highly attractive organic growth prospects. For our Life Science business in total, we are guiding to midterm organic sales growth in a range of 7% to 10%. And importantly, keep in mind that this high-end includes an expected paving of COVID demand, which means that the outlook for the core business is going to be even stronger. For additional context, we expect total COVID sales of about EUR 1.15 billion in 2021, EUR 1 billion coming from Process and around EUR 100 million coming from Research. For 2022, we are guiding to around 900 in Process and significantly below 100 in Research Solutions. We anticipate further erosion of COVID sales in the outer years, although, as you well know, the market will stay volatile. Visibility is limited as we have recently seen with the variant Omicron. But we have been betting for several scenarios, several alternative scenarios and we'll be ready to deliver what our customers need. From a portfolio perspective, Process Solutions will be our key driver of growth in Life Science, complemented by very solid performance in Research and Applied. To sum that, we are very excited about the outlook for our Life Science sector and stay committed to fully capitalize on the tremendous opportunities that we see in these markets. Turning into Healthcare. Let me also briefly start with a comment on market trends. Growth in oncology, our largest therapeutic area remains attractive and the trend towards personalized medicine continues to advance. At the same time, the cost pressure from the industry continues to raise and pricing will likely be more volatile. Yet, we are confident that our Healthcare sector will deliver mid-single-digit organic sales growth in the midterm. We also believe that our focused leadership approach positions us very well for growth beyond 2025. Our globally diversified footprint in terms of manufacturing, R&D and commercial is giving us competitive advantages, and we have solid plans in place to continue to build on them in the U.S., in China, in other relevant markets. The foundation lies with our established portfolio, which as we have shown in the recent years, is highly resilient. On top of this, we will continue to invest to drive further uptake of recent launches, in particular, Mavenclad, Bavencio and tepotinib. Thinking about the longer term, we see great promise in advancing our pipeline, including our late-stage blockbuster candidate, evobrutinib in MS and xevinapant advancing in locally advanced head and neck cancer. Other aspects of our pipeline in focus include berzosertib, M1231 and enpatoran, all of which have first-in-class potential. In terms of news flow, we expect 2022 to be a year of study initiations and 2023 to be very busy in terms of readouts with a target of at least 1 regulatory submission per year after that. We will also consider further bolt-on deals, similar to the ones you have seen recently with xevinapant and more recently with the acquisition of Core in order to complement our portfolio in areas with In summary, our outlook in health care is solid, significant additions from our pipeline are augmenting a highly resilient and well-established portfolio, and we will continue to be very focused on driving growth while maintaining a sharp eye on cost and prioritization in our areas of expertise. With that, let me move on a rehab date on ESG. I am absolutely convinced that an integrated sustainability approach will help our company and our business to perform even better. About a year ago, we introduced new strategic sustainability goals based on what we have already successfully achieved in the past and aim -- and are delivering much more in the future. First, in 2030, we will advance human progress for more than 1 billion people globally. Second, by 2030, we will integrate sustainability into all our value chains. And third, by 2040, we will achieve climate neutrality and significantly reduce our resource consumption. In the past couple of months, we have introduced concrete targets for reducing CO2 emissions, waste and water consumption as well as for increasing diversity, equity and inclusion. We are also integrating ESG in the Executive Board and senior management compensation and we launched a comprehensive set of ESG KPIs with our first integrated report for the fiscal year 2022 in early March. Sustainability not only guides our behavior in our day-to-day operations, our stakeholder interactions and the development of our people, but most importantly, is a cornerstone of our innovation agenda. This means that a rising number of our products and technologies will directly contribute to solving, addressing sustainability issues that we face, resulting in mutual benefits for society, the environment and importantly, for our business performance. Our climate neutrality target for 2040 is currently under evaluation with the science-based target initiative. We signed the commitment letter and submitted the required validation documents in November 2021. We are expecting the feedback towards the end of the second quarter of 2022. Before opening for questions and almost coming to the end, let me take a brief look at our guidance and my key messages for you today. Based on our latest guidance upgrade in November, we expect full year 2021 group net sales in a range of EUR 19.3 billion to EUR 19.85 billion. EBITDA pre in a range of EUR 6 billion to EUR 6.3 billion and EPS pre in a range of EUR 8.5 to EUR 9. Organically, this guidance corresponds to sales growth of 13% to 15% and the underlying EBITDA pre growth of 26% to 29%, of course, excluding the impact of the biogen provision reversal in the year 2020. And all the 3 business sectors will contribute to sales and to earnings growth with, of course, Life Science and Process Solutions as the fastest-growing sector and business followed by Healthcare and Electronics. To sum it up, we are acting from the position of strength, and we aim to continuously accelerate our science and technology leadership, having mobilized the organization to ensure long-term profitable growth. We will continue to invest based on a very well-structured approach, our capital with a clear focus on driving the innovation powered by digital and data. behind these BIG 3 growth engines. And last, but not lease, we progressed very fast our people strategy, advancing towards a high impact culture with greater emphasis on sustainability, diversity and inclusion as key enablers of our performance. Rest of that year that we will execute our plans with the termination and vigor, we are very confident to deliver on our ambitious goals, taking Merck to the next level and delivering sustainable value for our owners, shareholders and for the society at large. With this, I want to thank you very much for your attention and look forward to your questions. Richard, over to you.

Thanks, Belen. Maybe I could start just -- you touched on COVID-19 and how your revenues in Life Sciences will evolve over the next year, maybe into '22. But maybe we could go a bit more general. What's your latest thinking around COVID-19 and the demand for the industry and you over the next 12 months and beyond. I mean we're seeing Omicron come through very fast. We're seeing boosters required. And potentially, we're still waiting of the boosters pretty quickly, but maybe not so much hospitalization. So I mean there's a lot going on. What's your thinking?

Look, my view is that COVID is here to stay for a while. Omicron is with us since very late November. We are still learning from the ongoing studies and from the studies that have been performed in South Africa. And we don't have so much data at this point to determine what is going to happen to variant. I talk to many people including people, including [indiscernible] people and they believe there will be more variants. So I believe that to certain extent, this will stay indeed. If we call it like this, we will have vaccinations how often, who knows. We also know that based on the early publications that neutralizing antibodies do not seem to be so fit against new variants, in particular, Omicron. And an antivirus is very early to say, right? So we are not getting in the dark. And as I mentioned before, we need to be prepared. So what we are doing is to build different scenarios, and most importantly, to continuously strength our capacity to serve our customers no matter what. We know that at the end, our business is going to be very highly depend and operated, that they said, very highly related to the number of the billion of vaccines being produced. And the rest is less important to us, right? Antivirals, because this is a small molecule, and of course, we work a little bit more on neutralizing antibodies. But the most important for our future is okay, vaccines. And this is what we are preparing for. So we have already provided guidance for 2022. We are good. I mean, we feel very good with the guidance. By the time we come back to you with an update in March, we will hopefully have a bit more visibility. But so far, we are sticking to our guidance of about 900 million of COVID-related sales for Process Solutions in 2022.

And in Process Solutions because it is one of the bigger growth drivers as you highlighted, you touched on the market growing or maybe even accelerating in terms of the overall bioprocess market maybe. Maybe you could just talk about the drivers for that and how you see that delivering maybe an acceleration to the underlying growth as you may be touched on for Process Solutions and Life Sciences in general.

Yes. So let me take it from the Life Science market overall. Our expectation for the Life Science market in 2021 is that this is moving between 5% and 7% is what first of all, 190 billion growing by 5% to 7% as COVID. So Process growing by 9% to 10%. That is our expectations. We will overtake that growth. That is also our expectations. The main drivers of the market in terms of customers will be definitely pharma because of the pricing monoclonal antibodies volumes, we are expecting 11% growth of that market. Because of novel modalities, especially MRNA, which we are expecting to be delivering around 25% growth and the increasing trends to outsourcing, CDMO market is expected to move by 12% at least. Then in terms of geography, China is a very important driver of growth. As I mentioned in the presentation, first, because of the local antibodies approval because of the tightening regulations in China and large but not least because the biotech business in China is actually booming, right? And if you see a novel modality -- including And in terms of -- when you look at the annual publications, say 19%, for example, mainly cell therapies are there already surpass in the U.S. So it's pharma, China, pharmamonocloncal antibodies, novel modalities and increase on census.

And maybe to build on that then. You touched on the Exelead transaction and that's in the sort of novel modality area in mRNA. So what does that bring to the table? And how -- I suppose, how exciting is that? What sort of boost can it provide? How critical is it for your business?

Actually, it's very strategic for us, right, because is having us materialize this integrated offering that is so unique in the marketplace that we believe is going to be highly valued by our customers. Today, with the acquisition of Exelead, which is giving us presence in LMP formulation plus together with our legacy expertise in Sustainalytics, which is already prominent -- prominently progressing in the COVID context, plus the acquisition of AmpTec which is giving us the opportunity and the offer of the mRNA, Merck is the only provider of this integrated service approach to mRNA vaccine manufacturers or any other mRNA technology that may be developed for other indications. So the acquisition of is Exelead is very, very, very exciting for us. It's a small company based in Indianapolis with more than 10 years of experience as a CDMO for lipid nanoparticles and pegylated formulations. They have fantastic capabilities and full service. CDMO covering development -- covering everything from technical, clinical, commercial, the GMP and ISO-35 manufacturing process, and they work with major customers like Pfizer, like Teva, like Takeda, like So we are quite excited, very excited.

I have a couple of e-mails or rather questions on the website. So I'm going to take those now. And one of them is more broadly on M&A. And they're asking for your -- it's quite a broad question, so I might add to it, but the question from the person is, what's your starts of biotech out license merger and acquisitions in the midterm. But maybe I can add to that and just sort of say, we've seen a few bolt-ons that we just discussed in Life Sciences, but how -- and you touched on during the presentation the M&A being more bolt-on focused. But how do you see allocating the capital between the divisions for bolt-ons? Maybe I'd add back to it as well.

Look, let me step back to say that we have made a conscious decision to stay on threat with this complementary opportunities that we see to boost our -- the growth of our I have said many, many times that we are looking for growth acceleration and not to fill gaps. So we believe that at this time, our organic investment is equally important and our capacity expansion in Life Science and Electronics are really -- as well as our R&D investment in the Healthcare pipeline are really driving growth acceleration in coming years. But we are not overdoing their moves if the opportunity comes. And of course, this will be around the same business segments and the same business sectors, right? Remember, as a finally owned company, we are very mindful of the risk-reward ratio anytime we make a decision, right? And that is why I took a little bit of a few seconds of the presentation, also during the Capital Markets to show to all of you the way we are making decisions to make sure that it is well understood that whenever we make a capital allocation decision, we think enterprise and not the specific sectors. So whatever is bringing the best risk reward to the company and accelerating our growth will actually win. And we are very open and very flexible. I mean -- of course, we are not going to reveal the plans in detail, but -- and we have said everything that we need to say. We need bolt-ons for growth acceleration. We don't overrule anything that is in the coming years.

Makes sense. I have another question, which is, is Merck using the advantages of product engineering and microgravity. This might be a bit specialist, but I've asked it anyway. So if you...

We -- are we using...

Product engineering and microgravity. It's a little bit precise, I think.

We're talking the space, right?

We'll move on. We'll move on. We'll move on.

Too complicated for a CEO. Probably if we would be doing something, I would be intrigued by that. So I have to assume this is not the case.

Yes. No, fine. It makes sense. Maybe some of those pharma drivers that you talked about in terms of maybe Mavenclad and Bavencio, I mean we talked about Omicron being a benefit for the Life Science business. We've seen the multiple sclerosis market have impacts from vaccinations and -- for some of your competitor products, the CD20, and the whole market being depressed by COVID. So what's the latest thinking around Mavenclad's development and the pressures from COVID?

Look, I cannot say much more than what I said during the Q3 call. Mavenclad hit regular quarter in Q3 with a very significant organic growth and a very good diversification of the revenue source growth contribution coming from the U.S. and from the ex-U.S. The U.S. is the U.S. high efficacy dynamic market is definitely very sensitive to COVID and to potential lockdowns. We haven't seen major lockdowns like we saw in 2020 in Q3, Q4. But we need to see very soon what happened in Q4 with the increasing pressure on hospitals in the U.S. related to Omicron. So far, we are -- we continue to be confident, nothing new. We have -- as you have seen, we haven't lost market share. So we go right and continue to progress, but we are very sensitive to the high efficacy dynamic market with a competitive advantage that should be recognized. And it's very well recognized in Europe of being the only option in the high efficacy dynamic segment that is not influencing the immunity generation at the patient level. So we continue to focus very much on presenting those data, recessing those data with health care professionals because we believe this should give us a competitive advantage in the COVID context. But in terms of lockdowns, we will come back to you when we disclose full year.

Perfect. Thank you very much, Belen. We're at the top of the 40 minutes. So that was a great discussion. Thanks for the presentation. Hope everyone has a good day. Good to see you.

Thank you, Richard. We look forward to seeing you in person one of these years. Bye, everyone. Thank you very much.