Merck KGaA (MRK) Earnings Call Transcript & Summary

Right. So we aspire to provide the full range of services along the entire value chain across multiple modalities. And with that, we're really able to engage early with our clients in the early development phase, support them through clinical development and into commercial supply as well, right? And then we're already seeing that this is resonating with our clients. In terms of gaps in the space, we're -- we have some defined gaps, for example, fill-finish capabilities [ and ] some of the modalities, but we're also rounding up our global footprint by adding certain capabilities and capacity to the global network as well. And then we double down on innovation, all right, because that's really important for us as well as we continue to see a shift towards novel modalities. And maybe, [ Anya ], if you could add to that...

Yes. So for our -- well, thank you for having me, first of all. It's nice to be here with all of you today. For our [indiscernible] contract testing services, we really have a best-in-class portfolio both for traditional modalities like monoclonal antibodies as well as for novel modalities like cell and gene therapy. We engage with our clients really early on in their development and take them all the way through development and manufacturing. And we innovate alongside them so that they have all of the services they need to both characterize and then release their molecules.

So just following up on the customers, as you mentioned them. Who are your customers? If you can talk about that. Which modalities do they serve? And how do you expect that to evolve over time?

Sure, yes. So with our value proposition around accelerating speed into clinic and to the market, we're really attracting both large pharmaceutical companies but also small and emerging biotech companies. So today, that split is about 50-50 in terms of revenues, but we do expect that to change and really shift since emerging biotech companies are really fueling the development pipeline here. And in terms of modalities, about 60% of the revenues are already coming from novel modalities. And we also expect that number to go up over time because we're already seeing that shift towards gene and cell-based therapies; and also specifically in our testing part of the business, where that shift has already occurred. Maybe you can add to that as well.

Yes. In our testing business, we really have a quite diverse customer base as well, like Dirk was saying, all the way from small biotechs to large biopharma companies but also including CDMOs. And we really have a best-in-class portfolio that can be customized based on the needs of these various customer types. We -- again, we engage really early in a customer development cycle and so we're able to actually get exposure to novel modalities right as they're emerging.

So okay. And why do customers choose then Merck? Because -- and there's a range of competitors in the market. And secondly, what is the value of combining CTO and CDMO for you and your customers?

Right, loaded question, "Why us?" right? So absolutely. With our newly launched Millipore CTDMO service businesses, we're really doubling down on integration and innovation. And that's for the sake of reducing the complexity in the supply chain for our customers and accelerating the development of new drugs. And we're already seeing that this is well appreciated in the industry, so about 40% of our CDMO clients today already rely on our best-in-class testing services as well, and we expect that to continue over time. And in general when clients pick CDMOs as their long-term strategic partner, they really look for a reliable, high-quality partner with expertise in regulatory, technology and just driving that overall reliability that they can engage with long term. Maybe...

Yes. And for our [indiscernible] testing services, our customers really choose us based on our position in the market as scientific and regulatory experts as well as our broad multimodality portfolio. Innovation is also a point of differentiation for us. We are really innovating not just in our portfolio but also in our service delivery. So with that, it really allows us to have a fully one-stop shop in our CTDMO. And one example of that is for our ADCs or antibody drug conjugates. So as you know, we provide raw materials. We can also manufacture the monoclonal antibody, the payload and the linker; perform the conjugation; and then provide the testing services along the entire value chain to enhance the value for our customers.

Yes. Thanks. That's a great example. And another great example is our mRNA value chain, where we also cover the entire value chain from lipids manufacturing through the mRNA payload itself, liquid nanoparticle formulation, fill-finish services and the testing. And in addition to that, we also deploy proprietary technologies to drive that acceleration of drug development. So for example, on the viral side, we have VirusExpress, which is a proprietary technology that can cut the development time of those modalities in half; and the same actually on the ADCs as well. With ADC Express, we can literally drive development times down in half. And then last but not least in terms of differentiation there, obviously, with our best-in-class products business and our ability to not only control our own supply chain but also to push the boundaries and innovate together, that's a clear differentiation in the market.

Thank you. And what does it all mean for your outlook? How should we be thinking about your growth profile?

Yes. So I'll start with the testing business because it's the most established. And I think we have a really well-established market leadership position that we can -- that we've been able to use to leverage some of the market shifts, right? So we have a very, very -- customer base, which allows us to weather some of the downturns like COVID, for example, by indexing really on the high-growth parts of the market like cell and gene therapies.

Yes. Maybe to add to that: On the CDMO part of the business, we're at an earlier stage of that growth and at an earlier part of the maturity curve, right? And we also see some market volatility, similar to other CDMOs in the space, right, but we're really confident in the long-term success for each one of the modalities that we're serving. But in the short and mid term, we're certainly expecting some variability in revenues as we continue to build the pipeline and really fill up to get each one of the businesses to critical mass.

And maybe just to add on that. That's why, in the morning session, Marcus showed a bit of a wider range, right? We said low to high teens, especially to acknowledge, right, the bigger volatility compared to a PS product business.

So how does -- how do -- your capacity investments, how do they compare to peers? What's your perspective on that? How should we be thinking about the mix of organic versus inorganic, if you can talk about that?

Yes. No, indeed we're absolutely seeing lots of investment happening in this space by some of our competitors. And that really highlights the attractiveness in that space. So year-to-date, more than EUR 2 billion have been committed to the services space, with about a 50-50 split in organic and inorganic, and yet we're still seeing very long lead times for [ GMP ] manufacturing slots. So for traditional modalities, we're seeing up to 12 months to get into a [ GMP ] facility; for novel modalities, up to 18 months. And we believe that we're really well positioned with our differentiated offering so that, even if the supply and demand situation normalizes here over time, we continue to capture the growth.

Well, thank you very much for all of these insights. I'm aware of time. I think we need to wrap it up here, so let me hand it back to all of you for any closing remarks. Maybe, [ Anya ], we'll start with you.

Yes. Thanks, Constantin. And thanks, all of you, for having us here today. It's a real pleasure to be with you. I want to just close by saying that the CTDMO space is a really exciting place to be. And we're really excited about the work that we can do both with novel modalities as well as the second wave of biologics and the impact that we can have on patient lives. Dirk?

Yes, absolutely. As [ Anya ] mentioned, first of all, also thank you for your time. It's a great opportunity to shed some light on the service business. And as you can see, the opportunities to really drive health and -- life and health with science are fast. And we as a fully integrated CTDMO backed with an industry-leading product business have a crucial role to play in bringing new cures to patients. So we're very committed to collaborating with our clients and to continue to push the boundaries of life and science to advance the industry. Thank you.

Yes. Look. Thanks a lot for your interest in Life Science. I really look forward to our dialogue later this afternoon. We have a clear strategic growth agenda. We are executing well. We're very much committed to our midterm guidance. And as you see here, we have a very dedicated, well-experienced and passionate team. And you will see other team members in the session this afternoon, so we're really looking forward to continue the dialogue.

Thank you very much. This concludes our first session. Thank you. All right, with this, we are now ready for the second fireside chat of the day, which is our Healthcare sector. I would ask the colleagues to join me on stage, please. So welcome. Let me, first, introduce the speakers of this session. We have Peter Guenter, member of the executive board, CEO of Healthcare; and Danny Bar-Zohar, global head of R&D in Healthcare; Victoria Zazulina, global head of development for oncology. So Peter, I'd like to start with you. Pharma is a pretty broad field. Let's start by taking a look back at the previous CMD, 2021. And you introduced the concept of focused leadership, so where do you see -- where are we 12 months later?

Well, thanks. And great to be with you and see so many familiar faces again after a couple of years, and happy to see you live. And to answer your question, Constantin: I think that -- if I would summarize it in one sentence, I think we say what we do and we do what we say, if I look back at the last 12 months. And let me give you some proof points of that. First, in clinical development. And we have 2 distinguished teams here of the R&D teams, right? So think about the evobrutinib clinical development. Of course, we have faced significant headwinds with the Ukraine situation. And our teams have been able to do a fantastic job in keeping the integrity of the data but not only that, changing the protocol to an event-driven protocol. And as a result, we are confident we will keep the initial [ time lines ]. It's just one example. Xevinapant, the drug that we inlicensed from Debiopharm [ and with ] great progress in [ the CIS-eligible ] population with the trialing study and also now the starting up of the second study which is the x-ray vision. So I would say, on the clinical development front, some great proof points, that indeed we are building that focused leadership paradigm. And I would also say that we have been quite active on the M&A and licensing front. Xevinapant is, of course, a case in point, which fits extremely well with Erbitux, but not only that, right? We have regained the rights on cladribine, to develop it in myasthenia gravis, with the Chord acquisition at the end of last year. And only 2 weeks ago, we announced the option deal to inlicense a new generation or next-generation PARP1 inhibitor from Nerviano medical science, which fits extremely well again within our DDR portfolio. So these are a couple of proof points, I think, on the progress we have been doing in the last 12 months. Of course, it doesn't stop there, right? We also have to be very active and successful in the commercialization of our products. And you will have seen that with Bavencio we have been able to establish a real -- the new standard with care in metastatic bladder cancer. We are delivering quarter after quarter with nice progress in a very uniform way between U.S., Japan and Europe. And also, Mavenclad, granted with different dynamics at both sides of the Atlantic because the labels are different but also there very strong positions in Europe. And even in the U.S., where we have a first-line label that is difficult and -- we are actually still gaining market share in the second line in MS. So I think overall great progress on the focused leadership concept.

Thank you. So what does this all mean for the established portfolio?

Well, you have seen also in the introduction that established products remains a substantial part of our products. Basically what qualifies as established products is -- it's a lot, right, because it's everything except the launches, so -- but you have seen that it's a very solid foundation. And when indeed we are successful with the launches, it really augments that very solid and resilient platform of the established products. A couple of comments there: fertility, worldwide market leader, significant tailwinds that will remain in that business and, Belén mentioned it in her speech, probably a little bit more volatile. We have seen that, for example, with the lockdowns in China, but -- that had some impact on the Q2 results for fertility, but fundamentally we remain convinced that delayed parenthood, increasing access to treatments is indeed going to continue to drive that business, right? The CM&E business is kind of a diversified business within the diversified business, right? It is geographically diversified. There is cardiovascular in there. There is diabetes in there. There is also thyroid business, for example, in there. And in the second quarter, we kind of started to communicate a little bit more in detail on a product that is doing extremely nicely, called Euthyrox, for thyroid disease. And then last but not least, Erbitux: Erbitux is much more than a [ supply or not supply ] to Lilly in the U.S. It is a very dynamic brand if you normalize it for that supply. We are very active with that brand. And having Victoria with us today -- I'm sure you would like to expand a little bit on that, Victoria.

Thank you so much, Peter, for the opportunity to add to this conversation and share some excitement about the good, old Erbitux; as well as some newer kids on the block. As you know, Erbitux has been on the market for 18 years now, believe it or not. And the core indications where we have played and where we have really impacted so many lives are still there, locally advanced and metastatic head and neck cancer as well as KRAS wild-type colorectal cancer, but Erbitux, and that's the amazing story about it, doesn't stop there. In fact, if you look at the ClinicalTrials.gov portal, where we track all of the ongoing clinical trials industry-wide and also academia-wide, you will see more than 200 active trials with Erbitux today. And this is the tribute, the scientific tribute, to the excitement around the EGFR inhibition that can -- if sustainably delivered, can be really a great effort and a great benefit for the patients with cancer to control directly cancer but also to control the resistance mechanisms. And there we have already seen some interest in data, leading to expansion of the indications for Erbitux as well; for example, with a BRAF inhibitor in BRAF V600E mutant colorectal cancer, novel-novel combination. Or recently we have seen the data coming from KRAS inhibitor -- KRAS G12C inhibitor plus Erbitux, where together they are doing much better in terms of response rate and duration of response compared to KRAS G12C inhibitor alone. And this is just the start of it. And we are obviously walking the talk and entering into these partnerships and collaborations to further expand on the strength and opportunity that Erbitux can bring as an EGFR inhibitor in order to establish more novel-novel and chemo-free regimens and expand the footprint for Erbitux clearly.

Well, thank you, both of you. Over to you, Danny. You have been with Merck now 2 years, about. What does focused leadership mean to you?

Well, Constantin, yes, I think that it has 4 dimensions. The first dimension is what actually Peter alluded to, which is the indications that we choose. Multiple sclerosis started with Rebif; Mavenclad; now with evobrutinib. And you heard about the Chord deal. Why did we do the Chord deal in myasthenia gravis [indiscernible]? Because this is neuroinflammation and neuroinflammation is something that we're strong in. Xevinapant, we don't need to elaborate on that. The second dimension is the biology. Again, you heard about the deal with Nerviano on the PARP1, strengthening the DDR portfolio. And this biological path does not stop here because it could talk -- cross-talk not just with ATR inhibition, which we feel very strongly about, but also with inhibition of apoptosis [ because of ] xevinapant [ and alike ] and antibody drug conjugates. So there are a lot of combination potential with that. The third one is actually the modalities, the technologies. We have a proven track record in NCEs and NBEs. That's great. And it gives us a very easy pivot to go to new areas such as antibody drug conjugates, and we'll be very excited to tell you about it in the R&D Update Call, and on protein degradation. On top of that, together with our Life Science colleagues, we are working on AI in drug discovery from discovery, design and synthesis, all the way. The last point is actually how we manage risk. And I think that you heard that -- you heard us last year talking about correlated risk. Now this is not a binary thing, yes. We will take the risk, the overall risk, of the portfolio very, very seriously. And we will try not to put all the eggs in the same, in one basket, but on the other way, we will not shy away from a pipeline in a compound. For example, enpatoran, the most important thing will be to get into the most robust proof of concept and then in parallel think about partnering options, as we have already alluded to. I can tell you that, during the last 1.5 years, with the latest acquisitions [ and ] BD&L, we actually increased the overall POS of the pipeline, so I'm very happy about it.

Thank you. A follow-up and if I may zoom out again: From your perspective, what's the ambition for R&D at Merck?

More medicines to more patients faster. Look. I am very happy with we're actually carried by tailwinds of the success, of the momentum with Mavenclad. There is no other Mavenclad in terms of mechanism of action. Of how we change the textbooks with Bavencio in urothelial cancer, many firsts with Tepmetko. Evobrutinib is homegrown. Enpatoran is, so it gives us all a very good reason to smile. I'm not satisfied, okay? We are clearly aiming higher in order to make Merck Healthcare R&D the most agile and productive R&D engine. How we'll do that: First of all, we'll focus on execution. When it comes to the Russia-Ukraine conflict, with evobrutinib, we started working on that before the [ first charter ] was made, unfortunately, okay? So we are very proactive on that. We finished recruitment ahead of competition. And we are handling it, I would say, quite nicely; same with lockdowns with China, with -- for xevinapant; same with MET amplification, post Tagrisso, with tepotinib. The gap 2 years ago was 18 months. Now it's around maybe [ a quarter ] between us and AstraZeneca. So very strong focus on execution. We will not -- we will continue, actually, focusing on the great signs that we come up with, but we will be [ cold ] and laser-focused on the decisions that we take and on the risks that we put on ourselves. The other one is reloading the pipeline. You will hear in the R&D Update Call. How are we confident and excited about the DDR portfolio, ADCs, enpatoran and much more? Now we will continue relying on the internal research and discovery capabilities, but this will unlikely bring us to the productivity that we aspire to. You will hear more. You have started hearing and you will hear much more about external innovation and bringing more assets, particularly at the -- our ambition is in the [ peri POC ] area but not only. And I think that I need to be crisp here because we'll keep it to the R&D Update Call on November 21.

Well, thank you. On our assets and if we look at the 2 Phase III assets: If we could dive into xevinapant, first, and this would be for both of you, Peter and Victoria, what's the status?

Well, xevinapant is really extremely interesting. We took the license when I was 3 months at the company. We had as a base case scenario that [ iOnc ] had failed and will continue to fail, which came true. And you have all seen the ESMO data, right, the 5 years, more than 50% of patients still alive. That's typically when in oncology one would start to talk about a curative effect, so -- and we know that space extremely well with Erbitux, but Victoria, you are the specialist.

[ Yes ]. Thank you, Peter. You've said it all. When we talk about overall survival, that's what excites us in oncology because ultimately every therapy that we are developing is with the aim to improve survival. And we have achieved that on the basis of the Phase II data with xevinapant and not only that. It's also, all of the end points efficacy-wise that we are looking at, they are consistently going in the same direction. With the addition of xevinapant to chemoradiotherapy as a backbone, we are seeing consistent improvement in how the patients perform and which outcomes they have. And that, by the way, doesn't come at the cost of any extra burden of toxicity, which is also important in the context of the quality of life of those patients. And the reason why we are excited, as well as the broad academic community is excited, having seen those data just recently in Paris, in one of the medical congresses, is because for the last couple of decades there was nothing new happening into this population of locally advanced head and neck cancer. If you think about the beginning of 2000, it was actually cisplatin itself in high doses that was introduced, not necessarily as a breakthrough but something new to add to their [indiscernible] of treatment. So 20 years on, some of the failed trials included immunotherapy trials in this setting. And here we come with a Phase II data which seemed to be robust from this replication of result. And looking forward and referring to the discussions of the abstract that we presented at ESMO, the conference that I've referred to already, this is the largest achievement in the area of locally advanced head and neck cancer. And if this signal replicates in the Phase III, and this is confirmatory trial well underway already now, we are talking about the next standard of care. And that's not me saying this to you. That's again I'm referring to the discussions of the data at the congress. And the reason why xevinapant could be more successful than other drugs tested in this area is down to probably its unique mode of action. So far, it has the potential to be first in class. It's well positioned to synergize and work together with chemo and radiotherapy. And even going beyond that, we have talked about the DNA-damaging agents, and this is where xevinapant or the agents like xevinapant could work well as well. And that provides a great synergy and strategy for our own portfolio as well. And we'll talk more about that at the update for the R&D when we are talking on the 21st of November.

Thank you. I'm conscious of time. I think we have to speed up a little bit, but still I want to ask this last question because we have a lot of interest on the topic. So the second Phase III, evobrutinib. Danny, very quickly, what's the status? And maybe, Peter, if you want to add and also already have some closing words.

Look. It's been a roller coaster. You know that, Russia, Ukraine, we managed it. We are very confident with the data. We had recently a very good dialogue with the FDA regarding the quality of the data that comes from there. And we are strongly committed to the readout before the end of next year. That's one thing. These are the technicalities. I want to emphasize what we believe -- not just what we believe as the residual unmet need in multiple sclerosis. I've touched a couple of RMS drugs in my life. And it is very clear that, beyond the relapse rate of 0.1, relapse every 10 years, there is not so much to add, but what there is much to add is this progression that is not related to relapses. It's fatigue, loss of your occupation, cognitive decline. This is the smoldering inflammation. And with evobrutinib, which is a brain penetrant drug that addresses the culprit cells, microglia and B cells, inside the center and nervous system, with evidence on reduction of slowly expanding lesions and neurofilament, we have all reasons to believe that it has the potential to address this, on top of its great anti-inflammatory properties. Peter?

Just to conclude. Of course, I share the excitement of Danny on evobrutinib. We are in full prelaunch mode. We have regular launch steering committees and I personally participate in those. And we have, by the way, a lot of inbound interests of people to join those teams, which is kind of an external validation, I think, of the interest that the community takes into BTKi. And just as a conclusion, I would say that we have drilled down a little bit on the Phase III assets. There's a lot more and we will create a lot more in the near future, but having 2 Phase III assets with very strong POC, both [ with ] blockbuster potential for a company of our size in health care, I think, is a good place to be in. And I will conclude with that.

Well, thank you very much. That concludes the second session. Thank you.

Thank you.

And with this, it's now my pleasure to come to the last fireside chat of today. And the colleagues are already coming on stage. This session is about Electronics and the semiconductor business, representing also one of our major growth drivers. Now before we get started, let me introduce the speakers for this session: Kai Beckmann, member of the executive board, CEO of Electronics. Then we have Kate Dei Cas, head of the delivery system and service business; and also [indiscernible], head of procurement for the same business. Now again I would like to start now with you, Kai. So last year, you announced significant invest in the Electronics sector. And if you think back since this announcement of your strategy update, did you meet your expectations?

Thank you, Constantin. And first of all, happy to be back on stage at a in-person Capital Market Day. It's such a pleasure to see all of you in person in this room. Just recap: When we met last time, in 2019, this was still a couple of weeks shy of the closing of the Versum acquisition. So that is the timing. So since then, we integrated Versum successfully. We were able to take advantage of that semiconductor boom that happened not only in the news and every newspaper writing about semiconductors. I think it was a real development, a step change for the semiconductor industry in the past years. With that, we were able then, referring to your question, Constantin, to switch gears from integration to building additional capacity and leveling up our capabilities as an organization. And we already announced another acquisition with Mecaro chemicals business that we want to close still this year. So it shows all these kind of bits and pieces fit nicely together and take advantage of the enormous opportunity we have in front of us. And so the team has accomplished all that by now, in record time, without traveling, an integration. I think we haven't seen that happening in the industry, so far. And our customers do appreciate kind of this substantial portfolio. It's an industry-leading portfolio that we offer across materials and related delivery systems equipment and services.

Thank you very much. Now what is your view on 2023 and also the years beyond and also the key priorities for the Electronics business in order to successfully continue the growth path that we just talked about?

I learned during dinner yesterday the visibility into next year is, of course, in everybody's mind right now. When -- just remember, when we announced last year our upgraded midterm guidance of 3% to 6%, many of you said, "Aren't you too conservative? Isn't there more?" [ Guys ], there is always a bit of uptake here and sometimes there is a bit of a dip. And our midterm guidance includes, of course, the perspective that there will be at some point maybe a bit more modest development of the industry. And this is built in, so we don't have to change that, unlike probably others that have already adjusted for that. We have said this is a midterm guidance. And typically, we try to offer a high level of predictability of what we do. Of course, the current economic circumstances aren't a pleasure for any of us, but this is part of our midterm guidance. And as already mentioned in the morning session, these swings, of course, are factored into our full company picture [ and absolutely unimportant ] for the group picture. So that is more kind of a sector review. As you saw in Q2 reporting already, kind of an early indicator is the reduced consumer demand that we already saw happening in the display businesses. In semi, so far, our customers are ordering a lot. So it's not that we already see that happening, but of course, we are cautious enough. And we have experienced, many of us, quite a number of ups and downs in the industry; cautious enough to get prepared if things get a bit more modest. But long-term growth perspective in the semiconductor industry is absolutely phenomenal because, these investments, at some point, they will all produce chips. And we are in line with their investments with our capacity.

Thank you for this overview, this introduction. Now let's shift a little the gears and go into the Semiconductor Solutions business. And I'd like to start with you, Kate. So can you help the audience understand a little bit better what the delivery systems and service business is all about? And also, why is it at the core of the ongoing semi CapEx expansion that we are seeing?

So our business is really about providing a solution for safe and reliable delivery of specialty materials to the semiconductor manufacturing process. And we really do that in 3 different ways. We do that with the equipment that we design and manufacture. We've been doing that now for almost 40 years, and we have 10,000 pieces of equipment installed globally. We also do it with our MEGASYS services brand. And that's our brand that's 24/7 support at our customer locations, where our technicians are there operating equipment in the sub-fabs supporting semiconductor manufacturing. And then the third aspect of it really builds upon the equipment and the services support, where we're participating in large construction projects on our customer site when they're building semiconductor fabs.

So thank you for that overview. So the large project business that you just mentioned: In our earnings calls, the quarterly earnings calls, we often refer to them as a growth boost to Semiconductor Solutions in the past quarters. And can you elaborate a little bit more about what is it exactly that we do there for our semi customers?

Sure. The semiconductor industry right now, the growth is driven by large customers like Intel, Samsung, TSMC building semiconductor fabs. And what we are doing is now engaging much earlier in the process with these construction projects, where we're engaging early, at the very start of these projects, doing design, the construction and facilitation of equipment and then utilizing our services team to provide the support for the start-up and commissioning of that equipment. So our team is there turning gas on for the first time to support these semiconductor facilities.

Thanks, Kate, very clear. Now if you had to describe the overall value of Delivery Systems & Services business to Merck Electronics but also more importantly to your customers, yes, how would you put this in your own words?

So absolutely, and I'll start with customers. Really it's about safety and reliability. This is what we do. We provide the solutions to allow our customers to ensure that their factories are up and running continuously. How we participate and the value that Delivery Systems & Services brings to Merck overall is that we bring that different perspective. Kai talked about the fact that there are cycles to this industry. And delivery systems, we engage with the same customers as the materials side of the business, but we engage with different partners. We engage with folks that are working in the sub-fab. And our MEGASYS team is there on site 24/7. They're there. They can see when our customers are speeding up or slowing down wafer production. By engaging in these large construction projects early, we're able to then really understand what's happening from a very different perspective than the materials side. And the combination of both of those is what makes it really powerful for the electronics industry.

And is there a way how the delivery system and service business can flexibly respond to the semiconductor cycles that are typical for the industry?

Yes. So these cycles are happening, and it's really about how we respond with that flexibility. It's the flexibility in our manufacturing capacity, how we're utilizing our plants. We have 3 plants now. We're adding a fourth in Taiwan at -- by the end of this year and we're adding a fifth in Arizona in the first half of next year. So having maximum flexibility in our manufacturing capacity is really quite important.

Thank you. [ Vipka ]: So if I can come back a little bit to what we just heard from Kate. The supply chain is a key role, also supporting location flexibility. Can you talk about how that plays together?

Sure, yes indeed. So I think one of our biggest advantages is really our operating model. So you heard Kate emphasizing that soon we will operate across 5 plants in 3 major and distinct regions. So that's definitely giving us access to a diverse supply network so we have a global manufacturing base with a balanced local and global supply. And this is in particular giving us advantage over other pure-regional equipment provider. So let me give you a very precise example. Special valves are being used to equip and manufacture our products. And these exact type of valves are being used in any kind of investment for the semiconductor industry, so supply has been very tight and challenging. However, we've been able, as I've just described, to tap into different geographies, leverage multiple supply base. That equipped us with a robust supply chain and enabled us with flexibility also short to mid-term despite facing longer lead times. Moreover, I think another key to our success from a supply chain basis is really that early engagement. You heard Kate emphasizing the early insights into the market, and that transparency is really shared with our vendors. And this gives us successful preparedness when it comes to capacity expansions like we are facing. So ensuring that the vendor grows as much as we grow, and that in a true partnership. So we treat our suppliers as strategic partners.

Thank you. Kate, I'd like to come back to a point you made earlier. So you mentioned that the -- one of the values that the delivery system and service business has for Electronics is this additional foresight in the semi industry. Could you just talk a little bit more about that and explain?

All right. So you heard [ Vipka ] mention that we treat our suppliers as a true partner. And really what we've done with our customers has worked the same way. We've worked to provide trust and transparency on when we have challenges with valves. We can work with our customers to really get their help to switch to an alternate vendor quickly, which helps us keep our factories loaded. And so by doing that and developing that trust, we're able to then get a very long-term plan from our customers, not just the projects that they're working on now but projects that are 3 to 5 years out. And so being able to do that really helps us with the visibility and being able to respond quickly.

Okay, back to you, [ Vipka ]. What is it that we do exactly to manage the supply chain risk and particularly in the current environment?

Which is challenging, but to build up on what Kate just said is the visibility and the foresight. So we help our customers to build their capacity, so we have a very long-term and strategic direction and, with this, access to all investments and plans in the semiconductor industry. And this is then translating into orders we have on our book that reach out into 2024 and 2025. And that knowledge is then used from our side to drive the supply chain proactively so we can anticipate raw material demand. We share that in a joint effort with our vendors. And for example, we can hedge raw material naturally in advance. And that also helps us to foster that strategic partnership with our vendors. Moreover, I think where we differentiate from others is and picking up what Kai said earlier is our customer proximity also from a supply chain basis. So we proactively discuss with our customers on business continuity plans and focus on driving alternates. And with the acceptance of these alternate equipment, that is then also giving us the flexibility and the resilience we are discussing also during challenging times.

Well, thank you to all 3 of you. Kai, any closing remarks after what we've heard today.

Important takeaway message in tough times is how do we deal with foresight and flexibility in the organization. I think that what we've gained, kate, it's clearly, clearly for the cross is how we build that for site? How do we understand what our customers are doing and how do we build flexibility in our production and supplier network in order to be more resilient if there are swings in demand. I think these are the most important component of today's fireside chat. And that combined with our broadest industry-leading portfolio in the material space, world-class R&D and the capacity buildup that we do in the frame of Level Up. And that should give you confidence on how we kind of maneuver these huge opportunities we have in the industry, while, of course, the economic environment is where it is right now. So that is the picture we wanted to get across in today's fireside chat.

Well, thank you very much. And with this, we -- I'd like to remind all of our virtual participants that the program will continue at half past 1 with the last webcast session for today, the ESG session. And with this, we are now closing the morning session. The afternoon session will start at 01:30. Please check the call of your name tags to find your group. I think you remember how [indiscernible] worked here at Merck. And all of you who are here present with us in the room, we invite you to join our management for lunch on the other side of the street now. And yes, that's it for the morning. Thanks a lot for the attention and the interest. Thank you. [Break]

Welcome back, everybody, online and also here in the room. My name is [indiscernible] I'm your point of contact in the Investor Relations team for all sustainability and governance related questions. I think we put a nice agenda today together. And I invited some of my dear colleagues to join me here on stage. And they will give you some more insight on how we are progressing towards our sustainability goals. So we will have today, Petra Wicklandt. She's having the corporate sustainability, quality and trade compliance at Merck, and she will give an introduction and update on our general sustainability strategy, Andreas Polomski. He's our Head of Climate Action, and he will guide you through our emissions and targets and efforts. Some examples from sustainability product development will be presented by Jeffrey Whitford. He's our Head of Sustainability and Social Business Innovation and Life Science. Manfred Klevesath, Head of Global Health, bioethics and digital ethics. He will present our strategy for access to medicine and global health. How we are integrating sustainability into our supply chain will be the topic of Bianca Harnischfeger, Head of Procurement, Governance & Solutions. And last but definitely not least, our Chief Diversity, Equity and Inclusion Officer, Renee Conolly. She will report on ambitions and achievements in these coming [indiscernible[. So with that, I will kindly ask Petra to come on stage. And I will hand over the phone to you.

So sustainability. This is definitely an enterprise priority for MERCK. And this is why we have tightly included this and integrated this in our business strategy. For those of you who are not familiar with our sustainability strategy, just a very short recap. In our corporate level, we have 3 overarching targets. The first one1 is until 2030, we want to create human progress for more than 1 billion people by sustainable science and technology. And here, we are focusing on innovations for our customers, but also on health and well-being of our patients. The second goal focuses on our value chains. We want to integrate until 2030 sustainability in all our value chains. And this is about culture, values, it's about transparent supply chain, and we will focus on all geographic regions. The third goal, focus on climate and on resource consumption. Until 2040 we will be climate neutral and we will significantly reduce our water and resource consumption. Our strategy is based on 5 of the 17 sustainable development goals. We have, in the last couple of years developed our governance. And here, you see the result. The overall responsibility is with our CEO and 1 additional Executive Board member, the 2 are the sponsors for this enterprise priority. The Executive Board is, of course, responsible for the approval of the sustainability strategy and also any changes to this strategy. The Board has established the so-called Merck Sustainability Board and I'm the chair of this board. And here, we are tracking and reviewing the implementation of our strategy. And then we have the business sectors and also the enabling functions, for example, procurement that's actually quite a key function, especially to reach our third sustainability target. And in this area, we have the responsibilities really for the implementation of the single targets and KPIs. Of course, we adhered to the main codes and principles. For example, the UN Global Compact and UN guiding principles on business and human rights, but we have also established our own internal guidelines and policies, for example, our human rights charter. We are not only internally discussing sustainability, but we are also regularly exchanging with external experts. And we have here 3 separate external expert panels One is an expert panel with sustainability experts, but we also have an expert panel with ethical experts and with digital experts. Yes. Where do we stand in terms of execution. At the moment, we are in Phase I. That means our corporate strategy has been cascaded to the business sectors and each business sector has meanwhile developed their own business sustainability strategy. We have implemented the governance, as I explained it to you, we have clear metrics and KPIs. And we also have increased the transparency of our reporting, and we will further increase that. We have a lot of tools that are newly developed, and one of these tools was already mentioned this morning. This is our R&D sustainability scorecard, which will help us to and continuously improve the sustainability of our R&D portfolio. In Phase 2, we will build a sustained or continue to build our sustainability culture and mindset. We will also focus on modeling and steering sustainability rather than just measuring it. And in the end, we will decouple business growth from any negative environmental impact. So this was a short introduction. I will now hand over to the first expert, which is Andreas Polomski, speaking about climate action.

Thank you, Petra. Update on climate action at Merck. My name is Andreas Polomski. Merck is fully committed to reach climate neutrality by 2040. And on our journey to do so, we just recently have set a near-term science-based target for 2030. With this, we want to reduce our emissions under Scope 1 and 2 by 50%, former baseline 2020 until 2030. We also have set an intensity target of reducing Scope 3 emissions per euro gross profit by 52%. On our journey to 2040, we then intend to reduce emissions even further to the maximum way we could. The residual emissions we would offset at this point in time. You might have heard end of last year, the science-based target initiative also concluded a framework around net zero. This is, in our mind, the most ambitious definition of net zero. Merck is currently evaluating the possibilities whether we could sign up for a target like this and then to offset residual emissions via carbon capture thereafter. But where do we stand to reach our science-based target, the near-term target? And what are the decisive levers we already have been identifying? Under scope 1, the main lever is around process emissions and mainly stemming from the electronic industry, a product we manufacture NF3. We already have piloted technical solutions to reduce NF3 emissions. We are fully committed to retrofit the existing plans with the solutions we have found for NF3. And we are also committed for any future capacity expansion that this would only go online with built-in abatement solutions as well. Under scope 3, it is all around renewable energy. We have set the target to cover 80% of our purchased electricity with renewables by 2030, and we are well underway. In 2021, last year, we already reached 30% coverage with renewables. Scope 3, it is all about collaboration with customers and suppliers. Last year, we have set a so-called The supplier decarbonization program where we reached out to our suppliers to see where they stand with respect to their decarbonization journey. In the first wave, we covered around 50% of the respective emissions in that category, and we have a tailored -- made a tailored follow-up this year to even better understand where these suppliers stand. And we enlarge the supplier base, which we reached out in the second wave this year as well, covering even more suppliers for transparency reasons. The second biggest lever was in Scope 3 is the use of our products. And here, again, with respect to the semiconductor industry. Here, it's about collaboration. One example being the work we are doing together with Micron in order to develop alternative etching gases with significantly lower warming potential. But how to anchor really the decarbonization in our organization. We have some enablers of our decarbonization. For example, in our investment processes, CapEx investments, we integrated climate targets, we established a so-called carbon price for transparency reasons so that we understand prior to approving an investment, what is the potential footprint in the future. But we're also giving guidance to our project teams in terms of technical requirements where we implemented greenhouse gas reduction targets as well. And we look for example, also for climate risk assessment of new buildings. An even larger area is around new products and new product portfolios. Here, we really want to establish and making sustainability part of the R&D processes so that this has already been thought of in the design phase accordingly. Last but not least, we linked climate targets to executive compensation. Here, we really want to anchor and make sure that we have a continuous and coordinated actions towards our climate targets and anchoring the decarbonization journey within our existing processes. This, I finish and like to hand over to Jeff, who is going to talk about sustainable product portfolio.

Hello, everyone. So I get to talk to you about how we bring what you just heard Andreas talk about come to life. And this is really the development and advancement of the product portfolio. As you can imagine, you heard Andreas talk about Scope 3 and the supply chain where a significant amount of the emissions sit. So it's imperative that we not only do the work on [indiscernible] supply chain, but also think about where is the carbon within the products. And so one of the things that we want to do is to be able to bring that through across all 3 of our businesses. You heard Belen mention this today about how we were using design for sustainability within our product development teams to be able to start to capture what it meant to decarbonize -- materialize. And this is really the first step in seeing that evolution of our product portfolio. You heard Marcus talk about this as well about really having a competitive end and advantage, where we think about greener alternative products. So now I want to give you practical examples of what that looks like and how our teams are bringing this to life. So let's take the first example. This was the pilot project that started the official design for sustainability process within Life Science. Here, you see the Stericup at the bottom. You'll notice that there is a slight difference between those 2 pictures. There is less plastic. So in the bottom unit, you would pour the media directly into that Sterile filtration cup. It would filter down and then collect in the bottom container. In the new model, you can see that you actually take the [media] bottle directly on to the filter itself, turn it over, right, and then eliminate that plastic. Now this is good, but the important part is the data that sits behind it. How do we capture and be able to quantify those improvements because this is where the pull-through to the customer becomes extremely important. When we're able to quantify these types of improvements, we help speak to and address the goals that our customers have as well as the goals that we have as an organization. So you can see here that there's up to 26% less plastic. There are a variety of SKUs and so that's why you see the up to 26%. We also have reduced packaging. So we need less plastic packaging less corrugated packaging to be able to ship that. In 2021 alone, there is a 10.5 to reduction of CO2 because of this dematerialization that is captured in material use as well as packaging and transportation. Now you may also sit back and say 10.5 tons is not that much in consideration of some of the numbers you just saw. But in Life Science, if you think about the product portfolio of 300,000 products, you start to see how a lot of a little adds up to a lot. And that's really the direction that we want to go. Another example, our Milli-Q water filtration systems. So one of the gold standards within the industry for water filtration. The new generation of this machine, IQ 7000, which was introduced last year, brings to our customers a system that has been dematerialized again. So once again, the decrease of system weight by 18%, helping to decrease emissions. We have reduced the amount of plastic used in the purification cartridges. So if you think a very sophisticated better cartridge except for very high-end water filtration for scientists use in labs. So that has been reduced. And then also contributing to things like Scope 2 emissions, the amount of electricity required to run the system. So all of these things, once again, can be quantified for our customers so that they can see the benefits. One final example, which is the Cyrene solvent. So Look, go back. There we go. So one of the things that we realized, specifically in the science is solvents are significantly used material, and they hold a lot of carbon because of the raw material that is used. Here, it's generally fossil fuels. So the question is how do we transform this part of the portfolio? And this is where you see us work externally and internally to develop products that are bio-based that use waste raw materials instead of using virgin materials. So in this instance, you have a CO2 footprint that is almost 5x smaller than that of what it's replacing. All of this happens because of the systematic implementation of design for sustainability for R&D teams. It provides them with a framework that is clear, it's measured and we report out what happens. So through the systematic implementation, we're able to expand and evolve the portfolio, both new and existing products in a way that helps us bring these greener alternatives to our customers on a more consistent basis. So with that, I'm going to hand it over to Manfred to take us into the next section.

Thank you, Jeff. Good afternoon, everyone here in the room, and good everyone. Good afternoon, everyone who joins us online. I'm going to talk about Global Health and access to health, our major activities in this area. We have 3 strategic priorities in global health. We fight against schistosomiasis and expected tropical disease, we catalyze innovations for health needs in low and middle-income countries. And we want to expand our access to our health care portfolio in low and middle income countries. Let me explain to you what we believe makes us unique in how we approach these areas. Let's start off with our approach to schistosomiasis and malaria. Here, we follow an integrated approach, holistic approach. And what do we mean by that? Let's take schistosomiasis as an example. This is a peracetic worm disease, maybe not well known, but it affects over 240 million people worldwide, also the young children. It represents a terrible public health burden for poor and developing countries. So to fight this disease, we could have set up a [normal donation] program and lifted at that. But we felt this wasn't enough. We wanted to do more. So we're doing the drug donation program, of course. But we're also doing a drug development program. We're doing a diagnostics program, a behavior change program because we believe that several elements need to come together to overcome the very complex disease. And let me tell you how this works. So taking our drug donation program as an example, starting point. We donated over 250 million tablets to treat up to 70 million school age students in Africa every year. And I focus on the school age children because preschool age children are excluded in this because there's no formulation for these children. But of course, they also contract the disease. So we developed a child [center of] formulation that allows exactly treatment of this population. We've completed a Phase III trial for arpraziquantel for Schistosomiasis Elimination. In many areas, we also offer wash programs, behavior change programs. We want to help people understand how they contract the disease and how they pass it on because this is absolutely crucial to break the transmission cycle. And lastly, we also support the development of a rapid diagnostic test because this will help us focus our donation program or treatment in a more targeted and efficient way to really focus resources where they're most needed. And this is also scarce in these countries. So I hope this helps to show how the individual elements build up and reinforce each other and build on each other to really help us achieve this goal and become a recognized partner in this area. It's also a sign of our long-term sustained commitment to fight this disease. We started in this area more than 10 years ago, and we committed to continue to fight until the disease has been eliminated as a public health program. I've taken schistosomiasis as an example, but we follow a very similar approach in malaria, a disease that you probably know much better. In our access to health strategy, we follow our focused leadership approach. You probably heard about this principle earlier on in one of our sessions today. We want the aim for leadership in areas where we have strong knowledge, where we have expertise, where our product make a unit difference. And we translated this approach into what we call a go wider, Go Faster, Go Deeper, Go Smarter approach. Let me tell you what this means. Starting of will go faster. We want to make sure that we shorten the gap between the first launch usually in the developed country and the next launch in the low and middle-income country. The gap for too long at the moment, we want to shorten them. In our go broader approach, we want to make sure more countries have access to our portfolio in low and middle income countries. Our go deeper approach looks at individual countries where we are already present with our products, but we want to reach additional segments of the population, moving away from urban areas into more remote areas. And lastly in our Goo Smart approach, which focuses on Praziquantel donation program. This is really to make our donation program more effective, more efficient and also look for novel and sustainable financing mechanisms to make sure the burden of fighting this disease is equally distributed and shared among everyone who is fighting this disease. So in conclusion, I've shown you how our integrated holistic approach to fight malaria and schistosomiasis sets us apart and is also a sign of our long-term commitment to fight these diseases. And our access to health strategy, I've shown you that our focus leadership approach is really tailored to our product, tailored to the needs of the patients in lower middle countries to ensure we deliver maximum impact to help these patients get better lives. Thank you for your attention. And I hand over to Bianca.

Hello, everyone, here in the room and online. So I would like to talk about sustainable supply chain management. Here we go. So as Petra said, this is mainly anchored in our goal #2 to achieve sustainable and transparent supply chains. When we look at procurement or the supplier landscape overall, we have to acknowledge that we have a broad supplier base, which is 60,000 suppliers worldwide that make up around EUR 8 billion purchasing volume. So how to tackle this mass of suppliers. This is really the challenge for us. But we continuously strive to set up our strategies, processes and our guidelines to prevent those violations and improve our standards that we have set. One example is, for example, the supplier code of conduct which was previously the response to sourcing principles as well as referenced on the slide that Petra showed, the responsible sourcing principles had to be updated to meet those new expectations. The supplier code of conduct is then as well as the expectation that we address to our suppliers and will be rolled out in 2023. We are a member of Together for Sustainability since 2015, and for quite some time, and we have recently added our partnership to the pharmaceutical supply chain initiative, PSCI, which we joined, as I said last year. Together for Sustainability has an own audit program but they're using as well EcoVadis for performing assessments of suppliers on a paper-based basis. All those initiatives, the approach is to share those results in the community. The one example that I brought for you is how do we need those changing legislations and regulations that are out there. And one is, for example, the German supply chain due diligence act for which we prepare for us at Merck, but as well for our supply chain. So the why and the reason why we do this is basically the same in the same lines. And what we have to do, you will see on the slide is kind of a risk analysis, setting up preventive measures set up mitigation actions and a compliant system kind of a grievance mechanism. What we need to do is -- or what is the basis of this is kind of the human rights, we respect the human rights in social and environmental aspects for our own business area. That means work internally and as well for our supply chain. This is not a German -- this is a German law, but it's not a German problem or topic only. This is a global need to have this transparency available. We have set an internal working group, which is working since 2021. a cross-functional team staffed with all the colleagues needed, including business representatives to prepare us for the needs of this law. We aim to build on existing processes, and we have found our gap analysis that we have quite much in place. So there are a few elements that need to be added, and we are right now preparing for those. The first achievements that we have made in that regard are, for example, exactly this, supplier code of conduct I talked about, and we have appointed a human rights officer. So how do we measure this particularly going forward? And we have introduced a KPI that should help us to demonstrate as well our achievements towards systems currently. So we have basically 2 indicators that we have set. So one is focusing on the purchasing volume and the other one of the number of suppliers. But basically, both are calculated in a similar manner. So when we look at this broad supplier base, we need to have a filtering system that allows us to say where do we focus our activities on, and where do we look at. We call those the relevant suppliers. And we have said we have a risk-based approach, so we look at country and industry risk and to our top suppliers that are contributing to 50% or more of our purchasing volume. So with this filtering logic, then we can measure again the purchasing volume and the number of suppliers in terms of those suppliers that have done a sustainability assessment or audit. And when we compare this, then we get our concrete KPI. So message for you is mainly we aim to measure as well towards our transparency targets. And those targets are set, you see the indicators on the bottom of the slide, our starting point from 65% in 2021 and 21% in terms of number of suppliers. So we expect a steady improvement towards those into the near-term future. And with this, I hand over to Rene for our final slot. Thanks a lot.

Thanks so much, Bianca. Well, I have the great privilege to talk about one of our most critical assets, our people. As a Chief Diversity, Equity and Inclusion Officer, our job and as an employee, but our job as leaders here is to really look at what we mean when we talk about diversity, equity and inclusion. And here at Merck, when we talk about it, we're talking about diversity in the sense that the rich tapestry of our employee base, everyone is invited to the party. We embrace the rich mix of our people. And when we talk about equity, which is a new concept that we added about a year ago, it's just an idea that everyone can contribute to this playlist and to us really working to identify and eliminate barriers that prevent people to feel like they belong here. And when we talk about inclusion, which is a critical piece of all this, everyone is welcome to celebrate. And together, we really are building One Merck, although 3 very distinct businesses, we really have One Merck and one goal. And I think it's important for us to think about it. And you heard Belen and Marcus referred to it this morning, it's not just a topic, we have to be credible, we have to look the talk. And I think it's very important that we look at this as it's not just an issue or a hobby. For us at Merck, the E&I is a business imperative. I'm very proud that about a year ago, we were transparent and disclosed our aspirations, our aspirations through 2030 to drive the business forward as it relates to DE&I Additionally, a major milestone that was made last year was the fact that we kind of expanded the focus that we've had over the past beyond just gender. So now we look at this in 3 dimensions: inclusion, culture and ethnicity, and in gender. On an inclusion front, we talk about offering people training. We have mindset shifts, people are deeply rooted in the culture and experiences they add. How do you really bring that organization along, especially in an organization of 65,000 people across the globe. Secondly, we're focusing a little bit on listening to the feedback of our employee base. So we added into our engagement survey, an inclusion index, and we look very carefully at individuals and how they feel included at Merck and able to excel and perform in their job. When we look at culture and ethnicity, we have so many cultures, and that's the richness of what makes our company so wonderful. And I think it's important that we're talking about how do we expand our leadership levels, which we call L4S and above in the areas in Asia MEA and of course, in LATAM. And additionally, our underrepresented communities with such a big business and customer base in the United States and such a big footprint from an employee base, we're looking to increase our underrepresented communities. And Jim, from a gender perspective, we have really doubled down and said that we will achieve gender parity between females and males by 2030. Purposeful actions, and I think there is a very critical concept there. We do surveys of course, we listen to feedback both internally and externally. We do regional networking because it's different by country, and we're really looking to share best practices and making sure we're not reinventing the wheel, and we're maximizing our opportunities. Additionally, we have employee networks, which I'll talk about in just a second, and we talk about funding underserved communities, which I have proudly announced earlier this week. And then we just recently announced and today for the first time, you'll see that we're announcing of the disclosure of our gender pay equity analysis, gap, which is less than 1.5%, quite an enviable position for a company of our magnitude. We have leadership in women that is north of 36% and making and tracking that against our balanced scorecard, very nice progress there. You'll see in the culture and ethnicity space that we have over 142 nationalities that make up our organization, which really does demonstrate how broad a base of the culture is that we have here. We did make the C note investment earlier this week and announced that from an investment portfolio perspective to support the communities and bring economic liability to the areas in which we work in the U.S. market, a growing market for us. We've almost trained 50% of our people leaders as it relates to inclusive leadership, very proud of the progress there, that goal and objective. We want to get all of our people leaders trained by the end of next year. And last but not least, we have over 60 communities within our organization, international communities, ERGs, which allow people of like-minded purpose and mission, whether or not sexual orientation, ethnicity and culture, role in a leadership kinds of organizations that we have here. And when those employee networks really give people a place to go and belong and be able to encourage and live and breathe every single day of the work that we're doing in this space. Very proud of our organization, and I think we can proudly say that many of us feel like we belong here at Merck, and we're going to continue to drive that forward in support of our business imperatives and goals. With that, I'm going to hand it over back to Eva.

Thank you very much to all of our speakers. Thanks for the insights you share with us -- with me. And now we are coming to the Q&A section. The people in the room, I kindly ask to prepare for questions, just raise your hands, use the mic. Colleagues, yes, please join me here on stage. So any questions from the audience so far? If not, I will start with the Warm up question maybe, and some others might follow. So Maria, maybe, I have a question for you. Can you please give us some insights on how Merck is thinking about future reporting standards because you didn't cover that in the presentation. So it would be great if you could outline a little bit.

The strength that we are seeing is that the financial and nonfinancial reporting is coming closer and closer together and reflected this already by integrating our nonfinancial statement in our annual report this year for the first time. In addition, in our sustainability report, we are reporting against the social standard and also published a TCFD report. Besides that, what we already do. We are also looking at what is relevant with regards to transparency and reporting. And we all see the development in the European Union is a corporate sustainability reporting guideline being drafted directives been passed to draft it and understand that they are developed on specific reporting requirement, you also see what is happening in with the international sustainability standards board on reporting requirements. And look, what we need to do now is to integrate and adjust our reporting to those requirements to make sure that we fulfill our stakeholder's information needs.

Thank you very much, Maria.

When you talk about reporting, relate to that on M&A, which earlier this morning, we indicated that you might go for big [indiscernible], how will you take into account your KPIs when considering M&A? Basically, your targets are before M&A and then you adjust the targets. So how are you going to do that?

You are talking about the steering sustainability goals, right? They stay as they are currently. So when we are looking -- we created a catalog of criteria, ESG criteria, that we are considering in the due diligence. And those criteria cover, for example, sustainability strategy, reporting greenhouse gas emissions, supply chain standard and so on. And during the M&A process, those targets are evaluated according to this criteria, and this might have an impact on the size of the target and also maybe result in implementation recommendations. So our sustainability goals stays the same, but we are considering sustainability criteria in our EMEA due diligence.

Rajesh Kumar from HSBC.

How do you really have when a division manager decides, I suppose for discussion's sake. It's a very flamboyant division manager very successful driving the business growth. And you say, you know what, if you buy this, you're going to miss on our sustainability goals, these guys have not a single female manager in the top leadership there, carbon footprint is absolutely rubbish, if we change it, the profits won't be the same. Do you have any influence on that decision making? Or is it -- that thing is brought and then you have brought in to fix it?

I mean this is the example you just made like no diversity in leadership or so, these are things that then go into the recommendation for the integration process. And then our.

So you fix it.

Yes, we can fix it, yes. I mean it cost-benefit analysis and you need to see. Can you fix is it or how expensive is it to fix it? Maybe we can give an example from CapEx.

Yes. Maybe I'll give you a concrete example because we're talking about climate action that topics we discussed, of course, right? And then in my presentation, I tried to outline that we build decisions in existing processes. And the example would be CapEx investments for Example, the larger CapEx investments now read statements concerning what is the future footprint of that prospective piece of investment. And if the footprint is not in line with our goals, the investment is just not getting approved. And we have these examples in the company with significant investments. And now there's abatement coming.

Okay. So you know of examples where investments will stop because that's excellent.

Not stop, but approved. And the abatement measures delivering the goals also the GHG goals are net.

I think what is important is that before you make a deal, you have the transparency and then you evaluate what would it cost to fix this. And if these costs then are not any more fitting into the business case, then you should not do it. But this transparency, this is the first step you need it. So what will it cost us to fix the gaps in sustainability. This is the important question.

And I would say maybe just on the people -- [indiscernible] the half from a diversity perspective. As Maria said, the due diligence we do post acquisition normally from an integration perspective, we become very methodical about having diverse late candidates. So there's no assumption that there's going to be any one party that stays or goes, having lived through the Sirna and the Sigma-Aldrich acquisition, myself. So that process is extremely diligent. I think we've done a really excellent job of putting that M&A process in place because there is something from a competency and capability perspective that some individuals were less of their background, they bring something very important to Merck. So we go through that process as in very diligently. I don't know if it would be a deciding factor on the people side to buy or not to buy, but I can assure you that when we get to the part of integration, I'm glad it's very much closely looked after in a factor decision-making of the hiring.

Okay, trying to get a sense of the psychology in the room. So 1 other question, which is a slightly more philosophical one, and you guys are a whole board of intellectuals looking at a very difficult problem. So the stock markets are very fickle minded. They are -- we've had a lot of noise around ESG. A lot of capital has been allocated towards ESG. But have put up the interest rate discount rate inflation and put -- I remember before '09, we had a similar trend around ESG and then that whole thing got deranged for another 6, 7, 8 years. And that's mainly because a lot of the benefits you're talking about putting an explicit cost of carbon, which makes all the sense because sooner or later, the carbon will have a real price, and it will impact your operating margin. So because it's a 5- to 10-year out problem and discount rates have gone up, which means that that contribution to present value and the of that problem is much smaller, the decision-making weight of it goes down. So how would you convince your board not to take that route because I know ESG can be fashionable and unfashionable depending on business cycle. But at the end of the day, 80% of capital raised in the last year had some form of ESG linked to it. So it will structurally be more fashionable. So that's why I'm asking that question to you, how do you think about engaging with your management on that?

Maybe I can take that question. For us, sustainability is certainly not a fashion. I mean, we deeply believe that sustainability is a prerequisite to be profitable in the future. So we also often hear the question, well, with all these crisis happening outside geopolitical crisis, COVID, inflation, how can you still invest in sustainability? I mean, it's very easy. First, we think if we are not investing in sustainability, we will not be profitable in the future. That's the first thing. And the second thing is when we do investments, and I really talk about investments, not about costs because for us, these are investments like other investments. So when we make an investment into sustainability. We also look at a business case, right? So this is why we have established an internal carbon price, and we take this into consideration when we invest sometimes it can be that investment in sustainability will not have an immediate payback, but we are deeply believing that there is definitely a long-term payback, take another example, water. I mean, scarcity of water, water will become more expensive in the future. This is very sure. So when we invest into water saving investments today. This will certainly pay back in the future.

If I may ask, what is the price for carbon?

EUR 100.

You have said EUR 100, which is higher than what it's trading today so basically put out more.

Yes. To look in the future, and that's why we have a little higher internal carbon products that the weakened price. You can add something on the question, some opportunities to risks, but I think that's the other side of the equation that it's not just the return on the investment. It's the competitive advantage and the swaps that you potentially see. And we are seeing that as we have these discussions with customers, I spend multiple times a week meeting with customers, talking about these specific examples. And then is figuring out how do we provide a case to them that is compelling enough that helps them achieve their goals so that they choose us as the partner of choice more frequently. And we are seeing that come to light. And I think that's the upside that we're not maybe taking into account in the risk-based solution or scenario. And that's where we do see a lot of potential upside because of how long we've been doing this and leading with data and transparency, it does provide us with a competitive advantage.

Just on the customer side, obviously, every customer has got their carbon targets. And we sort of had a period between 2015 to '17, everyone reported Scope 1 and 2, and they were done with. Now Scope 3 is becoming the standard. So they are going to compare [indiscernible] or signal a retreat every other supplier and say this is the landed cost of carbon. So you need to sort of provide them with a figure on each of the product, is that what you're talking about?

Correct, exactly. So there was examples that I showed with lik Stericup and some of the other products. That is the competitive differentiation is the ability to take all of the things that are happening. So like the work that Andreas is doing and that we partner with him on climate action. So how we pull through things like the VPPA, which Mark has talked about, that exactly affects what Scope 2 footprint looks like for any product now manufactured in the United States because that's now zeroed out for life science products. And that's where you start to see and pull and connect these things to translate the benefits of all this work because if we do not capture the work that's happening in the supply chain, the work that's happening in climate action and the works that we're doing across the board and make sure that the reporting of this comes through, we lose that benefit in terms of how we can turn that into the competitive advantage.

That's very interesting.

So maybe, Andre, if you could just add a little bit on product carbon footprint, what it means for us as a customer, but also as a supplier?

Yes. I think the -- also for us what is important what Jeff just said that we established a product target footprint for every single product. And we are about to do that step by step. So we started that progress to get that transparency. And it goes both ways. It gives customers a better choice of where we stand, but it also helps us to really manage our own products and portfolios accordingly. So that's a vital element to steer portfolios within the Merck Group as well. And then to link that to our suppliers, we are also within the supplier decarbonization program, pushing slowly suppliers to also establish product carbon footprint so that we get the full transparency along the whole value chain.

And in relation to that, can you quantify how this translates into pricing power or incremental pricing, you can actuate a product that's more sustainable than from competition? Is it quantifiable?

I think I would hand over to Jeff because they are.

Yes. I think one of the difficult things that we need to maybe change our perspective on is the green premium. I think that's a -- it's a tough conversation to have naturally these products are actually more expensive, not because of the environmental characteristics per se, but because of the scale of which they're manufactured at because if you think about some of these solvents that we have, for instance, they're produced in hundreds of metric tons a year. and these newer substances are coming in on smaller scale, maybe a 1,000 to 5,000 metric tons per year. So the important thing that we're thinking about is how are there -- how do we build the book of business that sends the market signals that this is a good place to invest, so that there is more capacity built in this space so that we can then take that price curve to make it closer to parity, I think there will still be some type of premium that exists. But we've got to make it realistic because it's if it's 5x the cost of what it is today, that's not going to take hold. And so it's really imperative that we think about how we can extract that benefit. And I think this is where we're looking at volume of business transition over maybe incremental price on greener alternatives.

[indiscernible] I think you mentioned at the beginning of your talk, carbon offsets you that would only come at the end of the process, right? I mean, initially, this is really just carbon reduction, Scope 1, 2 and 3 and then the offsets more at the end? Or is that an integral part of the entire process?

It's a little of both. What we are currently doing, we want to establish, if we're talking about offsets, we are not talking about avoidance certificates. For example, we really are talking about to remove critical gases out of the atmosphere. And that technology is as of today, not developed in a scalable means. That's why we are looking at a later stage in doing offsets. If there is something available, I'm sure we would look at this in the meantime.

And maybe to follow up on that perspective. So you're talking primarily about CCI basically when offsetting that or are you part of initiatives also to make that possible in Germany, which is still very much opposed to that being a possibility? And the second question is, you talked about the CO2 reduction measures. Also you mentioned earlier this morning one where you had a PPA. I think in the U.S., it was basically to purchase green power as compared to power from conventional sources. Are you planning to make that also in other geographic areas of your business, and would you go as far as I'm thinking of BASF to also consider equity investments, as you may have seen, sort of, spiking into wind parks.

Correct. I mean, we obviously try to reach our goal to reach 80% coverage there for procured electricity, and we are well on our way, I would say, to do that year. You have seen last year at 30%, and we will of course, evaluate every possibility, which makes really sense to do that. That's clear, I think. In terms of what are the next steps? I mean, there are steps out there in the next months to come. So to move the needle up, I would say.

I think we have time for 1 more question.

One of the things slightly less feel to you, Jeff. You showed the molecule water system right. I was a very rubbish chemist once upon a time. And you have one of the -- because as that I didn't heat it enough I did drink a lot of water and thinking of it an innovation like that for the lab, the scale potential for something like that can be quite massive. So have you ever as an organization thought of, hey, you just developed it for the labs, but what if we did it for people in general market?

So I can tell you that as we think about expansion opportunities, we throw out a lot of kind of wild ideas. So that's not something we're focusing on. We do focus about what our business is, and that's focused in the labs. But I think we do look and see where our potential adjacencies? And that's where a lot of to be honest, my ideas come from is my whole life, and that helps bring a different perspective because I'm not a scientist, but I think we have to find us on a daily basis. And if [indiscernible] a really interesting kind of synergy of creativity that happens that can bring new ideas to market. And I think you look at the technologies, and certainly, I'm sure our technical teams would be kind of like a little bit -- this is pure water that we drink. I think this is where they would -- there's that curiosity about well, what could happen if. And are there specific markets which are underserved I think those are the areas where we're more interested in going into because there's other people who do that space probably better, but there could be broader markets. that we can look at with water purification technologies but then also some of the new products that we're going into, could those technologies be translated into some of the processes that support because if we're taking raw materials, waste raw materials, is there ways that we could potentially clean that up for other purposes, and that's where our technologies come into play.

Thank you very much, [indiscernible]. Thank you very much to the panel. Thank you very much to all of you for your attention, these questions. And yes, I hope we will stay into the discussion with you to increase value from Merck for both for society and for business. So yes, thank you very much. We will close this session of our online participation now. Thank you very much, and have a nice day.