Merck KGaA (MRK) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the Merck investor and analyst conference call on the fourth quarter 2022. [Operator Instructions] I am now handing over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Thank you, Sharon. A very warm welcome, dear ladies and gentlemen, to this Q4 Merck earnings release call. My name is Constantin Fest. I'm the Head of Investor Relations here at Merck, and I'm delighted to be joined today by Belen Garijo, Group CEO; as well as Marcus Kuhnert, Group CFO, who will both lead us through the key slides of this presentation. We are also joined by our 3 sector CEOs: Matthias Heinzel, CEO of Life Science; Peter Guenter, CEO of Healthcare; as well as Kai Beckmann, CEO of Electronics. After the presentation, we will have some time for questions and answer. And with this, I'd like to now hand over to Belen to kick off this presentation. Over to you, Belen.

Thank you, Constantin. Good afternoon and welcome, everybody, to our full year 2022 earnings call. Please go to Slide #5 of the presentation, where I will start with the highlights. Overall, we demonstrated our resilience, delivering robust results for 2022 and also delivering on our guidance. As you know, the global economic activity experienced a broad-based slowdown. Inflation has risen to levels that we haven't seen in decades, and the pandemic continued to impact the economy on a local as well as global basis throughout 2022. Focusing on the numbers. Organically, our group sales increased by 6.4%, and EBITDA pre rose by 6.1%. Together with significant currency tailwinds and a small portfolio effect, sales grew by more than EUR 2.5 billion year-on-year to EUR 22.23 billion, while EBITDA came in at a strong EUR 6.85 billion. EPS pre of EUR 10.05 was up 15% year-on-year. As mentioned in previous occasions, the Big 3 contributed once again to close of 90% of our total sales growth. Life Science was the top performer with mid-teens organic growth in the core business and high single-digit organic growth, including COVID-19 headwinds. In Healthcare, we continued to advance our pipeline and drove significant growth for the further ramp-up of Mavenclad and Bavencio, delivering mid-single-digit organic growth overall. In Electronics, our Semiconductor Solutions business had a strong year. Organic sales grew in the mid-teens, more than offsetting the decline of Display Solutions. As always, at this time, we provide initial qualitative guidance for 2023, which I will detail later on. Keep in mind that the global economic challenges, in many cases, start to exert effect on businesses and markets only now. And I am happy to say that we remain resilient also in 2023. Organically, at group level, we expect slight to solid sales growth and EBITDA pre between a moderate decline to about stable. Excluding COVID-related sales, we expect solid to strong organic sales growth. Looking ahead to 2025 and with 2023 as a transition year, we fully confirm our midterm aspiration of around EUR 25 billion sales by 2025. Let's take a quick look at how we performed against our targets in Slide #6. As mentioned before, we delivered on all of our headline promises. We have achieved our guidance cores on net sales, EBITDA pre and EPS pre. We have shown great resilience in a challenging operating environment with headwinds having become even stronger throughout the year. In fact, we achieved the organic growth ranges for sales and EBITDA pre, which we first provided to you with our Q1 results back in May and that we confirmed in the subsequent quarters. Moving to Slide #7, you see the dividend. And as we communicated in our press release this morning, we will propose a dividend of EUR 2.20 per share to the AGM on April 28. This represents a 19% increase over 2021 and a payout ratio of EUR 21.9 of EPS pre, which is fully consistent with our dividend policy aimed at continuous dividend growth in line with our earnings development. Let me now provide a bit more color on the different business sectors, starting by Life Science in Slide #9. Life Science had a strong year again. Organically, sales and EBITDA pre rose 8% and 10%, respectively. All 3 business units contributed to that result with Process Solutions in the lead at 11%, followed by Science and Lab Solutions as well as Life Science Services, both at 6%. In line with our guidance, COVID-related sales fell from around EUR 1.15 billion in 2021 to around EUR 800 million in 2022. Excluding this effect, organic growth in the core business was 14% in 2022. Turning now to profitability. The EBITDA pre margin came in at a still very strong 36.2%, only slightly down on last year despite significant investment in growth and the macroeconomic conditions. Our strategic direction remains clear. In Life Science, we aim to strengthen our core and expand in high-growth segments, and we made great progress in 2022. First, we implemented a new organizational structure that is better fit for our customers. Also, we manage our capacities and supply chain. And this new operating model will aim -- or will allow us to capture growth in the rapidly expanding services market. We had a number of CapEx initiations with a total volume of close to EUR 1 billion, including the single-biggest CapEx program in Ireland, to significantly expand our membrane and filtration capacity. We also increased R&D in the double-digit percentage to drive innovation in key areas such as bioprocessing. We significantly accelerated our multimodality CTDMO strategy through both organic and inorganic investments, including the acquisition of Exelead. In summary, 2022 was a great year again for Life Science, and we remain highly confident about the prospects of this business sector. Turning to our Healthcare business sector on Slide #10. Organically, Healthcare sales were up by 5.5%, and EBITDA pre increased by 3% despite lower income from milestones and from active portfolio management as well as inflationary pressures. Growth was driven by our oncology portfolio, which overall delivered 17% organic growth, fueled by the continued ramp-up of Bavencio and Erbitux, which has reached blockbuster status. Our neurology and immunology portfolio remained organically stable with the strong performance of Mavenclad in that challenging market environment compensating for the expected Rebif decline. Our established portfolio remained resilient and showed stable organic performance. From the strategic perspective, 2022 was a year of big progress for Healthcare, and we are confident that our focused leadership approach is providing solid basis for longer-term growth. Our pipeline has significant potential, and we advanced it further in 2022. In all stages of development, we have compounds with novel mechanisms that could redefine the standard of care in key therapeutic areas. In addition to that, we intend to fully capitalize on our technology capabilities in antibody drug conjugates. We presented recently new data -- well, last year at ACTRIMS for our blockbuster candidate, evobrutinib in MS, demonstrating sustained clinical benefit for people with recurrent multiple sclerosis through 3.5 years of treatment. And this is the first BTK inhibitor to do so. Evobrutinib could be the first to address significant unmet needs in relapsing multiple sclerosis, and we aspire to make it a market leader. Peter will speak about evobrutinib later during the presentation in more detail. We are on track with the development of xevinapant, our late-stage blockbuster candidate in head and neck cancer. As you know, the second Phase III study in LA, locally advanced head and neck cancer in resected cisplatin-ineligible patients has already been started. All in all, we feel good about our positioning in Healthcare, and we'll remain very focused on stringent execution of our strategy to drive efficient growth and to meet our growth targets. Now moving into Electronics on Slide #11. Organically, Electronics sales increased by 3.7% in 2022, while EBITDA pre declined by 7%. Our Semiconductor Solutions business had a strong 2022 again with sales up above 50% organically. Our Display Solution business saw sales decline by 20% organically, and this was driven mainly by a significant slowdown of demand, especially in liquid crystals. Surface Solution generated organic growth of 3% driven by strong sales in coating and cosmetics. The EBITDA pre margin was 29.7%, helped by currency tailwinds. The sales decline in Display Solutions had a highly adverse effect on the underlying margin development. While the short-term outlook for the electronics industry looks challenging, market forecast assumes a recovery in the second half of 2023 and the long-term outlook remains compelling, in particular in semiconductors. We see vast growth potential and a substantial need not only for more materials and solutions, but also for cutting-edge innovation to enable the next generation of chips. We are confident that our Level Up growth program will help us ensure that we address our customers' ongoing capacity expansions and also their innovation requirements. To sum up, for Electronics, 2022 was a year in which we coped well with challenging business conditions, such as inflationary pressures, supply chain constraints and weaker demand in Display Solutions. We are convinced about our positioning and see healthy midterm prospects, thanks to our strong focus on innovation and significant reach in Semiconductor Solutions. And with this, I am going to hand it over to Marcus for a more detailed review of our financials as well as Q4.

Thank you very much, Belen, and welcome also from my side. I'm now on Slide 13 for an overview of our key figures for 2022. As you already heard from Belen, we delivered a solid organic performance in line with our guidance. On a reported basis, group net sales increased by 12.9% to EUR 22.23 billion, EBITDA pre was up 12.2% at EUR 6.85 billion, and EPS pre rose by 15.3% to EUR 10.05. Operating cash flow was strong at EUR 4.3 billion, down, however, from EUR 4.6 billion last year mainly due to higher working capital. We have seen, in fact, a strong increase in inventories from higher safety stocks and inflationary pressures. CapEx increased significantly in line with our guidance, and we spent more than EUR 800 million for acquisitions, mainly Exelead. Nevertheless, we were able to further reduce our net debt by more than EUR 400 million in 2022 to a level now of around EUR 8.3 billion. Moving on to Slide 14 for a summary of our performances by business sector. Belen already walked you through the highlights so let me just add the following. All 3 business sectors contributed positively to organic sales growth with Life Science as the main driver followed by Healthcare and Electronics. Organic EBITDA pre growth was driven by Life Science and Healthcare. And the group EBITDA pre margin came in at 30.8%, very close to the 31% in 2021. Let's now have a look at our reported earnings numbers for 2022. I'm on Slide 15. You can see the EBIT increased 7% year-on-year. This was less than EBITDA pre growth mainly due to higher restructuring costs and impairments. The latter include a EUR 90 million charge in connection with the discontinuation of berzosertib and around EUR 80 million linked to early pipeline pruning related to our Healthcare R&D transformation program. Financial results improved by close to EUR 70 million on the back of ongoing and swift deleveraging. The effective tax rate was 22.1%, in line with the lower end of our guidance range. Note that we are lowering our guidance range for the effective tax rate by 1 percentage point to a corridor between 21% and 23% for 2023 mainly due to a different country mix. Accordingly, the underlying tax rate for the calculation of EPS pre will decrease from 23% to 22%. Reported earnings per share came in at EUR 7.65 in 2022, up 8.8% year-on-year. That said, let's now take a closer look at Q4. Before I go into the details by business sector, let me briefly share some headline figures for the group. You can find these as well as additional color on the tax rate in the appendix of this deck. Organically, group net sales increased 4.3% in Q4 and EBITDA pre rose 12.5%. The disproportionate growth of EBITDA pre was mainly driven by the strong margin improvement year-on-year in Healthcare. FX tailwinds moderated in the fourth quarter, adding 3.9% to group sales and just 0.6% to EBITDA pre. Earnings per share pre increased by 12.6%. And with that, let's now take a closer look at our 3 business sectors, and I'll start with Life Science on Slide #16. Growth in Life Science moderated further compared with previous quarters due to rising comps, but in line with our expectations. Organically, sales increased 4.2% in Q4 with the core business up 11%. COVID-related sales continued to decline and came in at around EUR 800 million for the full year as guided. From a portfolio perspective, Process Solutions remains the key engine of growth with sales up 10% organically despite fading COVID sales, while Science and Lab Solutions saw an increase and Life Science Services, a decrease. Looking at Process Solutions first. The core business grew at 24% organically, which is below the peak we saw in Q3, but in line with an already strong Q2. Core growth continues to benefit from freed-up COVID capacity and new capacity coming on stream. Order intake continued to decline year-on-year as expected, but was up sequentially in Q4. The book-to-bill was again slightly below 1, and cancellations were at or near normal levels in the fourth quarter. Turning to Life Science Services. Here, the sales were down 15.6% organically against tough comparables. This decline reflects both a decline in COVID-related sales and in the core business. The more mature contract testing business continued to show double-digit growth, while the CDMO business was impacted by unfavorable batch phasing and attritions in the clinical pipelines of our customers. Science and Lab Solutions had a solid Q4 with sales up 3.9% organically and a plus-5% growth in the core business. Growth moderated slightly versus Q3 due to one less working day, tough comps in biomonitoring and some preordering in the third quarter. With regard to earnings, EBITDA pre increased by 2.2% organically, while the margin came in at 32.3%, down 260 basis points year-over-year. This decline reflects product mix effects, ongoing growth investments in our organization, for example, head count. And we were also -- we know that we were some EUR 50 million short of consensus. The explanation for that is we had a nonrecurring or 2 nonrecurring impacts on the EBITDA pre and on the margin mainly related to inventory write-downs and a portfolio effect related to Exelead. We now take a quick look at 2023. Please note our qualitative guidance implies some margin contraction in line with our midterm indication. Also, please bear in mind that margin comps in the first half are particularly high. And with that, let's move on to Healthcare on Slide #17. Healthcare delivered top line organic growth of 5.5% in Q4. Recent launches grew 33% organically, and the established portfolio grew slightly with 0.5%. By franchise, oncology increased 11% organically mainly driven by Bavencio, up 39%, and moderated by roughly stable Erbitux sales against tough comps. Regarding Bavencio, you might have seen long-term follow-up data of the Phase III JAVELIN Bladder 100 study published at ASCO GU 2 weeks ago. The results reinforce an overall survival benefit of 29.7 months from start of chemotherapy among patients receiving Bavencio in first-line bladder. Our N&I franchise was down 3.7% organically as the ongoing decline of Rebif at minus 14.7% will only be partly mitigated by growth of Mavenclad at 10.2%. On a positive note, we were able to keep market share stable for Mavenclad in the dynamic high-efficacy market in the U.S. despite intense competition from anti-CD20s. Also, please remember that Rebif benefited from one-off channel dynamics in Q3 with the sales development normalizing in Q4. The CM&E portfolio was up 6% organically and fertility grew even at 11% organically in Q4, supported, however, by competitor stock-outs. Regarding our pipeline. In oncology, we have reached our 700-patient enrollment target in trialing our Phase III study of xevinapant in locally advanced head and neck cancer and CIS-eligible unresected patients. This marks an important milestone for our efforts to fully deliver on xevinapant's potential. Regarding earnings, EBITDA pre amounted to EUR 633 million, leading to a margin of 31.2% supported further by FX. Organic EBITDA pre growth was up 21.5% in Q4 against particularly low comparables. In terms of income from active portfolio management, we recorded around EUR 10 million in Q4 and hence close to EUR 50 million for the full year, in line with our guidance. Looking to 2023, we expect income from active portfolio management in a mid- to high double-digit million-euro amount with only a small contribution anticipated for Q1. On margin in 2023, I'd like to say the following. On the one hand, we should see some margin support from a higher share of new products and cost discipline, including in R&D. On the other hand, we expect this to be slightly more than offset by inflationary effects and investments in precommercial activities for evobrutinib. We currently assume that FX will weigh on margins in 2023. And with that, let me hand over to Peter for a special on evobrutinib, who will provide you with a few thoughts regarding the potential of the drug expected to address a significant unmet need in RMS.

Thank you, Marcus. Indeed, I'd love to take the opportunity today to share a few thoughts on the drug's potential plays in the therapy. So let's turn to Page 18. First of all, we target to be first-in-class in what promises to be an interesting multi-horse race. Even more important, our vision is that evobrutinib will transform RMS treatments by uniquely addressing both relapse-driven and CNS inflammation-driven worsening of the disease. To give you some more details, let's look at the graph on the right side, addressing the RMS population in the U.S., still reflecting the largest MS market in value to date. The value proposition of evobrutinib for the 30% of RMS patients who need to start a new treatment, so either naive and switch, is compelling. Anti-CD20-like efficacy on relapses and relapse-driven progression with the potential to go beyond anti-CD20 efficacy on progression independent of relapse activity all in an oral formulation, whilst delivering this efficacy without depleting immune cells that are critical for fighting infections and for mounting normal responses to vaccinations. In addition to this, evobrutinib has the potential to address an even larger group of patients. There are the so-called stable RMS patients who still experience progression independent of relapse activity. As you can see, this group represents approximately 45% of the treated RMS market. Recent analysis of Phase III trials in large patient cohort studies suggest that early disability accumulation independent of relapses is evident even at the earlier stages of MS. And when it occurs early, it is a key determinant of poor long-term prognosis. Given the accumulating evidence so far, evobrutinib could be an exciting new option for neurologists to treat also this patient group that have significant remaining unmet needs despite today's treatments. So let's move to Page 19, where I would like to highlight the data that supports this dual efficacy. Our excitement for evobrutinib's potential for dual efficacy in RMS is based on the largest Phase II data set. Coming to the excellent control on the peripheral aspects of the disease, we showed in the longest extension up to 4 years annualized relapse rates of around 0.1 in the ballpark of anti-CD20s. You can also see that the part of the extension that used the BID dose had lower relapse rates, which proves our theory for dose selection, which has previously shown leads to higher BTK occupancy throughout the dosing interval, not only at peak levels. Going clockwise to EDSS, a measure of disability, it's indeed very encouraging to see such clear stability of the EDSS score throughout the 3.5 years of following up initiation of evobrutinib treatment. This is another important aspect of disease control. Now coming to the most commonly accepted marker of neuronal damage, serum neurofilament light chains. Evobrutinib is the only BTKI that showed such a rapid and sustained reduction. Note that towards the end of the follow-up, the levels are practically 0. And as an emerging marker of CNS inflammation that drives PLA, evobrutinib is the only BTKI to show reduction on slowly expanding lesion volume in the Phase II study. This gives us the reason to believe that based on its penetrance into the CNS and action on cells inside the brain through BTK, chronic inflammation in the CNS will be controlled. With this brief summary, I'm closing for now. Let me reiterate in a competitive field, evobrutinib could be the first drug in RMS to address significant unmet needs by tackling multiple drivers of disability progression. Marcus, back to you.

Thanks, Peter. I continue with Electronics on Slide 20. Sales were up organically by 2.4% in Q4, while FX had a positive effect of 5.2%. Semiconductor Solutions sales grew at double-digit rate, again, up 11.5% organically against tough comps. This was fueled by double-digit growth in both semi materials and DS&S, supported by volumes and pricing. Sales in Display Solutions were down 21% organically mainly due to a significant demand slowdown in the display value chain, especially for liquid crystals, and hence, much lower plant utilization at our key customers. On a positive note, sales in Display Solutions were flat sequentially. Surface Solutions generated organic growth of 6%, the highest quarterly growth rate in 2022, as softness in industrials was more than offset by strong sales in coatings and cosmetics. The EBITDA pre amounted to EUR 308 million, implying a margin of 30.1%, down 140 basis points year-on-year despite support from FX. Organically, EBITDA pre declined 5.8% primarily due to Display Solutions. With that said, let me also briefly comment on 2023. Looking at Semiconductor Solutions, all indicators point to a declining market in 2023. We see H1 particularly affected, while current industry forecasts point to a recovery in H2. Our differentiated market position in semi materials and our strong order book in DS&S should help to mitigate some of the market headwinds. However, we are not fully shielded. There is less leeway for price increases in semis, while inflation continues to put pressure on costs. Turning to Display Solutions. We expect customer utilization in liquid crystals to remain low, at least in the first half, and a reduced contribution to sector EBITDA pre. Finally, with FX becoming a headwind and a limited natural hedge, we expect an additional drag on profitability. Altogether, we expect margins in Electronics to be negatively impacted in the near term and for 2023 as a whole as reflected in our qualitative guidance. However, let me also mention that the overall contribution of Electronics to group EBITDA pre is limited. 100 basis point change in EBITDA pre margin of Electronics moved the group EBITDA pre margin by just 20 basis points. Turning to Slide 21 for a few remarks on our balance sheet at year-end 2022. In summary, the EUR 3.1 billion expansion compared with year-end 2021 mainly reflects business growth and currencies. On the asset side, cash and cash equivalents were roughly stable. Receivables and inventories increased on the back of higher sales, inflationary effects, higher safety stocks and FX. And the intangibles were driven by -- again by currency effects and the acquisition of Exelead. On the liability side, financial debt decreased by around EUR 400 million due to net repayment. Pension provisions were significantly down primarily due to actuarial gains from rising interest rates. And net equity increased, thanks to growth in profit after tax, actual gains and positive FX effects. And with that, let me hand back to Belen.

Thank you, Marcus. A brief update on ESG in Pages 23 and 24. So I've discussed with many of you on previous occasions in the recent months, we have stepped up our sustainability efforts, and I'm very pleased to report that we have made good progress in 2022 as you see in this quite busy slide when you look at the indicators since -- or between 2020 and 2022. Our goal continues to be to decouple business growth from negative environmental impacts wherever this is possible. And despite our business growth, our Scope 1 and 2 greenhouse gas emissions have come closer to our goal of reducing emissions by 50% until 2030. We have also made strong progress on purchased electricity generated by renewable sources and also improved our water intensity score. Looking at Scope 3 greenhouse gas emissions, we haven't made much progress in reducing our intensity score yet. However, this also needs to be seen in the context of the methodology for the calculation of Scope 3 emissions. For additional color on our initiatives to reduce Scope 1, 2, 3 GHG emissions, please go to Page #24. Starting with Scope 3, please note that these emissions are calculated on a spend-based approach. And this means that, for example, inflation will push Scope 3 emissions to a higher level, all the rest being equal. To overcome this limitation, we are working together with other industry players on developing a common methodology to calculate the actual product carbon footprint of products and services purchased from suppliers. Other than Scope 3, Scope 1 and 2 are far more under our direct control. Improved production processes led to a Scope 1 reduction of more than 6% despite increased business activity. In addition, the NF3 reduction technology for our electronics production is showing good results in ongoing pilots and could lead to a substantial reduction in the coming years. Scope 2 has been reduced by nearly 25%. Overall, this reflects the significant progress that we have made in 2022 and that we remain strongly committed to the targets that we have communicated to you before. So let me now conclude the presentations detailing the guidance for 2023. As you can see on Slide #26, we provide qualitative targets as usual at this time of the year, which will be followed by more quantitative targets as part of our Q1 reporting in May. This is nothing new for you. Overall, we expect to demonstrate continued resilience in this very challenging environment that we have been discussing before. For group net sales, we are guiding for a slight to solid organic growth. Excluding the effect of COVID headwinds in our Life Science business sector, we guide for solid to strong organic sales growth for the group. For EBITDA pre at group level, we are guiding in a range from a moderate decline to an about stable development organically. While our 2022 performance got the benefit -- strong benefit from the currency tailwinds, we expect currency headwinds to be reflected in our 2023 results mainly stemming from the U.S. dollar and the Chinese renminbi. Both on sales and EBITDA pre, our guidance is for adverse currency effect of minus EUR 1 million to minus EUR 4 million. Going deeper on the business sectors, please move to Page #27. We expect different growth dynamics across our 3 business sectors in 2023. For Life Science, we guide for a slight to moderate organic sales growth and EBITDA pre to be in a range from a moderate decline to organically about stable. We expect profit-related sales to be dilutive to growth. We guide for total COVID-related sales of around EUR 200 million in 2023, down from around EUR 800 million in 2022. If we exclude this effect, we are expecting to achieve solid strong organic sales growth in the core business in Life Science. Switching gears to Healthcare, we guide for moderate to solid organic sales growth and a slight to moderate organic EBITDA pre growth. We expect sales growth to be mainly driven by recent launches, as it is the case to date, in particular Bavencio and Mavenclad, while CM&E and fertility should also grow. Electronics. For electronics, we guide for a slight to solid organic sales growth and slight to strong organic EBITDA pre decline. Please note that our guidance is based on the industry consensus of the semiconductor's market recovery in the second half of 2023. And with that, thank you for your attention. And now we will be happy to take all your questions.

Thank you, Belen. [Operator Instructions] And with this, Sharon, over to you and first question, please.

[Operator Instructions] And your first question comes from the line of Sachin Jain from Bank of America.

Two questions for me, one on process and one on evo. So for Matthias, at third quarter, I think the implication was that your CapEx cycle could imply process outperformance versus the extent others were normalizing. It doesn't seem to be visible with guide, implying, I think, roughly double digit -- low double-digit growth of process. So any color as to what changed and confidence in the underlying trends there within process? And then for Peter, thank you for the commentary on evo. I wonder if you could just give us an update on liver safety given the noise in the broader class. So could you confirm you still haven't seen any drug-induced liver injury in Phase III? Have you been in touch with the FDA to confirm their view on liver safety being a class effect? Could you just confirm you haven't been asked any mechanistic work that may deleter like some of your competitors?

It's Matthias. Let me take a lead your first question. So nothing has changed. We remain very confident in our midterm guidance and growth for PS, which is essentially low teens. That goes from 21% to about 25%. In order to support that growth, indeed, we had to step up our CapEx programs and spend, and we're exactly on track to do that. Now short term, there was obviously a catch-up effect, and we have used some of those freed-up capacity from declining COVID to really support our base customers. Hence, we have seen this really step-up in core growth in PS, 24% -- 31% in Q3 and then 24% again in Q4. So that's this catch-up effect. We were on this trend to get this more normalized. But essentially, we are really fully in line with what we have communicated before, which is getting towards this low teens growth for PS.

Yes. Sachin, thanks for the questions on evo. So in terms of liver safety profile, first of all, I would remind you that the Phase II showed reversible, and in majority, asymptomatic liver enzyme elevations. And also, you remember that they occur in the first 3 months following initiations, and no cases of isla have been reported. Again, the recently published extension over 3 years of the Phase II confirm that profile, so did not reveal a different pattern. As you know also that based on the Phase II data, obviously, we have aligned at the end of the Phase II meeting with the FDA on the liver monitoring plan as well as the eligibility criteria for the Phase III trials. Obviously, you will understand that it would be not very helpful to share data from ongoing pivotal blinded trials in Phase III. This could compromise the integrity of the study. So I will not do that. And also, bear in mind, obviously, that the head-to-head trial in Phase III is against the drug with definite hepatotoxic potential. Now what is also important to answer your question on the interactions with the FDA, I can tell you that, obviously, there is an Independent Data Monitoring Committee, by the way, including a hepatologist. And on a very regular basis, this group convenes, looks at the data and defines whether we can go on or not. And no changes to the protocol have been recommended by this committee. So every quarter, actually, the data package of the IDMC is sent to the FDA. So I think it's fair to say that we have a regular fluid communication with the FDA and that so far, we haven't seen any change to the protocol, any change to deliver monitoring requirements and so on and so forth. So I think that answers your question on deli and the FDA interaction. Last point, mechanistic work asked by the FDA, the simple answer is no. We have not been asked by FDA to do such mechanistic work.

And your next question comes from the line of Richard Vosser from JPMorgan.

One question on Electronics. Could you give us a little bit more color on your expectations for the shape of the market development in semiconductors in the first half and second half through the year and how you see that affecting your semis growth, both underlying? And I suppose the DS&S growth is more independent of that. So just some color on the shape of that growth profile for semis. And second question on Life Sciences. One quick one, which is, could you break down the COVID expectations by the different elements of Life Science, SLS, LSS and process? And also, if possible, just some more detail on those inventory write-downs and whether they're -- what they're related to and how we should be thinking about that?

Thank you, Richard. I'll take the semi question first. The shape of the curve, now that's a big question for 2023. Of course, we do have different businesses that respond in a different timing on the market development, which gives us, of course, more visibility. For example, as you said, DS&S is mostly independent of that curve since we have a full order book on equipment, which we work on. Second, on the projects in shelf first approach that many of our customers use, we built factory with the key -- turnkey project as well as we equip the factories with our equipment. And then they keep the shelf empty until they need the capacity. So our business is independent of delays of the investments on our customer side. Second, on the materials side, display is an early responder to any of these changes, and semi sees memory first and typically, logic second, and analog specialty devices with very low response to cycles. That gives us certain visibility, as I said. So once display recovers, that is expected mid of the year, then we can expect the rest to recover in the second half. So that -- this visibility, we will see further down, down the road and gives us, of course, a much better resilience as compared to a single-event situation that may be suggested by that curve that you have mentioned. I hope that helps.

Richard, a quick answer to the other 2 questions you had on COVID. So our expectation is for 2023, about EUR 250 million. COVID-related here at this point, we are not breaking it further down into the 3 businesses. But obviously, you can assume that PS still carries the highest share out of those EUR 250 million. And then your second question, indeed, we have seen an inventory write-down in Q4. That's to the vast majority related to COVID and related to COVID-finished products, not related to the base business.

And your next question comes from the line of Matthew Weston from Credit Suisse.

Two questions, please. There's obviously been a lot of discussion regarding transformative acquisition strategy and a number of comments that you made today, Belen. Can you at least remind us of your ambition in CDMO? At the moment, I believe you're very much focused on new modalities. Is that the focus of where you want to take the business over the medium term? Or you would consider a much more adjacent life science business? And then secondly, a question on pharma. Mavenclad and Bavencio, they keep growing. But obviously, growth is plateauing as the drugs get bigger and we reach full penetration. Are we reaching a stage now where we should really think about more modest top line growth for pharma before we get the new pipeline drivers? Or are you confident that you can still reenergize, particularly Mavenclad, in a number of markets to drive incremental growth? And if so, how?

So Matthew, on your question number one, I think we have extensively discussed what is our approach to M&A. We have also disclosed our capacity. And we have said that this is going to come in different -- may come in different forms with the objective of accelerating the growth of our 3 pillars, the 3 big -- or the Big 3. That goes as a general trend that we are repeating and repeating. We have accelerated our inorganic agenda. We do that on a continuous basis. So we have nothing concrete to report. We have also said that our focuses in other modalities, but I would like Matthias perhaps to give you a bit more color on the CDMO ambition.

No, absolutely. Look, we have a clear organic growth plan for Life Science in total, obviously, for LSS. And we have carved out LSS with a dedicated management team to drive the growth in that business, which has a very strong, if you will, existing testing business, which is very solid growth, very robust, resilient. And then with our CDMO business with a strong focus on novel modalities where we have invested and continue to invest. Just as an explanation, again biovector EUR 100 million in Carlsbad, we invest in ADCs. So we have a clear dedicated organic growth plan to grow from a smaller base. And like Belen mentioned, I mean, we have a wider lens to look at inorganic potential moves for the whole group, but also for Life Science. And that obviously includes our high-growth areas. This could be in the services area, but this could be also in the Process Solution product area.

Yes, Matthew, your general questions on growth profile for Healthcare. Let me just start with Bavencio and Mavenclad. So Bavencio, you continue to see a very dynamic growth rate over the year. You see a continued quarter-on-quarter growth, and you should see that continue in 2023. On Mavenclad, we came in with close to 17% growth rate last year. We expect to continue to grow Mavenclad although on a lower level. So you should assume the growth rate of Mavenclad tapering off as compared to 2022. But last but not least, don't forget the resilience of the base business. So you have seen fertility coming in, in line with our expectations. You have seen CM&E coming in, in line with expectations. I remind you, for example, that Erbitux, who has now cracked the barrier of EUR 1 billion sales, continues to be very dynamic with a 3% growth last year despite the nonsupply to Lilly in 2022. That was EUR 50 million, I remind you. And so there is really a very resilient base business. And then, of course, last but not least, once the wave 2 launches kick in, evobrutinib, we do expect a significant acceleration on the top.

And your next question comes from the line of Keyur Parekh from Goldman Sachs.

Two please, if I may, put on pharma. The first one is kind of your fertility franchise, kind of you're suggesting that the growth in Q4 was partly supported by competitors' stock-outs. Can you just give us a bit more color around your expectations for when these competitors be able to come into the market into '23? And then separately, how do you see the outlook for this in '23? That's question number one. And then separately, kind of on the neurology and immunology portfolio, kind of you're guiding to Rebif's declines kind of offsetting the growth in Mavenclad. But just fundamentally, how big do you see Mavenclad being kind of in the long term?

Yes. So thanks for your 2 questions. As we mentioned, our fertility growth rate in Q4 has been supported by some stock-outs of a competitor drug. And obviously, we don't have full visibility moving forward on the duration of stock-out of that competitor nor the depth of that stock-out. So it's a little bit hazardous to make any speculation on that. I think what's important is that we remain committed to our mid-single-digit growth outlook for fertility. On N&I, you are right. So far, growth of Mavenclad has more or less offset the Rebif decline. We expect this to continue moving forward because we -- as we mentioned before, I do continue to expect Mavenclad growth in the future.

And your next question comes from the line of Michael Leuchten from UBS.

Two questions. One, just coming back to Life Sciences. In the slides, you called out product mix as a negative in the fourth quarter. Was that just COVID revenues coming down and normally being at higher price levels and hence, the negative mix effect? Or was it more than that? And what does that mean as we think about 2023? And then a question on evobrutinib. What can you do now before we get the data to sort of get the idea of serum neurofilament light chain as a biomarker that physicians should look at? Basically, what can you do now prior to launch to really get physicians to focus on that 45% of patients that you call the untapped patient potential?

Michael, it's Matthias. Yes, really short answer to your first question on the product mix. Indeed, the answer is yes, it's absolutely related to the COVID -- negative COVID mix effect as the COVID share of the business substantially declined year-over-year and also sequentially. So clearly, COVID-related.

Yes, Michael, on your question, what can we do now between now and the disclosure of the data, well, we can do a lot of things. But I have to tell you also, when I talk to KOLs, the concept of PIRA, so progression independent of relapse activity, is gaining a lot of traction. So it is absolutely recognized that so-called last frontier of unmet medical need, which is that progression independent of lapses, is gaining a lot of traction. You see more and more complications. When you go to ACTRIMS or ECTRIMS, this is right from the center of MS treatment. So we're very confident that we will be able to shape the market in this direction. And then, of course, as a logic consequence, biomarkers or any measurement of PIRA, for example, will get a lot of traction, I would say, as a logic consequence of that market-shaping activity. And as you know, we have, of course, in our Phase III data, plenty of disability assessment measures that we are looking at. PIRA is one of it, disability improvement. We have Obviously, the biomarkers like NFL, we have cognition, we have fatigue, we have quality of life, we have slowly expanding lesions. So we will have the full battery of measurements to substantiate the case.

We will now go to your next question, and the question comes from the line of Peter Verdult from Citi.

Pete Verdult, Citi. Belen, just could you provide an update on the business development environment? You've been very clear where the areas of focus are. Should we still be thinking about this being a string of pearls strategy? Or are you currently being more open-minded? Kai, just to push you hard please, on the assumptions you've used with respect to the degree of market recovery, semis and display that you're expecting in the second half? And if I may, [indiscernible] I've been asked this question by a few investors. Matthias, just very simply, ballpark, if you adjust for COVID and the one-offs, what is the underlying EBITDA margin at Life Science exiting 2022?

Peter, listen, I don't know if I'm going to be able to tell you much more than what I said already on M&A. First of all, the -- it has to be a strong strategic fit with our group direction. As I mentioned already, with a focus on the Big 3, you have heard me saying that we value Life Science because Life Science is predictable, is quite stable. We have a great position in the markets in which we operate, but we will not neglect any of the other sectors. So in pharma, we will continue to actively look at in-licensing and potentially a smaller options that could bring optionality to the pipeline. And obviously, novel technologies for Electronics in -- we focus on semiconductors, which is part of our Big 3. We are very open to the format, if I may call it so. We said we are open to bigger deals because we have the capacity. But at the end of the day, what counts for us is that we -- whatever we do, allows us to keep the track record and that is on time and on budget. So we are monitoring the environment, our pipeline, our inorganic pipeline, let's call it that way, on a continuous basis. And we are looking at all the options, believe me. This is taking a significant time and efforts of the Executive Board at this time, and we will communicate to you in due time where we are and more concrete ideas.

Okay. Let's go for semi question, Peter. So we have the base assumption of a minus 10% MSI for 2023, which is consensus across probably all industry players. We have outperformed MSI for the last 6 quarters in a row or for the last 10 quarters out of the last 12 quarters and always at a rate of almost 10% or even above 10%. Last full year was above 10% outperformance as the numerical basis for our plan. On top, what I said earlier is we have a portfolio where not everything depends exactly on the recovery of the main portion of the semiconductor industry. We have still the recovery of display that we expect this year to happen, and we have the resilience of the DS&S business on top of that. So that gives us certain level of confidence. However, all based of the -- definitely the core element of the semiconductor industry returning into positive territory in the second half of the year with an average over the year of minus 10%.

Peter, it's Matthias. Let me get to the call to your margin question. The Q4 margin was 32.6%, obviously. And we had 2 effects I would like to highlight. One is -- and we talked about the inventory write-offs related to COVID. That contributes about 100 basis point and special effect. And then we also mentioned a portfolio element. We have an extended shutdown at the company we required to increase and improve the operating system. So that's about 90 basis points. So if you take those 2 together, it's about 190 basis points. I think you need to, if you will, consider on top of the reported 32.6% margin.

That's helpful, Matthias. But just for the full year, if you rip out the EUR 800 million of COVID sales and the one-offs, do you have a similar number you could provide?

No, I just gave you -- because you were asking about the exit margin, I mean that's what I think is probably relevant to Q4 number. I don't have the full year.

And your next question comes from the line of Gary Steventon from BNP Paribas.

First one, just on the group margin and the guidance, please. It'd be helpful if you could provide maybe a split just between the different factors which are under your control and those which aren't so things, such as boosting your investment in R&D and head count, the OpEx that's associated with the capacity expansion projects, and then you've got inflation rising costs, negative mix, et cetera, just so we can get some visibility to see at a group level kind of where margin pressures are more due to a conscious step-up investment versus other factors. And then second question, if I could ask just on the health care base business, again, please. The CM&E and fertility franchises have been performing pretty strongly. So Peter, it'd be useful if you could just provide a bit more color here on really what's driving the sustained growth that we're seeing, whether it's more about entry into new markets, whether it's about growing penetration in existing markets or pricing. So some more detail there would be appreciated, too, please.

So Gary, let me start with your question on margin. Obviously, there -- as you rightly mentioned, a lot of influencing factors on the margin. We are currently in a situation where we have, indeed, I would say, a higher share of external factors, which are influencing our margins in 2023. On the one hand, it is, of course, the rapid -- or more rapid decline of COVID-related sales in Life Science. You know that the COVID products on average have a higher profitability in the Life Science portfolio. So we have -- we are getting a negative mix effect from this expected loss of EUR 550 million COVID sales. Secondly, you should not expect too much changes or structural changes in the R&D lines. On marketing and selling, we have baked in some expenses for preparatory -- launch preparation of evobrutinib. We have factored in a negative FX effect, which is predominantly hitting the margins of Healthcare and Electronics. Life Science here is more resilient, however, was also not reacting very strongly to the margin tailwind in 2022. This year, most probably we will benefit here a little bit. We are also slightly more conservative on our ability to mitigate inflationary pressures with owned pricing. We have been very, I would say, adamant and strong on this in 2022 with around about 5% pricing effect in Life Science, plus also a significant effect coming positively from semiconductors. It is questionable whether we can repeat this again at the same amount. So let's see. We try, of course, to compensate the inflation as good as possible, but that is at least a certain risk. And lastly, I would like to mention, was discussed already during the call-in depth, the industry factors here predominantly the normalization in Life Science and Process Solutions, this is inevitable and especially on display and semiconductors, so the industry dip in Semiconductor Solutions where we expect a difficult first half year or a slower first half year and a recovery in H2. And in display, as Kai lined out, still slow demand, low customer utilization and also here an expected recovery from H2 onwards, but also this with a degree of uncertainty. So that is what I would say, margin factors, external/internal.

Yes, Gary. So on your question on the continued growth on CM&E and fertility, let me perhaps first talk about fertility. As you know, there is a substantial tailwind in this market, which is, of course, the increasing age of women trying to get pregnant. So this drives an increase in fertility, and therefore, stimulates the number of cycles that we see. And we see that consistently in all markets, whether it is a mature market or an emerging market. Second, there's also efforts from certain countries to drive access to facilitate access and reimbursement, which is also a driver overall for the fertility market. On CM&E, it's perhaps somewhat the same but also a little bit different. First of all, our CM&E business is essentially an emerging market. So no surprise there that cardiovascular disease, diabetes and so on and so forth, fired disease, for example, with our Euthyrox, there is a substantial under-diagnosis and therefore undertreatment of this disease. And we see significant and continuous volume expansions in the emerging markets. I give you the example of Euthyrox, which you have seen extremely interesting dynamics. We are, by far, world market leader. And so any volume expansion in this market segment, of course, we are the first beneficiary of that. Last but not least, it's not that we massively invest in it, but we have some life cycle management. We do some tactics there. For example, within the CM&E franchise, we have a product called Size, which is a growth hormone. So there, we have introduced in many markets new and sophisticated fans, allowing actually for the children using that and the parents to monitor in adherence to the treatment. And therefore, you can also get better outcomes which is, of course, absolutely essential in this market. So lots of little things happening left and right, and that ultimately leads to what you see, which is this mid-single-digit growth for both fertility and CM&E.

Okay. Could I just quickly follow up on the pricing point on the margin, please. So 5% positive in Life Science in 2022. Perhaps could you just share your assumptions over pricing in 2023, please?

Yes. Sure. It's Matthias. So look, we still operate in an elevated inflationary environment, and we continue to drive our pricing actions. Like Marcus said, we were under, let's say, [ 2.5x ] historic levels in '22. And ballpark, we will do the same in '23. Although, obviously, the environment gets also more challenging in driving those prices to the end market. But the goal remains that we are offsetting as much as inflation is impacting the business that we're driving to pass that on as much as possible.

And your next question comes from the line of Rosie Turner from Jefferies.

Two for me as well, please. So you mentioned craft expansion and the project in Ireland. I just wondered if you could remind us of the other key projects that you've got underway and the timing on those, when we can expect them to come online. And then just thinking about xevinapant. I think in the appendix, you highlighted Q4 2023 interim. I just wanted to double check that is definitely Q4 because I think there was some concern it might now be Q1 '24. And then can you just remind us of the xevinapant catalyst part from here and when we could potentially get that final Phase III data?

Let's make sure we confirm your first question. Is this about the expansion in Ireland and what are the additional investments in Life Science?

Yes, please. Yes, the expansion product in Life Science.

Yes. Rosie, I think you're referring to our EUR 440 million investment, which we announced in May '22. So these are 2 aspects. One is related to the membrane and then is -- the second one related to the finished filtration products. So we are expecting the first filtration products coming in '24 and then the membrane in '26.

Rosie, your question on xevinapant. As you know, this is an event-driven protocol. So of course, we cannot exactly and fully guarantee. But when we look at the events accumulating, indeed, Q4 is still our best estimate for an interim analysis later this year. Obviously, the full study completion is later in 2024 in second half.

And the next question comes from the line of James Quigley from Morgan Stanley.

I've got one Life Science then a follow-up on pharma. So in the Life Science Services business, there's been quite a bit of volatility in the last couple of quarters. Presumably, there's an impact from biotech funding there. But can you give us an idea of the revenue split in the CDMO business between commercial or clinical-stage products that you support? Also given your modality exposure, what are the key drivers to get you back to within the guidance range for growth in the short term and in the longer term? And then following up on the CM&E portfolio in pharma, you mentioned there was some -- in the slides, some impact from China. So could you give us an idea of within CM&E how China is growing versus the rest of the portfolio, whether it's a drag or not, given that you've had 2 quarters of 6% growth and what the upside could potentially be if China returns to normalized growth levels?

James, it's Matthias. Let me take indeed the first question. So let me dissect LSS. There's 2 components. Obviously, there's our testing business, which is very resilient, very robust, well established in the market. That's about 45% of LSS, continue to perform very strongly, actually also double-digit growth in Q4. And then we indeed have our CDMO business with the different modalities. And we indeed do see more volatility there for a couple of reasons. Like you mentioned, we have in this part of our business more, if you will, dependency or influence from the biotech funding as we're working with a lot of the smaller biotech companies. And we're working with them and depend also how their pipeline is exceeding, right? So quite strong influencers then. Whether we get a batch phase into this quarter, the next quarter, that kind of drives a lot of this kind of volatility. And I think I mentioned it before, we do expect this to continue this volatility in that part of the business for a little bit, let's say, a few more quarters.

Yes, James, your question on CM&E and China. So as you know, we have gone through the VBP for our 2 most products in China of that franchise, which are Glucophage and [indiscernible]. We have turned that corner. We have come back to growth. So I would say that overall, China is no longer a drag on the overall CM&E portfolio.

And the next question comes from the line of Falko Friedrichs from Deutsche Bank.

And my first question is on Life Science. What is your expectation for growth in the Process Solutions business in '23, excluding the COVID business? So your competition is saying high single-digit growth. Is that the level you're also targeting? Or can you grow a bit faster this year? And then secondly, within your Electronics guidance of slight to solid organic growth, it looks like the semiconductor business must be able to grow in the high single digits this year. I just wanted to check if my thinking is correct here.

Falko, it's Matthias. On your first point, so indeed, our core Life Science growth, we put it at solid to strong. And as in prior years, you can assume that obviously PS is a main driver and even stronger than that.

On your semi questions, we don't guide on that level that you requested. But of course, by and large, a single-digit growth in semi is a good result of your calculation.

And your next question comes from the line of Oliver Metzger from ODDO BHF.

Both on Healthcare. First, on fertility, you should have a strong year '23 ahead of you. So we see the normalization post pandemic globally and also China should push forward revenue growth. So what are your expectations regarding pent-up demand? Second question is about -- Marcus, you mentioned about prelaunch commercial activities in health care. How to think about phasing? So is it fair to assume the bulk of it will be skewed towards second half?

So the second question was around the prelaunch activities' phasing. Okay. Thank you, Oliver, for both questions. Let me take facility first. Look, as I mentioned before, we remain very convinced that indeed fertility will continue to grow. Mid-single digit is the midterm guidance. And for example, in 2022, we have some effect -- a negative effect you may remember from Q2 last year was the lockdown in China. We have some upside in Q4 from a competitor at breaking down. But of course, these are not fundamental structural elements in the market, right? So it may well be dependent on the length and the depth of stock-out of the competitors that 2023 may be a little bit better. But I wouldn't really read too much into it as of now because this is more speculation than reality, I would say. On the prelaunch activities, I would say that it will, of course, accelerate during the year, right? So we are really gearing up towards and building up momentum in terms of recruiting a certain number of people in terms of shaping some medical activities. And this should, in principle, as we -- as the year unfolds, progressively increase.

We will now take our last question for today, and the question comes from the line of Simon Baker from Redburn.

Two, if I may, please. Firstly, on evobrutinib. The slides you gave are useful in mapping out the opportunity. And you alluded to similar efficacy levels to CD20. I was wondering if there was also a similar regional opportunity to CD20. If we look at Aquavit sales, it's about 75% in the U.S. Is that the sort of opportunity split you envisage for evo? And then secondly, a tax question. You have a couple of Brazilian subsidiaries. I was just wondering if there was any likely impact from the forthcoming abolition of the interest on equity fiscal regime in Brazil.

Yes, Simon, for the evobrutinib question, you are right. If you look at the anti-CD20s, they have roughly 3/4 of their sales in the U.S. And I would say, as for most new innovative products launching, of course, U.S. is by far the most important market. Whether this would be exactly the same as for the anti-CD20s remains to be seen. But I would say directionally, the number that you put forward is probably not far from reality.

Simon, on the tax question, that's a good question. I mean we are evaluating -- I mean we have very low exposure to Brazil, right, from that perspective. What I can tell you is that we will evaluate the topic, but we cannot give you an exact impact at this time.

Yes, we come back to you on this, Simon. The reason for the tax -- the lower effective tax rate for the group is more, let's say, the overall composition of the country mix, which has moved to our favor in light of the very strong sales development, especially in the U.S. The U.S. has a tax rate which is below the average of the group. And due to the strong -- especially the strongly growing Life Science division, this is a major factor. On Brazil, the Investor Relations team, so we'll check this, and we'll come back to you.

All right. Thank you very much for all of your questions. With this, Belen, any closing words from your side?

Very quickly because we are running out of time. So 3 points I would like to emphasize to close the call. First of all, very solid performance in 2022. We have delivered profitable growth in a highly challenging environment, speaking of the resilience of the company associated to the global diversification at different levels. 2023 is looking like a transition year. We don't see any structural problems, as you have heard from all the members of the Board. So it's a transition to the post-COVID world. And this is definitely the way we are looking at this. And last but not least, confidence in our midterm guidance that we have repeatedly expressed towards 2025. Based on our organic perspective, but hopefully accelerated with our inorganic agenda, that will become much more concrete to all of you once we have an option to communicate. So thank you very much for your interest in Merck. And I'm sure we will be talking to you in the roadshows in coming days. Have a good evening.

Thank you. Bye-bye.

Thank you, ladies and gentlemen. Thank you for your attendance. This call has been concluded. You may now disconnect.