Merck KGaA (MRK) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the First Quarter 2023. [Operator Instructions] I am now handing over to Constantin Fest, head of Investor Relations. He will lead you through this conference. Please go ahead, sir.

Thank you very much, Sharon. Dear ladies and gentlemen, a very warm welcome to the Merck Q1 2023 Results Call. My name is Constantin Fest. I'm Head of Investor Relations here at Merck. I'm delighted to have today with me here, Belen Garijo, our Group CEO; as well as Marcus Kuhnert, our Group CFO. Please note for the Q&A part of this call, we are also being joined by Matthias Heinzel, CEO of Life Science as well as Peter Guenter, CEO of Healthcare; and Kai Beckmann, CEO of Electronics. Also note that at the beginning of this call for a brief introduction, we are joined today by Helene von Roeder as our newly appointed Chief Financial Officer as of 1st of July. Also for your information, the first minute of the call, we would like to spend by guiding you through the key slides of this presentation and after that, we are happy to take all your questions in our Q&A. With this, I would like to now hand over to you, Belen, to kick it off.

Thank you, Constantin. Welcome everybody to our Q1 earnings call. Overall, Q1 has once again illustrated the strength of our business in a year that we have deemed to be transitional. Before I go on the highlights for Q1, please allow me to briefly comment on the changes that we recently announced at the level of the Executive Board. As you know, Marcus Kuhnert has decided to step down as CFO and as a member of the Executive Board as of June 30. I wanted to take this opportunity to express my deepest gratitude also on behalf of the Executive Board for the tremendous contribution of Marcus to the company over the last 9 years. We all wish him the very best. I personally have enjoyed immensely working with Marcus, first, as a peer in the Executive Board and then as a CFO over the last couple of years. At the same time, I'm truly happy to welcome Helene von Roeder as our newly appointed Chief Financial Officer as of 1st of July. Helene brings with her an extensive experience in finance and in capital markets, having worked for 23 years in several big investment banks. She is joining Merck from Vonovia, where she served as Chief Financial Officer until 2021 and then transitioned to become Chief Transformation Officer responsible for digitalization and innovation in both position being also a member of the Vonovia Executive Board. And as Constantin mentioned, she is here with us today on the call and I would say it's probably better if she says a couple of words about herself. So Helene, welcome.

Yes. Thank you, Belen, for the opportunity to quickly step into this call and to introduce myself. I am really excited to take over this task and there are indeed a number of reasons for that. Firstly, I do know the company already quite well as I have been a member of the Merck Supervisory Board of Partners of E. Merck KG for 4 years now. Secondly, I am passionate about capital markets and finance. As Belen mentioned, I worked for 23 years at various investment banks both in London, U.K. and in Frankfurt, Germany. And thirdly, I'm a trained physicist and as such, I feel almost naturally attracted to a vibrant science and technology company like Merck KGaA. In my latest role as Chief Transformation Officer at Vonovia, I was responsible for digitalization and innovation. And as such, I'm looking forward to sharing my experience here as well. It is impressive to see how Marcus ran the financial organization over the last 9 years. Let's be clear. He leaves giant footsteps. Starting July 1, it is now my turn together with the team. Marcus and I have been working very closely during my tenure at the Merck Board, and hence, you can rest assured that it will be a very smooth transition with Marcus still being around as a member of the Executive Board of E. Merck KG. In a nutshell, I feel extremely honored to now serve Merck KGaA as a CFO and member of the Executive Board. And with this, I hand back to Belen. Thank you, Belen.

Thank you, Helene. So I have to say, I was a bit surprised of the question that was raised around the announcement because several of you asked why are we breaking this news from today's earnings release announcement. Well, let me tell you very frankly. First as a company, which emphasizes people very much, we wanted to separate this important organizational announcement from our quarterly earnings release. That is the most important. As a second reason, it was already announced by Helene's current employer that she would leave her position on Thursday last week. And we wanted to limit the time interval between Vonovia's release and our own for obvious reasons. . So now back to our Q1 earnings. I am now on Slide #5, starting with the highlights. First of all, organically, our group sales increased by 1% and EBITDA pre-declined by 2%. There with a slight currency tailwinds and a very minor portfolio effect, reported sales were at EUR 5.293 billion, which is an increase of 2%. Currencies had a slightly dilutive effect on EBITDA pre and reported EBITDA pre of EUR 1.587 billion, was down by 3%. EPS pre of EUR 2.36 was slightly down year-on-year. Healthcare was the best performer with 5.3% organic sales growth, driven by the launches of Mavenclad and Bavencio. Life Science showed a robust organic growth of 7% in the core business and was slightly up despite the sharp decline in the pandemic-related business. In Electronics, Semiconductor Solutions increased by 2%, significantly outperforming the market. That in combination with a meaningful decline in Display Solutions led to a minus 7% organic sales development in Electronics. I am happy to say that our multi-industry setup is delivering and helping us to perform also in 2023. And as usual, at this time of the year, we are further quantifying our guidance. We anticipate in 2023 net sales in a range of EUR 21.2 billion to EUR 22.7 billion, EBITDA pre EUR 6.1 billion to EUR 6.7 billion and EPS pre between EUR 8.80 to EUR 9.90, thereby confirming our qualitative guidance for organic growth that we shared with you in early March. We will come back to giving you more details on the assumptions later in the presentation. Turning to Page #6. We see a bit more detail of our performance by business sector. As you see, Healthcare and Life Science contributed very positively to organic sales growth in Q1, more than offsetting the decline in Electronics. Our key growth engines in the quarter were our new Healthcare products, as I already mentioned. Science & Lab Solutions within our Life Science business sector. In fact, in a challenging operating environment in Q1, Healthcare took the lead with organic growth of 5.3% and that was driven by 28% growth from recent launches with Bavencio up plus 31% and Mavenclad growing by 23% in Q1, while the established portfolio remained stable. From a franchise perspective in Healthcare, oncology was the highlight, delivering an organic growth of almost 15%. Life Science was up 1% organically, driven by the strength in the core business. COVID sales became dilutive to growth and were significantly down both year-on-year and also sequentially versus the last quarter as we expected. Yet we performed well versus many of our peers, both considering our organic growth and our performance in the core business. In Electronics, our semi business was up 2% in the quarter, significantly outperforming a declining market. However, this was more than offset by the decline in Display Solutions and then resulting in an overall sales decline of 7% organically in Q1. A small portfolio effect in Life Science and Electronics contributed very marginally to sales growth for the group. Currency served as a slight tailwind across the board on sales, adding 0.8% to sales at group level. Regarding earnings, EBITDA pre came at EUR 1.59 billion, down organically around minus 2 or minus EUR 28 million. And this was mainly due to Electronics, where organic EBITDA pre was down by minus 20% or minus EUR 57 million in absolute terms in Q1 versus last year. EBITDA pre in Healthcare was up strongly by more than 10% organically in Q1, driven by operational performance and importantly, not yet including the repatriation of Bavencio -- of the profit of Bavencio, which will only kick in as of July, so on the second half. EBITDA pre in Life Science was slightly down. Currency was a marginal headwind on EBITDA pre, mainly due to the Asian currencies such as the Chinese renminbi and the Japanese yen as well as emerging market currencies. With this, I'm going to hand it over to Marcus that will comment and will provide additional color on our Q1 financial results.

Thank you very much, Belen, and welcome also from my side. I'm now on Slide 8 for an overview of our key figures for the first quarter. Overall, we had a solid start to 2023 in a challenging business environment supported by our multi-industry setup. Taking into account slight currency tailwinds and a minor portfolio effect from the acquisitions of Exelead and Mecaro, net sales increased by 1.8% and to EUR 5.3 billion. EBITDA pre was down by 2.6% to EUR 1.59 billion with currencies having turned into a slight 0.5 percentage point headwind. EPS pre declined by 2.1% to EUR 2.36. Operating cash flow came in at EUR 853 million, which is an increase of 1.5% over the comparable period in 2022. This was mainly driven by a slower increase in working capital and the development of other assets and liabilities, namely upfront payments received in our delivery systems and service business within Semiconductor Solutions. Net financial debt increased by EUR 664 million compared with the end of December, mainly due to short-term investments of our excess liquidity in the range of EUR 800 million. Accordingly, net debt-to-EBITDA increased slightly to 1.3x up from 1.2x at the end of last year. Let me also briefly comment on our reported results. So I'm now on Slide #9. EBIT was down by 11.8% in the first quarter. In absolute terms, this was a decrease of EUR 138 million more than the 2.6% decline on EBITDA pre. This was mainly driven by higher costs for our ongoing efficiency programs, but also by higher depreciation and amortization resulting from higher investments in Life Science and Electronics in particular. The financial result improved compared with an already low base mainly due to an improved result from financial investments benefiting from higher interest rates. The effective tax rate came in at 21%, below the 22.4% from Q1 last year and at the lower end of our updated guidance range. Despite a better financial result and a lower effective tax rate, net income and earnings per share were down by 9.6% and 9.4% respectively driven by the declining EBIT. With that, let's move on to review the sectors, starting with Life Science on Slide #10. In Life Science, the sales growth slowed down to 0.6% organically in the first quarter. The core business was up at a robust 7% while COVID-related sales continued to decline and had a dampening effect of minus 6% on organic growth. From a portfolio perspective, Process Solutions and Life Science Services were down due to the decline in COVID business, while Science & Lab Solutions showed a strong performance of 5.9% organic growth. Looking at Process Solutions first, growth in the core business came in at 3%, significantly below the 24% in Q4 and was only partly able to mitigate the COVID-related decline of minus 7%. The significant decline in core organic growth was mainly driven by adverse inventory dynamics, mainly at our large customers becoming visible only during the course of Q1. Order intake continued to decline year-over-year on the back of reduced COVID-related sales and book-to-bill was again slightly below 1 as expected. Turning to Life Science Services. Here, the sales were down 7.2% despite very strong organic growth of 35% in the core business, which was more than offset by a sharp drop-off in COVID-related sales to marginal levels as expected. The double-digit organic growth in the core was due to both the more mature contract testing business as well as the CDMO business, which benefited from positive batch phasing. Sales in Science & Lab Solutions were up 5.9% organically on healthy growth of 7% in the core, given positive pricing and a robust performance across portfolios, regions and customer segments. With regard to earnings, EBITDA pre decreased by minus 1.4% organically, while the margin came in at 36.2%, down 170 basis points year-on-year. This decline reflects product mix effects and ongoing growth investments in our organization. For example, capacity expansions and Process Solutions and CDMO activities. If we now take a quick look at 2023, I would like to point to 2 developments. Firstly, we only started to see the destocking dynamics at our customers in Process Solutions during the course of Q1 and expect this dynamic to continue throughout Q2. Additionally, we had particularly strong organic core sales growth in Q2 and Q3 last year, mainly driven by Process Solutions. Secondly, the EBITDA pre margin in Q1 was helped by a temporary uplift in the gross margin also on production cost efficiencies. And a number of dampening effects on the EBITDA pre margin, such as adverse mix effects, a higher operating expense base for our ongoing strategic investments as well as reduced operating leverage will only start to become more visible during the course of 2023. With that, let's move on to Healthcare on Slide #11. Healthcare delivered organic sales growth of 5.3% in Q1, comparing very well with our qualitative guidance range we provided in early March. Recent launches grew 28% organically, while the established portfolio grew slightly by 0.3%. By franchise, oncology increased 15% organically, mainly driven by Bavencio up 31% and supported by Erbitux, which grew at 4% organically. End of March, we announced to regain exclusive worldwide rights for Bavencio and we will take full control of the global commercialization effective June 30. Our N&I franchise was down slightly 2% organically with a strong Mavenclad performance of 23%, largely offsetting an amplified 25% Rebif decline in the quarter. Mavenclad benefited from patient wins in North America as well as lower comps. The Rebif decline on the other hand was partly driven by unfavorable channel dynamics in the quarter. Fertility grew 7% organically, competitor stock-outs continued in Q1, driving a stronger performance in various regions. However, this comes against the challenging market environment in China, where fertility saw a double-digit decline. The end of the Zero COVID policy led to a temporary slowdown of the fertility market in China. Regarding our pipeline, for evobrutinib, we are progressing towards the readout of our Phase III RMS program in Q4. For enpatoran, our TLR7/8 inhibitor, we initiated a Phase II study in polymyositis and dermatomyositis as indicated at the R&D update call last year. Regarding earnings, EBITDA pre amounted to EUR 590 million, leading to a margin of 30.9% slightly supported by FX. Organic EBITDA pre was up 10.5% in Q1 driven by operating leverage, mix and low comps on gross profit. This strong performance was achieved with no income from active portfolio management in Q1 while we hedge around about EUR 40 million in Q1 last year. Looking to 2023, we continue to see income from active portfolio management in a mid-to-high double-digit million euro amount for the full year with a significant contribution expected in the second quarter. Regarding the margin for the coming quarters in 2023, I would like to say the following. We expect the sales momentum to prevail, mainly driven by recent launches and normalization of our China business post-COVID and continued competitor stockouts. As such, we see the EBITDA pre margin level in Q1 as a good indicator for the coming quarters based on operating leverage, mix and cost discipline. I will continue with Electronics on Slide 12. Sales were down organically by minus 7.1% in Q1, while currencies had a slight positive effect of 0.8%. We had a small positive portfolio effect of 0.3% related to the acquisition of Korea-based Mecaro. Semiconductor Solutions performed strongly and remained in positive territory at a 2% organic growth, clearly outperforming a declining market and the MSI. Display Solutions was down 28% organically in Q1 against tough comps in Q1 last year, driven by a continued decline in liquid crystals due to lower customer set utilization. Surface Solutions was down minus 5% on software, industrial and coatings, mainly due to a slower recovery in Asia. The EBITDA pre amounted to EUR 237 million, implying a margin of 26.4%, down 380 basis points year-on-year despite support from FX. Organically, EBITDA pre declined by 19.8%. The main driver was Display Solutions on lower utilization, pricing and mix. Semi-materials also contributed to the decline in EBITDA pre as the weak market environment provided less leeway for price increases while inflation continued to put pressure on costs. That said, let me also here briefly comment on the coming quarters. Looking at Semiconductor Solutions, our differentiated market position in semi-materials and our strong order book in DS&S should help to mitigate some of the market headwinds as we demonstrated in Q1. However, we are not fully shielded. MSI expectations for 2023 dropped from minus 10% to now minus 14%, and we expect the market downturn to extend to Q3 as customers are lowering their outlook and utilization. Turning to Display Solutions, our market view has not changed. We expect customer utilization in LC to remain low at least in the first half and a reduced contribution to sector EBITDA pre. Overall, we do not expect top line momentum in margins in Electronics to change meaningfully from Q1 in the short term but continue to expect a recovery in H2 driven by semis but more geared towards the later part of H2. This is reflected in our quantitative guidance. And let me mention again that the overall contribution of electronics to group EBITDA pre is limited. A 100 basis point change in EBITDA pre margin of Electronics boost the group EBITDA pre margin by only 20 basis points. Before handing back to Belen, let me also comment on our balance sheet and cash flow statement briefly. As you can see on Slide 13, our balance sheet overall remained at the level from the end of December 2022. Zooming a little bit into the details, on the asset side, we see an increase in receivables and inventories, mainly related to our Life Science and Electronics business. Intangible assets decreased due to currency and amortization. Other assets increased due to the mentioned short-term investments and so cash and cash equivalents declined. On the liability side, we have seen stable provisions for employee benefits as the interest rates have not significantly moved since year-end. An increase in financial debt, which was offset by a decline in other liabilities and a slight increase in net equity thanks to retained earnings. Thus the equity ratio remained stable at a level of 54%. Turning to cash flow on Slide #14. Operating cash flow came in at EUR 853 million and was up slightly compared to Q1 last year despite a decline in profit after tax. This was, as already said, mainly due to slower increase in working capital. Cash out for investing activities increased, primarily driven by higher CapEx to support our growth ambitions. Last but not least, the difference in financing cash flow can be explained mainly by a temporary change of financial liabilities to Merck KGaA. And with that, let me hand back to Belen for the outlook.

Thank you, Marcus. Let's focus now on the guidance on Slide #16. So as I anticipated in our first slide, we expect the group net sales in 2023 in a range of EUR 21.2 billion to EUR 22.7 billion. EBITDA pre in a range of EUR 6.1 billion to EUR 6.7 billion and EPS pre in a range of EUR 8.80 to 9.90. And this is based on organic sales growth of plus 1 to plus 4, an organic EBITDA pre development of minus 5 to 0, in line with our qualitative outlook that we shared with you in March. Currency is now expected to become a headwind of minus 2 to minus 5 for sales and for EBITDA pre respectively. And compared with our previous quarters of the minus 1 to minus 4 for sales and EBITDA pre, this is a slightly higher negative effect mainly due to some -- somewhat weaker USD and weakening Asian currencies such as the ones I mentioned already, the Japanese yen and the Chinese renminbi. We stay confident on reaching our midterm guidance of EUR 25 billion in sales by 2025 despite the challenges and the operating challenges that we see in our environment in this transitional year 2023. Now moving into Slide #17. I will give additional color by business sector. First of all, we are moderating our forecast for Life Science to an organic sales development between minus 2% and 2% positive and an organic EBITDA pre-development between minus 8% to minus 4% amid newly observed inventory dynamics in Process Solutions. We reiterate our guidance for total COVID-related sales of around in 2023. Therefore, expecting that this COVID sales will be dilutive to our growth in 2023. Excluding the COVID impact, we forecast organic sales growth of plus 3% to 8% in the core business. Moving on to Healthcare. We are raising our guidance for organic sales growth to now go between plus 5 to plus 9 and for organic EBITDA pre growth between 8% positive and 12%. On sales, a number of drivers play in our favor, complemented by an upside from this competition supply shortages. EBITDA pre mainly benefits from rating performance and also regaining exclusive worldwide rights for Bavencio effective June 30. For Electronics, we forecast an organic sales development of minus 2 to plus 3, moderating our previous qualitative guidance range. For EBITDA pre, we are now specifying our guidance range to minus 12 to minus 3 to reflect a more pronounced downturn in the semiconductor market, which might extend into Q3. Overall, I'm happy to say that we continue to show great resilience in a continuously challenging operating environment. And as a group, we delivered on our promises in Q1 and are confirming our group guidance on the organic development helped by our multi-industry operating model. And with this, we are going to stop here and we'll be happy all of us to take your questions. Thank you.

[Operator Instructions] And your first question from the line of Matthew Weston from Credit Suisse.

Two questions, please. The first on Life Science. We had very mixed commentary from peers on near-term trends. So Matthias, would love your perspective. Firstly on customer destocking, I think you've suggested it's going to extend into 2Q. When do you expect that to recover? What's a realistic underlying buyer process growth trend for Merck and the industry when things settle down? And we've heard a lot about biotech funding slowdown, but your SLS business performed extremely strongly. So did you gain share? How did you do better? And then secondly, a question for Peter, it's a big picture one. I'm sure we're going to hear a lot about evobrutinib on the call. But I note that you've decided not to pursue EGFR mutant Phase III for tepotinib. We've obviously got questions about evo safety. It basically feels like everything now rests on xevinapant with Mavenclad's LOE losing. So how can you address that strategically within the business? And then finally, I just want to add, I want to wish Mark as well in his new endeavors. I think I can speak for many on the call that Marcus, your tenure has brought significantly increased openness and discipline for the financial markets communication at Merck, which was extremely well received by us and many investors. You'll definitely be missed. And clearly, we wish Helene well in her new role.

All right. It's Matthias. So let me take your first 2 questions. Obviously, starting with the destocking. So to paint the picture, obviously, we saw that trend during in the course of Q1 has a more stronger pattern. It's really happening in the PS business, mostly at larger customers, but the really across the globe. And they take a more, I would say, strategic approach to inventory management based on normalized supply chains, right, reduce lead times, which give them more comfort to place their orders on time, certainly all the stronger working capital initiatives globally. And then also to some extent, some customers are now starting to re-purpose some of the COVID reserved inventory as we are moving more to an endemic phase. So we expect that trend, which we only saw partially in Q1 now to show the full effect, if you will in Q2. And then our assumption is that we will see an inflection point sometime later in Q3 and then going back to a more normalized level. Obviously, that's a look into the future but based on our view and a lot of discussion with customers, that's the best view we have as we speak. So we'll expect in the second half of the year, PS kind of gradually going back up in terms of their growth rates. To your second question, indeed, LSS, we saw some very strong growth. At the same time, I would like to highlight again what I said before given the rather smaller base, especially in the CDMO business, we see more fluctuations, right? We are more dependent on individual batch phasing, and we saw that as a positive effect in the first quarter. I would not attribute that to a large extent of gaining share. Again, it's more related to batch phasing. And biotech funding, indeed, that's something we also observed. By and large, Life Sciences has only a small exposure as a total business to the early biotechs, a little bit bigger to Life Science Services, but this is a rather small effect what we currently see.

Yes, Matthias, I'll take your broad picture question on Healthcare. So first of all, on tepotinib EGFR mutation, the reason why we decided not to pursue the so-called INSIGHT 3 study is an economic reason. Actually, the FDA requested a large-scale comparative randomized clinical trial. So given the cost, time but also the intensity of the competition in that space, we decided not to pursue and make different arbitrations in our R&D portfolio. Now coming to your question, first of all, I think it's very important to restate our confidence in evobrutinib. I have been personally talking to many KOLs 2 weeks ago at the American Academy of Neurology. And when you really discuss with the KOLs there, again as we said before, they are absolutely used to do liver monitoring. It's a simple blood test. The healthcare systems are organized to do so. And more importantly, the promise of the product to really tackle the unmet medical need of which is progression independent of relapse activity is intact and continues to excite significantly the community. So we are confident in the benefit risk of the product. We are confident that a time -- a limited monitoring in time in the first 2 to 3 months will be implementable. And therefore, we remain very confident in the blockbuster potential of evobrutinib. Obviously, you mentioned xevinapant. We are looking forward to the interim analysis at the end of the year. We'll take it from there. And we think that the product really has a very significant potential. I would also remind you that, of course, the EGFR mutation with METamp, the fact that we will not pursue this indication, will not change our midterm guidance for Healthcare. So it was only a relatively small opportunity. We always mention that. And then you also have seen some progress in our pipeline, for example, on enpatoran where on top of the lupus indication, as already mentioned by Marcus, we also go into dermatomyositis, for example. So we think we have sufficient lags. And of course, we will continue to work hard to further reinforce that portfolio moving forward.

Matthew, Marcus here. Thank you very, very much for your remarks. And I will say a couple of words at the end of the call.

And your next question comes from the line of Sachin Jain, Bank of America.

I am Sachin Jain, Bank of America. I'd just like to kick off by echoing Matthew's comments to Marcus. Thank you very much for your help in the last years and best of luck for your next venture. My 2 questions, similar topics, one on process for Matthius and one on evo for Peter. On process, could you just clarify it is how much an inflection you're assuming in the back end of the year in process to get to the bottom end of your guide? The reason for the question is different commentary across peers. So Sartorius obviously expecting a significant inflection, talking about plus 10%, 15%, 20% variables and growth rate; Danaher suggests -- just want to get a sense of where you sit on that very wide spectrum. I wonder if you could quantify the biotech exposure that you have with the predominant reason for Danaher's miss? And then any color on upstream versus downstream, which Thermo had referenced as the main sort of source of inventory. So long question on process. And then just one very simple one for Peter on evobrutinib. You framed the debate is just related to monitoring, but I want to extend the question a little bit. Do you have confirmation of whether the 2 cases you've seen are Hy's law. If they are confirmed as Hy's law, how problematic to approval would that be? And then beyond monitoring what biomarker work and any identification of risk patients have you been asked to do given simultaneous had been added to both of those?

Yes. Sachin, let me take your first 3 questions on LS. So I think indeed, it's important also for your modeling to really get a sense for the phasing in PS. And I just want to take the chance again to mention, so we saw the partial impact of the destock in Q1. We see a full impact in Q2 and then indeed in our kind of midpoint scenario, there is an inflection later than in Q3, moving up through Q4. So yes, H2 in this kind of midcase scenario will be moderately about H1. The lower end of the scenario, right, in terms of our guidance would be that there is kind of no inflection point coming throughout the year. And of course, the upper end of the scenario would be there's a much stronger -- I wouldn't expect an early inflection point, but probably a steeper inflection point during Q3. So I think with those comments, if you will, we are probably more, if you will, balanced if I may say so in terms of what we expect. Certainly not a dramatic second half versus H1 kind of improvement. On the biotech funding, look just to size it, overall Life Science is less than 10%, if you will exposed to the early smaller biotechs. So that gives you a sense then -- yes, I mean, if there was some reduction -- short-term reduction in the spending, it does not have a substantial impact on total Life Science, a little bit more on LSS, I commented that before. We have a little bit of a higher exposure there. So there we see here and there are some batch phasing spreading out programs. But maybe compared to some of the other comments you referenced, we don't see that as a major reason. And then your specific question about inventory destocking, upstream, downstream, so by and large, upstream is more made to order, right? Downstream, if I generalize, it's more also make to stock, you can use those products for multiple processes. So in that sense, the destocking, if you will, has a -- is more pronounced in the downstream part of our portfolio.

Yes, Sachin, on your question on evobrutinib. Look, as we mentioned before, we have 2 patients, asymptomatic fully reversed after stopping the treatment without any kind of need of medical care. So I think that's the first important point to mention. Second, I remind you that Hy's law is actually a set of criteria that are aimed to establish the risk for serious drug-induced liver injury. So it's -- in reality, it's a constellation of biochemical measures, but also taking into account potential confounders. So the final ascertainment of whether Hy's law is made only by taking all of these considerations. Of course, we will not comment in detail on the ongoing discussions with the FDA. It's clear that from biomarkers, we are definitely looking into it. It's not easy because those would need to predict still very, very rare event. So -- but we are working hard and diligently in the dialogue with the FDA.

We will now go to our next question. And the next question comes from the line of Gary Steventon, BNP Paribas.

First one, if I could just ask on Electronics, please. So can you just help us understand what the visibility looks like here? I know in the past, you've spoken to good visibility in areas like DS&S within the semis due to the product time frames. But now with semi-materials growth softening and display remaining weak, it would be helpful just to understand what level of visibility you have there and therefore when you'd expect to have more clarity on the timing and the pace of the recovery that is supporting the guidance. And then I guess on the moving parts of the Life Science outlook, please. Could you just help us understand really what's driving the additional conservatism implied by the guidance? Is it more just about the impact of destocking now being felt in process or pressures from weaker buyer activity? Or generally, is it more broad-based? And is there any additional color there would be helpful, in terms of framing the areas where you're seeing more pressure and if there's any offsets in the mix as well.

Gary, this is Kai speaking. I'll go first on your Electronics question. So concerning visibility for the second half. So maybe 3 factors I would like to emphasize. Factor one, in display, the low utilization of our customers started last year late in Q2. So there is, of course, a much lower baseline that we will be facing for the second half. We see a recovery here for the second half in our model. DS&S, as you mentioned, we'll have some project phasing benefit in Q4. There is, of course, some positive impact from large project business in DS&S as well. And thirdly, on the semi-materials business, our model foresees the floor being hit in Q2, some stabilization in Q3 and a recovery in Q4. That's the current data that we see from the market and there's consensus in the market at this point in time that this is the shape of the recovery curve we shall see. But it's a of our guidance.

Gary to your second question, it's indeed related to PS and developing dynamics around inventory, which I indicated before, which we see now more pronounced across the segment, across the globe and that's kind of driving the adjustments we have made.

And your next question comes from the line of Sophia from JPMorgan.

So in Life Sciences, how is the China business developing? When do you expect to be able to start retaking share in China or going forward due to local competition? And then as a second question, what is your latest thinking on business development for Life Sciences now and availability of firepower for the business development given the evolving funding landscape and continued volatility in the market overall.

Yes. Let me take the first question around China. Obviously, Q1, we saw some dynamic in China related to the Chinese New Year, right. The post-COVID normalization, so we certainly also saw there a similar effect, like I mentioned before around the destocking, especially in PS. SLS was running rather strongly and we continue to expect that. And indeed, due to the constraints during the COVID situation over the last 2 years, there was, if you will, the ability for local competitors to gain share, right, to serve the local market. And now with more normalized supply chains, capacity being more available, it's certainly our intent to kind of, if you will regain that share. And that's also substantiated or supported by expanding our local footprint. We mentioned before that we're expanding our footprint in PS in Wuxi and we are continuing to drive that capacity because it is really crucial to then kind of serve the customers locally from within the country for the country.

Sophia, thank you for the question, it's Belen. So our M&A approach have not significantly changed from what we have already told you during the Capital Markets Day and in other quarterly discussions, that we are operating under the same principle. So definitely a strategic fit and value creation potential. We have already said that this can come in a form of a transformative, bigger move . And of course, that we are privileged Life Science because of the predictability of the market and our leadership position in certain business segments. Having said this, we have also said that the 3 big -- our big 3 growth engines are going to be subject of capital allocation and candidates for potential different forms of M&A in licensing to increase options or new technologies for electronics, et cetera, et cetera. That's basically where we are.

And your next question comes from the line of Peter Verdult from Citi.

I don't want to make this a U.S. biotech call, but if you remissed not to also add my thanks to Marcus and best wishes on your next venture. So on to the questions, Peter first, please. Just is there any rationale in your view or intention at Merck to pursue evobrutinib in the progressive MS setting? Matthias, just on the Life Science margin, pretty robust at 36%. My question is getting a sense of the conservatism you have applied with respect to your full year margin guidance and outlook? I know you've called out production efficiencies and COVID product mix effects that won't last. But if you could give any sort of ballpark centers to the relative contribution of each, just to help us understand the degree of conservatism you've applied. And then look, only if you allow me, you don't have to answer this, but a sneaky third one for Kai. You've talked in the past about OLED offsetting LCD and getting display stabilized. Is that given the dynamics you're seeing now, out of the question in terms of when might you see stabilization of your display business?

Yes, Peter, let me take your question first on RMS versus progressive MS. So as you know, we decided to focus our resources to really look at relapsing MS. And I remind you that RMS, relapsing MS is 85% of the diagnosed MS population. So that's number one. Number two, even more importantly, we believe that progression starts actually very early in the disease and we believe that with early targeting of progression, we can show the biggest benefit to patients. Last, and this was also hotly debated at AAN, there is an emerging thinking that the concept of MS as one disease is kind of starting to emerge. Experts believe that the biological mechanism driving long-term disability are not really relapses of focal RMI activity but rather smoldering inflammation leading then later to disability accumulation over time. So we really believe that we're investing in an area with the understanding and treatment of MS is moving in the future and not only reflecting today's understanding.

Peter, yes, on your questions related to the margin. So there are a couple of effects. Usually in Q1, the margin is sequentially up versus the prior quarter. In Q4, if you look at last year, that effect created about a 270 basis point increase. It was even more pronounced 2 years ago. So there is some kind of that effect. And in Q4, we reported 32.6% and there were some one-time effects with some write-downs, so normalized 34.5% margin. So you see even smaller kind of quarter-over-quarter increase in Q1. It was then, in addition, supported by some temporary production efficiencies. So that is a kind of a one-time effect during Q1 and we need to keep in mind what we mentioned before with the COVID kind of decline, we see a negative mix effect. In addition, also with a rather limited or impacted destocking on the base business for PS, we also see a margin impact on that, especially as I mentioned before, in the second quarter, and that it will gradually kind of come up again as we see the inflection point for the destocking. So by and large, I think what we provided with the midpoint guidance is, I think, what you should assume.

So Peter, let me address your bonus question. So even under the kind of the current ups and downs that we saw short-term, we still stick to our midterm guidance of display returning to growth in 2025.

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

I have 2 questions on Life Science, please. The first one is based on your guidance. Is it fair to assume that the Process Solutions core business should be roughly growing in the low single digits for the full year and should most likely decline in the second quarter? My second question is on your Science and Lab Solutions business. Pretty strong growth in the first quarter. Can you share the split between price and volume in Q1? And how sustainable is this type of growth for the next few quarters?

Yes. Look, on the first question, we are not guiding by BU, right? But we gave you some, if you will, book ends, we said all BUs are contributing to the core growth. So that if you will, a lower end of the book end and the phasing is indeed what I think explained before with a stronger and full impact of the destocking in Q2 and then the inflection point coming in later in Q3 to Q4. So I think that is with the best framing for PS. SLS indeed performing well with a strong pricing component, a very high portion of that growth currently is coming from price and our ability to pass on high inflation cost to the end customer.