Merck KGaA (MRK) Earnings Call Transcript & Summary

Welcome to the 43rd JPMorgan Healthcare Conference. I'm Richard Vosser, European pharma analyst at JPMorgan. It's my great pleasure to introduce you to the Merck from Darmstadt session at the conference. It's my great pleasure to introduce Belen Garijo, CEO of Merck to the stage. We will take questions from the audience afterwards. They will also be available on the portal, I think, if it works. With that, Belen, welcome to the conference.

Good afternoon. Thank you very much. Thank you so much, Richard, and good morning, everyone. Very happy to be here. A warm welcome to all of you joining our session. Let me start, if I can get slide numbers, let me start kicking off with message of strong confidence in our ability to deliver compelling structural growth in the near, mid and in the long term. And why is that? First of all, we are uniquely positioned in highly attractive end markets across our 3 sectors, particularly in life science, we are an innovation leader in Process Solutions with other modalities where I am especially proud of our ADC offering. In health care, we are building an exciting pipeline of ADCs and DNA, damage response inhibitors. And in electronics, our semiconductors portfolio is geared towards leading-edge applications. Number two, importantly, we have not only invested in innovation and growth, but we have, over the years, invested quite a lot on making our supply chain very well diversified and resilient. So we are very well positioned to deal with the geopolitical constraints and potential challenges affecting global trade. And geographically, we are positioned stronger than ever before. Number three, resilience. If there is a word that defines Merck KGaA, Darmstadt, Germany is resilience. We have a strong balance sheet and corresponding cash generation throughout the cycle, enabling us to drive business forward organically and also inorganically, building on a stellar track record of portfolio management, both acquisitions but also divestitures. For those of you who may be less familiar with our company, we operate a multi-industry business model focused on 3 leading sectors. Let me highlight a few points. This is a very busy slide. I will not go through this. First of all, as I mentioned, we operate 3 leading businesses in highly attractive end markets with strong secular growth drivers. Second, our portfolio is not only balanced across sectors, but it's also well diversified across geographies and below sectors across customers with a significant presence in local and regional markets. Third, we are focused on innovation-driven businesses. Innovation is part of our DNA and definitely a key enabler of our success as a company with over 350 years of history. And most importantly, innovation is the essence of our future growth ambitions. So let's now move into our most recent history. As you see on the slide, in the last 15 years, we have delivered 8% CAGR of revenues. Underpinning this growth is a strong organic sales growth with a CAGR of 5%. We are absolutely convinced that organic growth is the most important foundation of our ongoing value creation. Value compounding is best represented by a broader set of KPIs. In addition to sales, we should see growing EBITDA, free cash flow and EPS. And as we drive the growth of all these metrics, we are definitely positioning our company to invest for the future to invest to create even more value. Our financial strength is represented in our consistent ability to grow EBITDA at a faster pace than sales and EPS even faster than EBITDA. Our ability to consistently deliver organic growth is, I insist the most fundamental pillar of our value creation recipe and the critical ingredients of innovation combined with technology leadership and attractive mega trends will continue to enable the company to drive organic growth. Turning now from our track record to the midterm outlook. We are expecting to return to attractive midterm growth around historic levels, the ones you have seen before and we are relentlessly focused on improving our margins. We will benefit over time as we grow back into our shoes following capacity expansions with an eye on cost scalability. And that, we see margin upside versus 2024 starting already in 2025. We will also enhance our free cash flow generation after a period of deliberate overinvestment. And I will mention a little bit more of this in the next slide. Considering all this together, our company intends to accelerate EPS growth and returns in the midterm. Let me now go back to this deliberate overinvestment that I mentioned before. A few years ago, we made the conscious choice to significantly invest in our business capacity, which resulted in those years in an elevated CapEx to sales ratio. It has been a priority for us to make Merck even more resilient based on in the region -- for the region approach. And we have made significant progress on our network and capacity expansion priorities with most projects either already completed or to be completed by the end of 2025. So mission accomplished. Today, we are even a more resilient company than ever before. And with this, we target a lower CapEx as a percentage of sales post 2025. As you might guess, ultimately reducing capital intensity will result into additional cash generation moving forward. We have a strong track record in mastering inorganic capital allocation, both in terms of scale, which is the case of life science, for example, and innovation across all sectors. And we continue to build on the exceptional integration track record that we have developed over the years. This is also illustrated looking back at our recent past in 2024 when we further strengthened our profile to stay at the forefront of new innovative technologies. We acquired Mirus Bio, a specialist in the development and commercialization of transaction agents. And we also completed in Q4, the acquisition of Unity-SC, which is a provider of metrology and inspection instrumentation, which is critical in key technologies for artificial intelligence applications. Having said this, we have also in '24, sharpened our portfolio with the signed agreement to divest our Global Surface Solutions business unit. And what does this mean for our M&A strategy moving forward? We have underlined several times, and you have heard me saying and the team saying that our priority is to execute on life science M&A. And we continue to plan to allocate a significant percentage of our capital and our M&A power to the life science sector. On health care, our inorganic strategy is to accelerate external innovation primarily in the form of late stage in-licensing to increase the optionality of our pipeline, but we are also ready to consider M&A in health care if limited to clear cut low-risk deals that would create value from very early on. It will surprise no one that we remain extremely disciplined. To this point, we will stick to our M&A at risk. Are we on the right slide? Okay. So coming to our structural growth drivers, let me go now a bit more in detail into the sectors. The most important structural growth driver sits with our Life Science business sector. We have a strong confidence in the fundamental market dynamics of the life science market as our commitment demonstrates to allocate a substantial percentage of our M&A firepower to life science. The life science market is expected to grow between 5% and 7% annually. We have seen in 2023 an all-time high FDA approvals of biologics, which represents a real step change. We have also seen a stronger late-stage pipeline and the introduction of artificial intelligence, we are convinced will accelerate new breakthroughs. Biotech funding is rebounding and has already exceeded the levels of 2023 based on the data that we have available until the end of October. A factor of relative uncertainty stays with China. However, you have to keep in mind that our exposure in Life Science in China is below 10%. We have a strong and expanding offering for fast-growing novel modalities and our portfolio demonstrates leadership with its breadth, which we look to expand further by building critical mass in areas where we set the industry gold standard. A good example is our ADC offerings that I mentioned before, where we already have a strong platform across the value chain, including linkers, payload and bioconjugation. All of this taken together, this is the reason why we are expecting in Life Science to overtake the market in the coming years. A key driver of our midterm growth ambition in Life Science is our Process Solutions business, which represents 40% of our Life Science business sectors. With our products and services, we address the full value chain in bioprocessing from upstream processing to drug products. We also grow and expand our offering for the production of novel modalities because we are expecting this part of the market to grow at around 20% annually in the midterm and the acquisition of Mirus Bio that I mentioned before is a good example that will complemented our already existing portfolio for vector-based cell and gene therapy applications. Consumables and services account for more than 90% of our sales. Our customer base is very well diversified with 9 of our customers representing or generating more than 5% of our sales in Process Solutions. We also have market-leading positions across the different product categories. Millipore with the filtration franchise belongs to the world's leading life science brands. And we firmly believe that we have the broadest offering, as you can see on the slide in relation to our competitors, we have the broadest offering across market segments, and this is definitely providing a competitive edge for our company. Moving into health care, growth on the global pharma market will continue to be driven by innovation, as you all know. With our very well-established CardioMetabolic and Endocrinology franchise and Fertility, we have very solid foundations, not least thanks to our strong presence in emerging markets like China. However, over the past couple of years, we have generated the majority of the growth of our health care business sector coming from our innovative sales franchise, namely oncology and N&I, neurology and immunology. Following 2 late-stage pipeline setbacks in 2024, we are currently laser focused on reinvigorating our pipeline. And in this context, let me highlight our 2 derisked late-stage assets pimicotinib and cladribine capsules, but also mid-stage enpatoran for which we expect full data this quarter. This is complemented by a growing set of highly promising early assets like ADCs and DDR increasingly moving to mid stage. On top, we are actively studying the market, as I already mentioned, for further in-licensing opportunities for example, including compounds against already established targets and areas of validated biology. We are also open to adjacent areas for underserved patient populations with attractive commercial potential. As illustrated in the chart, we believe that our current pipeline combined with external innovation will start contributing to sales in the mid to long term. In particular, we are expecting to reaccelerate organic growth to mid-single digits on slight growth in the next few years. What is important in this context is that, we do not face a patent cliff in our innovative portfolio, but more of a kind of patent staircase, if you will. Second, we continue to see a very highly resilient and solid growth outlook for our established business franchises given strong fundamental drivers, especially as I mentioned already in developing markets. Finally, health care is and will remain a strong source of cash generation for Merck as we advance our strategic agenda. In electronics, to conclude, we are at the center of the most important innovation in computing power for gears, which is artificial intelligence. We are expecting the semiconductors market to grow between 5% and 7%, driven mostly by the integration of AI broadly. Semiconductors is the growth engine already of our electronic sectors, representing 80% of the division when we exclude Surface Solutions, which as I mentioned, we are planning to divest. Our portfolio is positioned towards leading-edge applications and our offering across materials and delivery equipment is one of the broadest in the industry. Furthermore, the recent acquisition of Unity is further expanding our offering in metrology and inspection tools, which we consider to be a highly attractive market. With the weighting of semiconductors increasing, we also comfortably raised our electronics midterm sales growth target to 5% to 9% at our Capital Markets Day in October last year. In conclusion, 2 key take home messages. First of all, our multi-industry business model and our diversification is a real strength and a big dimension of resilience. We are in a prime position to capture the potential of highly attractive end markets, as I mentioned at the beginning of the presentation. Expect us not to only deliver growth in a changing market environment, we are planning to accelerate our growth trajectory in the coming years. Number two, we will continue to focus on a rigorous execution of our strategy to secure long-term profitable growth. And in that context, innovation, which is already part of our DNA, will remain a key enabler of our success across the 3 sectors. And with this, I would like to thank you for your attention and invite my colleagues, Matthias Heinzel and Peter Guenter to join us on the stage for the Q&A. Thank you.

We're moving to the Q&A session. So if anyone has a question in the room, please put up your hand and wait for the microphone. There is a question at the front. So let's take that. I've actually got mic.

Can you elaborate more on oncology strategy?

On our oncology?

Oncology, yes.

Yes, Peter. Go ahead.

So yes, this works. Thanks for the question. So currently, we are in solid oncology with leading positions, for example, in colorectal cancer and head and neck cancer with Erbitux and metastatic bladder cancer with Bavencio. And it's fair to say that also when you look at our pipeline, we have PARP inhibitor, DDR, we have ADCs. We're very excited, for example, on the anti-CEACAM-5 ADC, on which we will present new data at the upcoming ASCO in -- with the M9140 and M9140. And so solid oncology is definitely one of our strongholds, and we will continue to invest not only in the pipeline, but also looking actively at what's possible in-licensing deals. As Belen has mentioned, for us, it's very important that biology are very nicely validated and that mode of action ideally is already known and precedented. So that's basically the area of focus for the oncology strategy.

Further questions? Maybe we could expand there, Peter and Belen, just on the M&A strategy between the divisions, clearly, a focus on Life Sciences, but also in health care, maybe on both, first of all, but taking health care. What areas -- what business areas, therapeutics you're looking for, any geographic areas you're looking for?

We are -- I mean, as you have heard me say several times, we are expanding the market for basically for innovation -- perhaps I come closer to the mic. So what I said is that what we are looking for is really the opportunity to accelerate our growth and integrate innovation, constantly rejuvenating our portfolio in life science. So contrary to the past in which we were looking also for scale, we have added innovation as a priority, and this is illustrated by our most recent moves in 2024. So we will continue to do that. This doesn't necessarily mean that we exclude the scale but innovation is driving our strategy when it comes to life science. The same is true for health care. I qualified as for health care, we have an additional focus on the U.S. in order to be able to scale our business in the U.S., but we are equally looking for innovation and growth. Perhaps you can add.

Yes, a little color more, if I may. If you look at the deals that we did in the last, let's say, 18 to 24 months, you have seen various types of deals. For example, the deal with Hengrui, where we have the ex-China rights, the deal with Abbisko and pimicotinib that has now read out with very positive Phase III data, where we have China and an option for ex-China. And then we did a deal with a U.S. biotech company where we have global rights ex U.S. It really depends on the opportunity. We would be also looking, for example, for local Chinese deals because we're very strong in China, and we do believe that we have a lot to offer there. So basically, it depends on what type of opportunity comes our way. But from a geographical, let's say, footprint, we can be relatively flexible.

Matthias, do you want to add anything?

Yes. Look, for Life Science, we like the high-growth areas, right? Novel modalities, Mirus was a good example. At the same time, I would say, certainly Process Solutions, a big focus area, but we also see some nice high-growth areas in Science and Lab Solutions, our business where we provide a broad offering for all the scientists across the world and also in Life Science Services. So we have quite a, if you will, a broad lens, but with a very strict and strong focus on innovation. And also keep in mind, we have a very strong global footprint with a strong sales and commercial capability and obviously, bringing in targets where we can leverage that scale and help them to really bring that innovation to scale is a strong value proposition.

We have a question at the back, I think, first of all, and then we'll come to you.

Just on Process Solutions. Maybe you could expand on your view for the market growth for bioprocess.

The question was, can you expand on your views on market growth to bioprocess? Was that the question?

If that normalizes in 2025 or beyond?

Yes. So our view is that we have put most of the volatility behind us, right, with COVID, all this destocking and we remain very positive on the long-term growth fundamentals for the bioprocessing market. Why is that? Nothing has changed, right, in the view around novel modalities, right, the pharma pipeline. So we are really a key partner for those kind of companies. And we see the market growth in the high single digit, right, in the 9% to 10% range. And we are very well positioned to capture that market growth as a business. In our last Capital Markets Day in October, we confirmed our growth expectations for our Process Solutions business around 10% for the midterm.

This is from [indiscernible]. At your position on rare disease. Just for example, you have a fantastic ADC due to -- ADC focusing on GBM in clinical trial. I think it is good target for diffuse midline glioma which a rare disease and affecting to children age of 10 with the expected survival of less than 1 year. I think that's very exciting if you are considering about expanding your therapeutic area to rare disease, that could be a very good choice.

Go ahead.

Yes. So we are definitely not only open to rare disease, but de facto we are already in rare disease because TGCT, which is the product we in-licensed from Abbisko is a rare disease. And you have also seen on the pipeline that we have a Phase III asset, which is cladribine in myasthenia gravis. So I think you also alluded to the 9140, the anti-CEACAM-5, where we will, of course, consider a broad development if indeed the first development holds. And for the time being, we have seen good solid efficacy data combined with a very well acceptable tolerability profile. Whether ultimately, we would also consider rare diseases for the ADC platform, that is not yet decided.

We have a question in front. I'll go again.

[indiscernible]. Can you share your attitude towards synthetic biology approaches in CardioMetabolic disease research-wise?

CardioMetabolic, Peter, I'll let you comment. But in principle, we are very, very focused on oncology and N&I. We are not investing R&D dollars outside of those 2 areas, but perhaps you can speak of our more opportunistic approach on most of it.

No, you're very right. So basically, in health care, we have 4 franchises, oncology, N&I, which are the 2 innovative franchises where actually the vast, vast majority of the R&D dollars go. And then we have the more established franchises, but still solidly growing because we are exposed to growth markets with the CardioMetabolic market. So these are products like Evergreens like Glucophage or Concor or Saizen or Euthyrox, for example. And then we have the All-Star Fertility business, where we are a worldwide leader where based on the demography, we have midsized -- mid-single-digit growth over the last years. Actually, it has been a little bit volatile because of competitor stock out. So we had an abnormally high growth rate in 2023. We had a somewhat lower, more muted growth rate in '24 because that competitor stock out came back. But moving forward, we do expect mid-single-digit growth also for this franchise. But these 2 labor franchises, we would only consider R&D or innovation with late-stage in-licensing deals, for example, in territories where we are very strong with these markets. But it would not go into the R&D pipeline.