Merck KGaA (MRK) Earnings Call Transcript & Summary

Dear ladies and gentlemen, a very warm welcome to this Merck 2023 Capital Markets Day. My name is Constantin Fest, and I'm really pleased to meet all of you here in Darmstadt as also to welcome the great number of participants, who are joining us virtually from across and around the world. One logistical item first, many pieces and parts of this event will be recorded in terms of audio and in terms of video, if you disagree, kindly contact the IR team immediately. We will now start with the main part and the main presentations of the day. With Belen Garijo, our Group CEO; as well as Helene von Roeder, our Group CFO. This will then be immediately followed by a round of Q&A. Then we will have spotlight sessions, which will focus on the 3 sectors and the regions that they operate in. In the afternoon, our guests here on site will be able to get very close to our management, have direct interactions in our annual Meet the Merck Management sessions. Now with this, I'd like to directly hand over to Belen to give us an update on Merck from the CEO perspective, which will be directly followed and complemented by a presentation from Helene with the financial view. And with this Belen, the floor is yours.

Thank you, Constantin. Good morning, everyone. I hope you enjoyed dinner last night, those of you who had the chance to be with us. So first of all, welcome, everybody, to our 2023 Capital Markets Day. Thank you so much for making the time to spend the day with us discussing our business, the challenges we are confronted with and to get a very transparent view on the way we see the year unfolding. Thank you also to those connecting virtually from all over the world. And what I aim to do is to kick this off with a high-level update on our business, then follow by -- followed by Helene that will share additional perspectives on the financial overview. Let me first say that I am delighted to welcome Helene for her first Capital Markets Day at Merck, very welcome. And after that, Helene and I will sit in the hot seat for a lively Q&A to proceed the 3 spot session -- the 3 spotlight sessions that will be chaired by the sector, CEO, Matthias, Peter and Kai that will come on the stage with some key members of the leadership team. So how to start on 2023? Very simple. Let me emphasize that 2023 has turned out to be a very tough transitional year for us as we already announced to all of you, when we had the chance to meet in early Q1 of this year. But let me also stress that we have a very strong track record of managing challenging times. Needless to say, the COVID-19 pandemic was a major challenge to the global economy. And during this time, we significantly outperformed global GDP as a key indicator for economic activity and delivered robust organic sales growth every single year. And this was simply driven by our resilient multi-industry business model and importantly, driven by our focus on markets, sectors with attractive growth trends. So our diversified business is also helping us in 2023. The world is transitioning to the post-COVID era. We continue to be faced with strong macroeconomic headwinds, combined with rising interest rates. We have seen a COVID cliff in 2023 and a pronounced destocking within Process Solutions in Life Science. Parallel to that, our electronic business sector is seeing a prolonged down cycle in Semiconductor Solutions paired with a low customer utilization in Display Solutions in most recent quarters. On the positive side, our health care business sector is delivering a stellar performance in relation to a very successful product launches on our first wave, particularly Mavenclad and Bavencio. I'm supported by a very resilient established product portfolio, which is helping drive growth mostly in emerging markets. We have navigated well through these transitional years. Temporary challenges in Life Science and Electronics were largely offset by a strong performance of our Healthcare business in the first half of 2023, enabling us to stay on flat organic sales performance, which you will recognize is significantly better than most of our competitors. What do we expect in 2024? A question that I had received frequently last night, that we received frequently last night. As you know, we are not in a position to provide any precise guidance at this time, but we have a strong confidence in returning to growth in 2024. Why? For Life Science, we are expecting easing COVID comparables and the destocking in Process Solutions coming to an end. Science and Lab Solutions is expected to remain a growth contributor thanks to the product portfolio that we have in that business unit, the broad range of applications and also the fact that our exposure to instrumentation equipments is limited in Science and Lab Solutions and in Life Science in general. Our Healthcare business sector generated a strong growth in H1 '23 and our full year '23 guidance of plus 6 to plus 9, also signals our expectations to stay on attractive growth for the remaining of 2023. From this high base in '23, we are expecting a normalizing of growth rates for Healthcare, more in line with our midterm aspirations. We also expect that at some point in time, the supply shortages of our competitors in the areas of fertility and endocrinology will come to an end. The main catalyst on healthcare, evobrutinib would start making meaningful contribution only as of 2025 followed by the launch of xevinapant. For electronics, we believe that the semiconductor market will finally pick up in '24. Artificial intelligence, the Internet of Things and the processing of Big Data will also start to drive the next stage of secular growth. And this brings me to my next topic. What is coming after 2024? First of all, let me stress that we see no structural changes to the attractiveness of the markets and stay confident on our ability and our competitive advantage to capture the growth expectations of those sectors. The 3 business sectors in which we operate continue to have attractive midterm growth prospects. as you see on the slide. For the Global Life Science market, we anticipate 5% to 7% annual growth and for the Global Pharma Industry between 3% and 6% annually. For Electronics, as represented on the slide, we expect growth between 5% and 7% in the semiconductors area. All our target markets or most of our target markets, I should say, are driven by major megatrends. And obviously, here, I'm going to focus on what is most relevant to our business sectors. In particular, in Life Science, we see continued emergence of complex and novel modalities, while growth from traditional modalities, particularly monoclonal antibodies. In Healthcare, we identified the growing burden of oncology, new therapies, new innovation and also the growing burden of neuro inflammation and immunology conditions in patients. In Electronics, I repeat, artificial intelligence, Internet of Things are driving materials for leading-edge chips. And of course, the overarching topics of climate transition applies across all industries. And all of these megatrends reaffirm our growth ambition. But in order to be able to capitalize on these megatrends, we need to thoroughly understand and develop a competitive advantage. And we also understand the way these mega trends are going to play out differently in the different regions of the world. We aim to build on our geographical diversification and also on our good track record and excellence in execution. The long-term growth potential across regions, across the 3 key world regions, our economic powerhouses is different for each of our 3 business sectors. In Life Science, for example, we see the strongest growth potential in Asia Pacific, followed by North America and the European Union. For our Healthcare business sectors, we see North America as a huge opportunity, followed by APAC and those 2 regions have been the best upside potential followed by the European Union. We can draw a very similar picture for our Electronic business sectors. Taking a look at the long-term growth prospects in the 3 global economic powerhouses across our business sectors, we see -- the strongest growth potential in Asia Pacific and North America, where we are already very well placed. I have now talked about our key mega trends and the fact that we believe this will play differently in the 3 key global geographies. But how do we capitalize on these megatrends? Our geographic presence fits extremely well to the overall economic contribution of each of the world's key regions as measured by global GDP contribution. In fact, we are highly geared towards the largest global market, Asia Pacific, which is also the region with the highest long-term growth potential for us. APAC contributed around 35% to the world GDP in 2022, which perfectly matches the sales contributions of Asia Pacific to our total sales. According to data from the IMF, estimated GDP growth in Asia Pacific for 2024 will be the highest of all these 3 global key regions. China is a major contributor to GDP in APAC, contributing around 50%. I -- we are aware that macroeconomic uncertainties and the geopolitical issues, mainly the tensions between the U.S. and China have increased in recent years, particularly in 2023. As you can imagine, with the U.S. being our first major market and China being the second major market for Merck, we are following the situation very closely and we concluded that these issues are going to be of temporary nature and that those will not meaningfully impact our business activities and investment decisions in China in the mid-to-long term. So now what I would like to do on the next 4 slides is to go a bit deeper into every business sector to illustrate that our geographic revenue distribution is not just an aggregate of numbers. We continue to seek very close proximity to our markets, which is extremely important for some of our businesses, for all our businesses, but particularly for Electronics. We understand the requirements across our 3 business sectors. Just to cite some proof points in Life Science, Process Solutions, for example, we have decided to move from global center of excellence to an in-region-for-region approach. Pre-pandemic, we only had a full manufacturing footprint across the key product categories, single-use filtration and cell culture media in the Americas and are now working to regionalize our manufacturing network in Europe and Asia Pacific to be able to better serve our customer needs in the different key global regions, and of course, to be better positioned to ensure resilience of our supply chain in case of additional trade issues. In Process Solutions, we seek to enhance our market-leading position in the bioprocessing market. We firmly believe we have the broadest offering across the market segments. And this provides a value-added proposition to our customers, a competitive edge. We have included a slide in the appendix that I invite you to take a look at, which outlines our differentiated market position. And obviously, Matthias and his leadership team will be more than happy to provide with -- to provide you with more details during the afternoon sessions. Now in Healthcare, Slide 13 illustrates how well we are poised to capitalize on our global presence -- presence, while identifying regional opportunities and building on them. Overall, Europe and Asia Pacific are as of today, the 2 strongest regions for Healthcare in terms of revenues. We have strong confidence in our renewed innovation engine, increasing our U.S. exposure through innovation-driven growth. In particular, through our Wave 2 launches, evobrutinib and xevinapant. And we will not stop here. R&D and business development opportunities will be driven in Healthcare by the potential dose bring -- by the additional potential those may bring for us in the U.S. Focusing briefly on Electronics and how the global economic powerhouses drive our investment strategy and business setup in semiconductor solutions, we aim to be the innovation partner to leading edge global customers. And you know that this market is highly concentrated on a few customers. The semiconductor industry is planning around EUR 900 billion in investments globally, and this is mainly driven by 5 to 6 companies, the 5 to 6 leading edge players. We serve today all of them. And with a network of R&D and production hubs as well as innovation hubs, we, as I said before, ensure proximity to our customers, which we believe is giving us a tremendous competitive advantage. Let me stop briefly on sustainability on Slide #15 because we have also made progress here. Already today, we are facing a shift in customer demand and expectations towards more sustainable products and sustainably responsible supplier behavior. In that regard, we have already some notable achievements. We are investing to reduce our Scope 1 and 2 emissions, aiming for climate neutrality by 2040, 10 years ahead of the European Union. We have already brought our emissions down by around 10% every year, since 2020. And -- Second, human rights in the supply chain is certainly a global topic, but with increased risks in certain regions of the world. We have controlled mechanisms, reporting and processes ready to comply with the German Supply Chain Act and 82% of our expenses to suppliers are already covered by valid sustainability assessments. Besides the achievements as shown in this slide, I am proud to say that, since the announcement of last year's Capital Markets Day, we have embedded sustainability in our R&D processes and have already assessed up to 90% of our relevant R&D projects. A company-wide assessment for a better sustainability performance of products in our existing portfolio across the sectors will follow and will be implemented by the year-end. Let me conclude these deep dives with the next slide. I showed you that Merck offers the right elements, the right pillars to maximize commercial success. We are close to the customers, we have excellent market intelligence and we are able to exploit our regional strengths as a global player. And we have the strategic flexibility to adapt our business to the market requirements. You will hear more about our strong customer positioning and our ability to capture growth during the spotlight sessions following this presentation and the presentation of Helene. With every business sector illustrating the key strengths in 1 of our 3 global regions. And this already brings me to the outlook and executive summary, which I'm sure you are eager to see. We view our midterm growth prospect has been intact. We have, as I mentioned, the elements in place to deliver attractive growth profile. We are well positioned both from a business standpoint and from the geographical standpoint to benefit from key megatrends driving our attractive markets. We maintain our growth aspiration for all our 3 business sectors. In Life Science, we continue to expect the midterm organic sales growth CAGR between 7% and 10%. Look, underlying market fundamentals remain attractive beyond these temporary developments such as the destocking in Process Solution. Our product portfolio and our innovation engine increased our confidence in the midterm growth perspectives. For Healthcare, we continue to strive for a mid-single-digit organic sales growth CAGR in the midterm. And this will be enabled by the recent product launches and needs to be expanded by the upcoming Wave 2 launches of evobrutinib and xevinapant. We also expect that our very resilient established product portfolio will make a positive contribution and will stay resilient. And finally, for electronics, we regard the midterm growth prospects as intact between 3% and 6% midterm CAGR due to our continued confidence in the secular trends driving semiconductors and our ability to outperform the market as we have done to date. We therefore have a strong confidence in midterm growth beyond 2025. We capitalize on these key megatrends that I have repeatedly mentioned in all our 3 business sectors. We have a strong base to maximize our future commercial success. We maintain our aspiration of around EUR 25 billion in sales by 2025. And we not only have attractive midterm growth prospects, but we also have a strong long-term growth opportunities fueled by our growth and by our enterprise innovation engine across sectors. Innovation is a key driver of future sales growth in the sector and across sectors, it will help secure our long-term perspectives and it's also a proof that our diverse multi-industry setup fuels our ability to solve problems faster and leverage our competencies across sectors. Life Science, for example, provides AI-driven tools and services and breakthrough combinations of AI and automation, while Healthcare provides expertise for life science development and users life science tool to accelerate drug development. I would like to highlight 3 developments today, illustrating what I have just said. First, AIDDISON. AIDDISON is a software package that Life Science is selling to customers for early drug discovery through our SLS team. It was launched in 2023 and is using generative artificial intelligence built from historic data in health care, and we are further building on this capability. The second development that I would like to highlight are Organoids. Recent announcement by both the FDA and EMEA signal a willingness to move away from animal testing, and we have made a big commitment to follow that as part of clinical submissions. SLS currently sells 2 dimensional cell culture organoids, which our Healthcare colleagues are already using for screening purpose. We are also working on next-generation organoids, which may incorporate chip technology. So the 3 sectors. This bio convergence brings together our leading innovation across Electronics, Life Science and Healthcare. One important point is a Smart Manufacturing. Smart Manufacturing is an overarching topic across all 3 sectors. We have clear synergies in terms of capabilities, engineering, data. We have a joint effort to drive advancement in Smart Manufacturing. Each sector has developed a strong capability in certain areas and the cross-sector collaboration enables us to have a holistic view to drive advancement in manufacturing. This also puts Merck in a position to support our customers in their own efforts. What is helping us now and even more in the future is to further leverage our competencies across sectors, to further boost our innovation engine through a Merck Business Services approach. Merck Business Services help us to manage our Cross-Sector Services and pull and create efficiencies across our 3 business sectors. We have moved to Merck Business Services 2.0 this year and have generated efficiencies, helping obviously our performance. I am sure many of you have been waiting for me to share how our organic growth ambitions mid- to long-term are complemented by our M&A strategy. I assured you that M&A continues to be a key priority for the Board. We have defined clear guardrails for our M&A. Any acquisition needs to fit in with the megatrends for the group and most importantly, needs to support and accelerate our organic profitable growth strategy. You asked me in what form? I say small and larger transactions are possible as it is a combination of both. While times can offer attractive opportunities, you know us very well. Most of you know us very well and we will continue to take a very disciplined approach. Helene will add further color of this point later. Importantly, and something I mentioned during our Q2 call, we are under no time pressure and M&A is always only a means to an end. To conclude, we have a strong track record in managing challenging time. We leverage and capitalize on appealing megatrends across our 3 business sectors, we are aiming to maximize our commercial success through our very highly diversified business, but also through our presence in key global geographies and we will count on that, vigorously execute on delivering efficient meaning profitable, sustainable midterm growth. And with that being said, I would like to thank you for your attention and would like now to invite Helene on the stage to continue with the financial overview. Thank you very much.

So thank you very much, Belen, and a warm welcome also from myself to this year's Capital Markets Day. I'm very glad I made it on stage without falling over, and I took the clicker. So good start to the day. So it's my great pleasure to share my financial perspectives and build on what Belen has just presented to you. So let's look at Slide 24. Sorry, this is 24. I will focus on the transitional year in my first section before moving on to 2024 and beyond. Explaining how we expect to return to attractive and profitable growth. And in my third section, I will focus on our midterm goals by sector before continuing with my presentation with an executive summary. So let's start with the financial perspective on the transitional year. So on Slide 26, I show you how we are navigating through this very challenging environment. Looking at the performance of Life Science and Electronics combined, sales have declined organically by around 5% year-on-year in H1 2023. I -- the combined EBITDA pre margin declined by 260 basis points from the level of full year 2022. We -- now you know the key reasons for this development were significant COVID headwinds. However, paired with pronounced destocking in Process Solutions as well as Semiconductor Solutions, having been affected by the obvious down cycle in semiconductors. Given our business model, this was largely offset by the strong performance of our Healthcare business sector, which delivered an 8.8% organic sales growth and a strong margin development in H1 '23. We -- now overall, the strong performance of a -- Healthcare business sector helped us to achieve a flat organic sales performance year-on-year in the first half of '23 with a robust margin level. Now I want to underscore that market conditions have made 2023 a transitional year for Merck, affecting both Life Science and Electronics. So with that, let's go to Page 27. Now what you can see on the first chart on the left side is that since early 2022, key interest rates have risen significantly. as illustrated by the increase in the Fed funds rate in the U.S. since January 2022. For many corporates, this means that preserving cash has become more important. And on top of that, the world is normalizing post COVID. As you can see on the chart on the right. Worldwide prescription drug sales are expected to decline year-on-year in 2023 after a period of strong growth reflecting this development. A consequential broad-based reduction on inventories has resulted in pronounced destocking in our Process Solutions business within Life Science. So -- and -- then let's look at the right-hand side. In electronics, we are also seeing the dynamics of the world normalizing post COVID. As economic cycles impact wafer production in semiconductors, the partial unwinding of work from home post-pandemic amplifies the effect. Nevertheless, the 2023 guidance reflects the fluid environment. So with that, let's move on to Page 28. The temporary challenges in Life Science and Electronics drive the development of the EBITDA pre evolution from H1 2023 into H2. For Life Science, we expect the trough and process solutions in Q3 2023. And to reach an inflection point for order intake in mid-Q4 '23 to Q1 '24. in line what we have said before. For Electronics, we do assume that the market downturn in semiconductor materials will extend into '24. However, please bear in mind that our EBITDA pre in the first half year of 2023 was also supported by the UDC patent agreement and Healthcare benefiting from active portfolio management income of around EUR 70 million. Now this is important. We do confirm our 2023 guidance ranges with sales of EUR 20.5 billion to EUR 21.9 billion and EBITDA pre of EUR 5.8 billion to EUR 6.4 billion and EPS pre of EUR 8.25 to EUR 9.35. We have provided you with these wide gained guidance ranges due to a number of moving parts we are currently confronted with. The shape and further evolution of destocking in Process Solutions, in particular, the ongoing very complex SAP migration project in Life Science. the uncertainty around China and Life Science and for Electronics, the dynamics of the down cycle of the semiconductor market. When I consider most of these factors now, the scale between challenges and opportunities has maybe shifted slightly to the former. So with that, if you move to Page 29, I also wanted to share a few words on our financial profile and explain how it reflects our confidence in strong midterm growth. As you can see in the chart on the left, our 2023 guidance implies a decline in sales and EBITDA pre with our operating expense being roughly in line with the 2022 level at the respective mid-terms of the 2023 guidance, but above the [ '21 ] level. And you also can see in the chart on the right, our CapEx to sales ratio has structurally increased over the last 5 years. Now actually, the message is pretty simple. We are investing in our 3 business sectors with a mid- to long-term view. And in line with our guidance, we expect around EUR 1.8 billion to EUR 2 billion in CapEx spending for 2023. This reflects an increase from the levels we had from 2018 to 2021 and is also visible in our CapEx to sales ratio. The ratio of between 8% and 9%, as implied by our guidance for 2023 sits above the recent profile. Now what this clearly shows is that we're investing through the cycle and have strong confidence in future growth. It is a high priority for us to manage CapEx responsibly. We're evaluating regularly where the investment continued to support our long-term profitable growth. And in summary, and as you have heard from Belen before, we do expect a growth inflection in 2024 and a return to attractive efficient growth beyond '24 and we are financially geared towards this goal. So now let me give you some more color on why we are so confident that we will resume growth in 2024 and on our profitable growth perspectives beyond '24 in the next section. With that, please look at Slide 31. While we're not providing guidance for you for 2024, at this point in time,I will provide a little bit of color and feeling on the developments we expect and how these are expected to contribute to the sales growth inflection and the development of EBITDA pre at this point in time. With the end customer destocking in Process Solutions, resilient growth in SLS and the pickup in semiconductor materials, we have drivers which will support our growth. We also benefit from the expectations that our DS&S business within Semiconductor Solutions will remain at a consistently high level in '24 compared to '23. And in Healthcare, we expect that competitor stock-outs will start to ease, which by the way, are leading to quite high comps in '23. But '24 is only the starting point for achieving attractive profitable growth in the midterm. So let's look at Slide 32. You have heard Belen talking about the end market growth potentials in each business sector and the key megatrends. In the midterm in Life Science, we actually see all our 3 business units to be the key drivers for the group. In Healthcare, I want to highlight the 2 therapeutic areas of oncology and neurology as key growth drivers to you. And in Electronics, it is our semiconductor solutions business, which we expect to form 1 of the key drivers for our midterm growth ambition. And importantly, these 3 key drivers we identified for Merck already contribute more than 70% to group sales. So when I talk about strong growth prospects, midterm, what does it actually mean in numbers? And with that, let's look at the next slide. We continue to see an attractive midterm organic sales growth CAGR of around 7% to 10% for Life Science. We expect Process Solutions to resume growth. Life Science Services to show attractive midterm growth after temporary headwind and Science and Lab Solutions to deliver sustainable, profitable growth in resilient and regulated markets. Our business and geographic mix in combination with our innovation engine will help us to deliver above-market growth, and I'm sure that Matthias and his leadership team will give you much more color during the Meet Merck Management session. So let's move to Healthcare. We continue to see a mid-single-digit organic sales CAGR, mainly driven by the launh Waves 1 and 2. The bigger portion is expected to come from the potential Wave 2 launches. Now this would be evobrutinib with best-in-class potential in relapsing multiple sclerosis and xevinapant, our new inhibitor of apoptosis protein, aimed at setting a new standard of care in locally advanced head and neck carcinoma. Also, the so-called Wave 1 launches, namely Bavencio and Mavenclad and our established product portfolio are expected to contribute to our midterm growth ambitions. Of course, this afternoon, you will hear more from Peter and his leadership team in the Meet The Management section. So with that, Electronics. We want to achieve midterm and organic sales CAGR of 3% to 6%, which is why we have not changed our midterm view on organic sales growth. We expect the vast majority of growth to be contributed by semiconductor solutions for which we see an organic sales CAGR of 7% to 10% in the midterm. This would be market growth and also supported by continuously investing as part of our Level Up program. And whereas Kai, because it will be him and his leadership team walking through you -- walking through more details also in our Electronics business sector sessions in this afternoon. So far, you've only heard me share my view on our organic growth ambitions midterm. However, Belen also mentioned we continue to look for inorganic growth opportunities through M&A. And I'm very happy to provide you more financial perspective on this topic. First of all, let me -- allow me to stress again what Belen said before. we are not pursuing M&A for the sake of it. We have clearly laid out to you today that our organic growth prospects are actually very compelling. Nevertheless, we seek out acquisitions, if they can enhance and accelerate our efficient growth strategy, meaning to achieve profitable and sustainable growth. We have very clear criteria, as you can see on the left side, which have not changed. For example, any acquisition must support our profitable growth strategy. We do want to maintain our strong investment-grade rating and an acquisition needs to be accretive to EPS pre. So with that, let me share more details on our focus areas, starting with Life Science. We are looking to enhance the core business as well as enabling and adjacent areas for all 3 business units within Life Science. Within Electronics, Semiconductor Solutions remain a key focus area for us, and we are also interested in innovative assets in Healthcare and are looking really continuously for licensing transactions. We maintain a strong financial capacity and look for small and larger transactions, and our clear guide is value creation. The current M&A environment is pretty influenced by macroeconomic uncertainties and key interest rates at levels we have not seen for many years. We have a sharp focus on our cash profile. We confirm our dividend ratio, payout ratio to be 20% to 25% of EPS pre. And please bear in mind, we have an extremely strong track record of fast deleveraging. Cash and debt remain our main financing options. We are in absolutely no hurry and can really wait patiently for the right target while closely monitoring development. So with that, I've already reached the executive summary. We are laser focused on delivering this transitional year. We expect the growth to resume in '24 in Life Sciences and electronics. We regard our midterm growth ambitions for 3 business sectors as being intact. And finally, M&A continues to be on the agenda with a clear goal to support our efficient growth strategy. So thank you very much for your attention. And I think we're moving to the fun part now, which is Q&A. And with that hand over to Constantin.

Thank you. Thank you very much, Helene. And I would like also Belen to join us on stage, and I think we can have a seat. So we are now ready for our Q&A session. with our CEO and CFO. We would kindly ask our audience in the room to get ready for the questions. Raise your hand as you already start doing and use the microphone on your desk once it's your turn to speak. So we open and Richard, I think it was first.

It's Richard Vosser from JPMorgan. Maybe on the reiteration of the midterm targets, I think I saw on the slides that they go from the beginning of '23 or the end of '22. I think the original targets were to hit EUR 25 billion in terms of sales by 2025, and that's obviously a EUR 4 billion gap from somewhere around today. So how should we think about that bridge? I understand the growth trends are intact, but that implies an acceleration in 1 of the next 2 years, and it's probably not '24. So some idea of that bridge and how to think of that would be great. And then maybe second question, you gave some color on margins for '24 in terms of the EBITDA contributions with bars. Just maybe a little bit more on that in terms of how we should think about margins? I could imagine Life Science could see some margin improvement and Semiconductors maybe in the second half when the recovery comes. But just some thoughts on margins year-on-year in EBITDA?

Thank you, Richard. So to be consistent, I will -- I was answering that precise question to one of your colleague last night, so I will say exactly the same as I said last night, 25x25 definitely don't go to the math, right? Or don't take me to the math. I said first. What I can tell you is that we keep that aspiration and that objective for ourselves and our teams. And we will definitely go after that objective. And this is what I can say about this. Not everything is going to be in our control, for example, currency, right? But everything that we control today is going to be managed to deliver on that aspiration on the margins.

So as you know, we don't give short-term margin guidance for the next years. So I would like to point you to sort of like what is our midterm margin guidance for Healthcare. If you look through, you have seen that like we are looking more or less at a plus 30% margin for this year. And if I look at Peter, he says, okay, that feels like a comfortable range going forward. On Electronics, again, midterm guidance and aspiration is to be around the 30 -- reach the 30%. And in life science, we've also been pretty clear at the moment, we are more or less at the 30%. We've been at 38% during COVID times. And as Constantin always so nicely says is like, if you take the middle of it, you probably can think of how we are aiming to strive towards margins.

Matthew?

It's Matthew Weston from UBS. Two questions for me, please. You made it very clear about M&A that you are in no hurry, and it's about finding the right asset. But I also recall that I think M&A was included in the 25x25 goals. So maybe I'm wrong that on the shaking...

It wasn't.

It was not. Okay, perfect. So it really is on top of that. The second question then is around Mavenclad LOE because that's obviously a very important assumption in that 2025 plus time frame that the market has to get its head around and I'd be very interested from a senior management level, where we should be thinking as a group about when Mavenclad will go generic? And how much impact that's anticipated to have?

So I mean you know that we have initiated and presented a very compelling position that allowed us to really gain in some European countries. The critical topic is going to be how does -- how is that going to unfold in major markets. But once again, we believe our case is compelling, and we are working on different scenarios. I think Peter and the team can give you a bit more flavor. There is nothing new to communicate. As far as I can say, but stronger positions in European countries and recognition of our regulatory data protection and the patent and expectations are still on the litigation -- on the patent litigation that we have in the U.S.

Sachin?

Sachin Jain from Bank of America. Two financial clarifications, please. So Helene, when you were discussing '23 at the end, you said challenges versus opportunities shifting to the former, so I just wanted to check, should we interpret that commentary as more bottom half of '23 guide? Or is that not an interpretation that should take from that? And on the 24 slide, when you talk about the divisional growth items, you talk about Healthcare achieving midterm, but that commentary is absent from Life Science. So again, should we walk away from that thinking about achieving the 7% to 10% in Life Science in '24 may be tough?

So on the guidance, as you know, I can't give you any update before we actually announce numbers. I think I would like to reiterate that like we have a number of challenges on our books. And again, sort of like point towards like maybe there's a little bit more challenges than upside. On the margin question, I'm not quite sure I understand -- understood correctly what you said because...

Sorry, it was on the 24 slide, where you discuss each of the growth drivers by division. I think there's an aspiration on Healthcare to achieve the midterm that was absent from the Life Science commentary at the top. So is it fair to think that Life Science will be tough to achieve the midterm 7% to 10% next year?

Yes. I mean, I think, let me answer. You are referring to the top line. So in my introduction, I mentioned 7% to 10% midterm. Obviously, this is going to be highly dependent on our perspectives for '23 and how fast the destocking is coming to an end. So if we -- if you assume, as we have assumed to date, that we may see the inflection in order the intake by Q4 2023, right? We have obviously -- we need a bit of time until revenue comes back. And obviously, even if we don't guide, I would tell you that 7% to 10% is more of a midterm topic rather than a 24% ambition.

I'll get you next, after Florent.

Holger Blum, Patinex Management. I have a question on the chart on Page 19. You showed illustrative growth after 2025. Which had a range of flat and increases. And given your midterm perspective, I wonder how do we get to a flat sales growth scenario from '25 onwards? What are the assumptions there?

I told you that slide was going to be confusing because there are 2 lines and I kind of -- I mean, I confirm that our longer-term perspective is attractive. We don't -- we are not in a position yet to make commitments post 2025, right? Concrete commitments. And this is why you should take for your own estimates and for your own projections, you have to take our midterm growth ambition as the guidance, right? With the caveat that I mentioned on 2024 in which we will give you more information, obviously, in March and in May, but take that midterm growth aspiration as to the longer term.

I would put that probability zone as a Gaussian's statistics with a certain parameterization.

I would agree.

Florent you are next.

Florent Cespedes from Societe General. Two questions, please. First, a financial question. On M&A, you reiterated your criteria, notably value creation and accretion on EPS pre. Is there a risk that with the higher interest rates, it could be an impact on the timing of the, let's say, implementation of these elements, notably the EPS pre creation? That's my first question. And second question, APAC, you said is a great opportunity for the company. But maybe could you elaborate a bit on how you will navigate on the short-term risks on this region.

Thank you, Florent. I'll start by APAC, if you want. So look, I mean, I mentioned already in the intro and you know that very well. China is our second largest market, and we have a strong presence in China with our 3 sectors, and the same is true for the U.S., although the presence of the different sectors is different by region. I mean we are -- we have been extremely close to the U.S. government the German government and obviously the major policy decision-makers in order to be able to -- to prevent additional trade restrictions, right? This is our main concern. At the same time, we are securing, right, that we gain -- while we mitigate our potential risk, we also gain more strategic autonomy to serve our China customers. We don't imagine global world without China. And we are expecting policymakers to be able to find acceptable solutions to continue to run globally. Obviously, investment decisions are being evaluated on a case-by-case basis in order to also derisk, our footprint whenever is necessary. But so far, I have repeatedly said that we have not drastically changed our investment policies in any of the countries. So we are more in the diversification piece. I mean the economic dimension is obviously a concern, right? The current anti-corruption Act is another challenge in the short term, but we consider those topics to be more temporary. And we don't see major impact, although we are working on different the couponing scenarios eventually, right, to understand our respect that's we don't really see that the couponing is going to be a reality or it's highly unlikely, let's put it that way.

And with that to the EPS question, I mean, as you rightly point out, given higher interest rates, it is harder to achieve a day 1 EPS accretion. So we would look at EPS accretion most likely at the end of the achievement of all synergies. So that's the way I think is a realistic way to look at M&A for the future.

I think Peter, all the way in the back.

Peter Verdult, Citi. Just 1 question, Belen. I mean, we sat here last year and everyone left Darmstadt thinking capital allocation was all about CDMO. But judging from the conversations we had last night that appetite seems to have shifted. So I know you're not going to call out what you're looking at and what we have specifically, but can you just describe your relative appetites to transact across the divisions?

Look, I think as the strategic frame guiding us is market attractiveness, our ability to win in that marketplace. And obviously, the considerations that Helene detailed as well on following our -- or supporting our growth strategy, right? So, we believe that CDMO is going to -- after the pandemic is going through turmoil, mainly also on the biotech funding and all this. This doesn't drastically change our perspective. We are -- we are going to be looking at Life Science overall as 1 of our top priorities for M&A. And as I mentioned, we don't need to go -- we may go small, we may go big or a combination of both. So it depends on what is going to create more value. And at the end, the targets will be evaluated on those basis.

I think James you already raised your hand earlier?

James Quigley from Morgan Stanley. Just picking up on M&A again in terms of the focus areas. There are 4 on the slide. Is there any order in terms of that priority? Or is it a case of canvassing across all 4 areas and seeing what could create the most value? And then secondly, on China as well, just picking up on that. So you've mentioned about why you're confident from a geopolitical standpoint as to why China is still an attractive market. But in terms of Merck, in terms of competition, in terms of investment, why you're confident that you can continue to capture benefits from that market?

Yes. Very good. So let me start by the M&A question. Is there a priority? Is there an order sequence, I guess, you mean, right? Unfortunately, this is opportunity driven, right? So I mean, we may have a sequence in mind, but it's opportunity driven. And definitely, what we -- what we do with a lot of discipline is to analyze and rebase our portfolio every year to be able to identify not only acquisition target or potential targets, better said, but also to analyze what businesses could be -- could have a lower fit with our own growth trajectory. So we look at everything, right? And there is no predefined sequence right? Normally. So on China, why are we confident? I mean we have a presence of the 3 sectors in China. Healthcare is our biggest sector at this time. We have built a high and very competitive presence over the last 7 to 10 years in China coming out of nothing through our competitive portfolio in fertility and essential medicines, right? So everything that could come to China for innovation will have a potential upside on our Healthcare development. Life Science is definitely a growth opportunity. I mean, we see increasing emergence of biotech in China in novel modalities. I mean the majority of the clinical trials that are being conducted in oncology are in China, 25% of the clinical research that is being conducted in oncologies in China, which is a fantastic opportunity for our Life Science business. Academic -- SLS is already having a very significant percentage of revenues coming from China, and we are very well positioned. And that's why the challenges that we have seen post-pandemic, we once again consider to be temporary. And of course, Electronics is a key market for -- I mean, China is a key market for electronics, in particular, for semiconductor materials. We are still relatively small in that market. So we believe that we have an opportunity to grow. So those are the main reasons, right? That we believe China is a growth opportunity for Merck.

Just 1 point on the M&A. The ability of Merck to position itself in the M&A market across 3 sectors actually is a huge option value, in my opinion, because it really does give the ability to leverage in M&A discussions, and it allows sort of like us to be much more picky in targets. So, I would say like that's a huge, huge positive for this company.

Falko?

It's Falko Friedrichs from Deutsche Bank. On Life Science, please. So I think I heard you just say that you still believe that orders are inflecting in Q4 than sales early next year. Can you just share with us what gives you confidence in that? What are you basing that expectation on? I mean we are in Q4 at the moment. So is it that customers are ordering now in October? Again, do you see that in the books? Just a little bit of color there would be helpful. And then secondly, congrats on confirming the Life Science guidance for this year. I think that's quite an achievement. But is the midpoint still fully in play? Or should we rather think about the low end for this year?

Let me start by the second question because it's very easy, and I will use a sentence from Helene, we will use the full flexibility of our guidance. I mean I think when you look at what the market is communicating, I mean, you have to give us some credit that we have integrated some of the business assumptions in the right way. And that is definitely what we say, we will use the full flexibility of the guidance and what is giving us confidence. What is giving us confidence is that we have a customer survey with 200 customers that we have recently seen. And we have some visibility on the way inventories at customer level are evolving, and they are basically reaching a kind of normalized inventory levels, right? So I think Matthias and the team will give you trillion details on the situation of inventory, but those are the main reasons that we believe we will make the inflection point in Q4.

Rajesh.

Hi, there. Sorry about that. On the M&A strategy, you referred to EPS accretion. Can I ask you one question? If you think of the Life Sciences business or electronics, these are perpetuity, if you're buying, these are not finite cash flow, right? But as in pharma, you get a patent life. So -- do you look at any returns metrics, when you're doing this? Because in low interest rate, even my granny could do EPS accretion. It's a bit more difficult now, right? I get that, but the cost of equity is much higher. So investors are looking for returns accretion. So how does your EPS accretion target, compares with return accretion. That would be the first one. The second question, you called out an SAP integration. If you could give us some color on that? It sounds a bit scary. I don't know what it is. Would really help. Third question is on the Life Sciences. Everyone has a different story, be it CDMO, be it bioprocessing, people are suspending guidance, making up guidance, I don't know. You have given a very clear part of how you see inflection and recovery. Within the various factors, interest rates on customers preserving cash versus biotech funding getting chopped at some parts, what do you think are the relative contributions of the weakness we have seen this year versus the recovery will see forward, i.e., do we get back to the growth rates we had in the past? Or do we go to a lower growth rate in the future?

Do you want me to start with that last one. I mean, once again, we have not seen structural changes into the markets in which we operate. When you look at Process Solutions, we see pharma pipelines being very strong. We see traditional modalities growing -- novel modality is growing even faster than traditional modalities. So biotech funding coming at some point in time, the biotech environment come into a more attractive profile, so research will continue, right? And research and development and manufacturing will continue. So definitely, this will play differently in the different business units, but we have not seen any structural changes. The market is going to be very highly competitive, right? Post COVID. We have seen that already. But we believe our portfolio is highly differentiated. We know the business really well. We are very well positioned in our customers. Now we have even more capacity regionally, and we feel very well prepared to deal with the growth ahead.

I love your question on the EPS because actually, I think we live in a new normative, which means we have interest rates. And of course, in the past, we have said, okay, EPS IR needs to be above work and all of these parameters, but we are right now also looking a little bit at our KPIs. It's interesting because at the dinner, I asked a few of you. So how do you think about equity, equity growth in this new environment. And it's still I get the feeling that actually the market isn't sort of decided itself. So hence, if I wanted to look in my little crystal ball, I would say like something around ROIC, cash conversion, ROCE is going to be on the table, at this point in time, we're doing the work. And you had a third question and...

SAP.

Lovely SAP. Look at [ Jessie ] he loves SAP. So we had an SAP migration in the U.S., the SLS business predominantly. And yes, with SAP migrations, things can go wrong and then they can go very wrong, and I think like we are probably more in the very wrong stage. Having said that, I mean, the team has done amazing work. We have a lot of people out there fixing it. We are very much seeing the light at the end of the tunnel, Matthias and I and Jean-Charles much more confident that we are through the worst. It will have a business impact. But to be clear, we are very glad that we've issued the guidance in Life Science with the way we have done it. This is included in our guidance. So nothing to be scared about.

And we will give you further information during the Q3 call on that precise impact.

Next question?

It's Oliver Metzger from ODDO BHF. So first question is, last year, it was all about resilience. Now basically, you talk more about growth. So if it comes to your M&A strategy, normally, I would assume in a resilient mode, you look more for factors like EPS accretion, so from a financial perspective. When growth, you look more about the strategic because you see a bigger future to come. So would you agree that the likelihood for strategic deals has increased compared to one year ago? Second question is more detail because you mentioned the Addison's and also organoids in particular, as very interesting ideas and to say, okay, we sell them, how do we sell them, how are the payment structures. Is this is just an upfront money you get? Or is it given the nature the kind of continuous payments?

Let me address this question first. So any product that is launched through the sector is associated, for example, if I am not mistaken, this is a software that we are providing to customers. So it's associated to a price, right? simple, very simple. Unless services could be provided on top and eventually, it will become a service fees. For example, in electronics, we have a project in which we are interacting with our customers, we call it [indiscernible]. I'm sure the team will -- may comment this afternoon. Right now, we are in the pilot phase, right? But at some point in time, it will become a service fees. So you should not think of this beyond being innovation sits that at some point in time will become monetized, right? And of course, this is not integrated in any guidance or in any of our business planning for So, is innovation sits and benefiting from bio convergence. I think on the strategic likelihood of the M&A, look, I mean, we have spoken about growth from the very beginning, right? We have spoken about efficient growth. If you were with us in 2021, right, on my first Capital Markets Day, we already identified efficient/profitable growth as one of our enterprise priorities. So resilience, I mean, for us, resilience means our ability to anticipate and deal effectively with adverse circumstances. That's why we have emphasized further resilience. We have a very thorough assessment of our resilience. And now the question or the objective for the Board is to keep the company resilient. And there are many different dimensions. It's not only about diversification cost structure is there and definitely not only about M&A, right? It's not one or the other. We have spoken about this already. There are several dimensions of resilience, like our cost structure versus competition, our ability to our own digital capabilities and digital transformation. So we discussed that more last year in anticipation of what we saw coming right? and the challenges that finally materialize in 2023. But it's not either or. That's what I mean.

We have time for one more last question, Gary?