In the third quarter of 2024, Merck (NS:PROR) (MRK) reported a solid financial performance, showcasing a 4% organic growth at the Group level and generating sales of EUR 5.266 billion, marking a 2% increase. The company's EBITDA pre rose significantly by 17% to EUR 1.618 billion, reflecting a robust EBITDA margin of 30.7%. Growth was observed across all sectors, with Healthcare leading at 6% organic growth. Merck confirmed its sales and earnings guidance for 2024, despite ongoing market challenges, and anticipates maintaining profitable growth into 2025.
Key Takeaways
- Merck's organic growth at the Group level reached 4%, with total sales of EUR 5.266 billion.
- EBITDA pre increased by 17% to EUR 1.618 billion, and the EBITDA margin was 30.7%.
- Healthcare sector led growth with a 6% increase in organic sales, driven by Oncology and N&I franchises.
- The company confirmed its 2024 sales and earnings guidance, expecting sales between EUR 20.7 to EUR 22.1 billion.
- Operating cash flow increased by 16.2%, and the company anticipates continued positive growth, especially in Healthcare.
Company Outlook
- Merck expects sales for 2024 to be between EUR 20.7 to EUR 22.1 billion, with EBITDA pre ranging from EUR 5.8 billion to EUR 6.4 billion, and EPS pre between EUR 8.20 to EUR 9.30.
- The Surface Solutions transaction is expected to close in the second half of 2025, with a full 12 months of Surface Solutions to be included in the 2025 guidance.
- A gradual recovery in Process Solutions is anticipated, with a soft demand in the pharma sector affecting Science and Lab Solutions.
Bearish Highlights
- North America experienced a slight decline of 0.6% in organic growth.
- The DS&S business declined, and Display Solutions saw a 9% drop in sales.
- The U.S. pharma market is showing temporary weakness, with a flat performance expected in the CDMO segment.
Bullish Highlights
- Europe led regional performance with 6% organic growth, while emerging markets like the Middle East and Africa grew 14%.
- Oncology and N&I franchises reported strong sales, with Erbitux growing 14% and Mavenclad 20%.
- EBITDA pre margin for Healthcare reached a record 39.2%, a 27% organic increase.
Misses
- Electronics sales are trending towards the lower half of both absolute and organic growth corridors.
- Healthcare sales are expected to be slightly below the midpoint of growth ranges.
- Bavencio sales declined due to pricing impacts and competitive challenges.
Q&A Highlights
- Executives discussed the partnership with Helix, stating it is in early stages and does not impact short-term forecasts.
- Growth is expected in the Electronics business from 2025 onwards, particularly in OLED and display patterning.
- The recent acquisition of Unity SC is noted but not included in current guidance.
In conclusion, Merck's diversified business model and strategic focus on innovation have contributed to its strong performance in a challenging market environment. With a robust financial position and a confident outlook for the remainder of 2024 and into 2025, the company is poised for continued growth across its sectors.
Full transcript - None (MKGAF) Q3 2024:
Operator: Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Third Quarter 2024. As a reminder, all participants will be in a listen-only mode. I am now handing over to Constantin Fest, Head of Investor Relations, who will lead you through the conference. Please go ahead sir.
Constantin Fest: Thank you very much Heidi. A very warm welcome to this Merck Q3 2024 Results Call. My name is Constantin Fest, I'm Head of Investor Relations here at Merck. Today I'm delighted to be joined by Belen Garijo, Group CEO; as well as Helene von Roeder, Group CFO. For the Q&A part of this call, Matthias Heinzel, and Sebastián Arana, Head of Process Solutions was in Germany and quick join on short notice. We are delighted to have them with us covering Process Solutions questions. Science and Lab Solutions and Life Science Services will be covered by Belen and Helene. Also, joining for the Q&A of this call, we have Peter Guenter, the CEO of Healthcare, as well as Kai Beckmann, CEO of Electronics. We would now like to guide you through the key slides of this presentation, and after that, we'll be happy to take all of your questions. And with this, over to you Belen.
Belen Lopez: Thank you very much, Constantin and welcome everybody from my side to our Q3 earnings call. Please go to Slide number 5 on the deck, where I will be starting with the highlights. As you saw, we had a strong Q3, in which we further accelerated organic growth to 4% at the Group level. And I am delighted to say that we also generated strong profitable growth in the third quarter, supported by all three sectors. Life science delivered organic growth for the first time since Q1 last year. Healthcare continues to show strong performance across the whole portfolio and the semi market for AI and advanced nodes continues to perform very well driving Semiconductor Solutions sales and supporting Electronics in achieving organic growth in the quarter. Back to the Group, sales increased by 4% organically, while EBITDA pre achieved an outstanding organic growth of 17% in Q3. Life Science delivered 2%, organic sales growth in the quarter. And this is a great achievement in a very highly demanding market environment, which however is steadily improving, And as I have said multiple times already, while we no longer distinguish the impact of COVID-related sales, it is still represents a headwind in 2024. Healthcare was the best performing sector in Q3 with 6% organic sales growth, driven by our innovative franchises, that means, oncology and N&I, as well as by our CM&E portfolio. Electronics showed organic sales growth of 2%, mostly driven by Semiconductor Solutions which now showed year-on-year growth for the third quarter in a row at 7% organically. Now, on reported sales, we reached EUR 5.266 billion, which is an increase of 2% as currency was a 2 percentage point headwind. Reported EBITDA pre of EUR 1.618 billion was strongly up at 12%, including a 5 percentage point headwind from currency. On EBITDA pre, we delivered 2.30 in the quarter, which is a robust increase of 11%. Therefore, we are happy to confirm, our absolute sales and earnings target corridors for 2024, which, as you may remember, we raised with our Q2 results. And I will come back with more assumptions on the guidance later on. Now, moving into Slide number 6, we have a bit more color on the performance by business sector. All our business sectors contributed to the 4% organic growth of the Group in Q3. In Life Science, Process Solutions returned to organic sales growth, while delivering sequential sales growth in a gradually improving market environment. The sequential increase and the year-on-year growth of our order intake now for three quarters in a row raises confidence about the further evolution of our Process Solutions business. Book-to-bill was solid again, staying at the around one. SLS, Science and Lab Solutions achieved organic sales growth in what is a still a cautious spending environment for Pharma Research. Turning to Healthcare, Oncology was supported by strong Erbitux sales and all across regions and indications, while Bavencio has slowed on the back of increasing competition in the US markets. Our N&I franchise got the benefit from Mavenclad in Q3 as the product confirmed its record sales performance from Q2 in Q3 now against this year comparables. Electronics showed slight organic sales growth, driven by our Semi-Material business, which grew in the double-digit, percentages due to AI-driven demand growth and growth in mature nodes in the Asian markets in particular. Regarding earnings, EBITDA pre came in at EUR 1. 618 billion which represent a strong increase of 12% or EUR 172 million. While all business sectors contributed, this was mainly due in the case of EBITDA pre are mainly due to healthcare where we saw an EBITDA increase of EUR 151 million in the quarter, driven by robust sales performance and a temporarily lower R&D spending. In Q3, Life Science and Electronics showed a positive EBITDA growth contribution to the Group for the first time in 2024. Now let's move on to Slide number 7 for a few remarks on our sales by region. Q3 once again, demonstrated the advantages of our globally diversified business with the right mix of business sectors in the different regions, supporting our growth trajectory. In Q3, two of the three larger regions that is Asia-Pacific and Europe were up organically, while North America was still slightly down. Europe grew the strongest and was up 6% organically with a strong growth in healthcare across all franchises, as well as Process Solutions driving Life Science sales in the region. Asia-Pacific was up 3% organically in Q3, which was mainly driven by the strong growth of Electronics and further supported by Healthcare. North America was slightly down by 0.6% organically as the slight growth in healthcare was offset by a slightly lower sales in Life Science. Looking at the two smallest regions, Middle East and Africa was up 14%, while LATAM also grew strongly at 12%. Both regions were mainly boosted by Healthcare, while Life Science also showed strong growth in Latin America. And with this, let me hand it over to Helene for a more detailed view of our financials.
Helene von Roeder: Thank you very much, Belen, and welcome also from my side. I'm on Slide 9 for an overview of the key figures in the third quarter. Taking into account, currency headwinds of minus 2%, net sales increased by 1.8% to EUR 5.266 billion with EBITDA pre growth and margin expansions in all businesses, we've achieved strongly leveraged growth. Healthcare was the main driver of this development. EBITDA pre was up by 11.9% to EUR 1.618 billion even with a higher FX headwind on EBITDA pre of minus 5%, compared with sales. EPS pre increased by 11.1% to EUR 2.30. Operating cash flow came in strong at EUR 1.458 billion, which represents an increase of 16.2% over the year earlier period. This exceeds the increase in EBITDA pre, mainly due to higher operative profitability and improvements in our net working capital. Net financial debt was slightly up, compared with the end of December 23, which was mainly due to the acquisition of Mirus Bio, which closed on August 1st. Let me also briefly comment on our reported results and with that, I am now on Slide 10. EBIT was up by 11.6%, year-on-year in line with EBITDA pre. The financial results were slightly down from minus EUR 46 million in Q3 of last year to minus EUR 54 million this year. The effective tax rate came in at 22.2%, which is around the midpoint of our guidance range of 21% to 23% and actually in line with the effective tax rate from Q1 ‘24. You may remember that the tax rate is showing an increase due to the expected Pillar 2 expenses. And as a reminder, the effective tax rate in Q2 ‘24 was at the top end of the guidance range, as it also reflected the termination of the Xevinapant program. In the first nine months of ‘24, the effective tax rate therefore came in at 22.4%, which is in the upper half of our tax guidance range. Reported EPS came in at EUR 1.86, which is an increase of 9.4% year-on-year. And with that, let's move on to the review by business sector and we're starting with Life Science on Slide 11. Overall, Life Science delivered on its goal to return to organic growth in the second half of the year and showed the first positive organic sales performance since Q1 ‘23 Sales increased by 2.1% organically in the quarter and we still expect to stay on the growth path for the remainder of ‘24. Process Solutions returned to organic growth in Q3, while Science and Lab Solutions have now achieved organic growth for the second quarter in a row. Life Science Services was down, but against a high base. Looking at Process Solutions first, sales were up by 3.7% organically, once again showing a positive sequential trend and increasing by 3% quarter-on-quarter. Order intake continues to improve sequentially as we had expected. I can confirm that we expect Process Solutions to deliver a sequential improvement in both order intake and sales for the remainder of ‘24. At plus 4.3% in Q3, Science and Lab Solutions achieved organic sales growth for the second quarter in a row. Again, driven by high demand from Industrial and Testing and Diagnostics. Excluding the SAP migration effect, which impacted the business by a mid-double-digit Euro million amount in Q3 last year, Science and Lab Solutions would have shown slight growth organically. Demand from pharma companies has remained soft especially in North America. And as you heard me say at our Capital Market Day, we are currently seeing a stronger focus on later-stage clinical development projects at our customers. And China remains muted. Turning to Life Science Services. Sales were down by minus 17% organically, while sales of our Clinical Testing business has increased in the high-single-digits, sales of our CDMO activities were down. As a reminder, we benefited from an end-of-contract payment in a low-to mid-double-digit Euro million amount related to COVID in Q3 of last year. Turning to margins, EBITDA pre increased by 7.1% organically in Q3, which is well above organic sales growth with the EBITDA pre margin having improved by 120 basis points year-on-year and by 30 basis points sequentially. For the remainder of 2024, let me say the following: first, we expect the recovery in Process Solutions to remain gradual. Second, the demand for pharma customers remains soft, which impacts Science and Lab Solutions, And finally, you might have noticed that the sequential step ups in our EBITDA pre margin during 2024 have become smaller. The biggest positive margin driver would be volume growth, while at the same time we expect the R&D to sales ratio to increase and start-up cost to grow as some CapEx projects come to completion. And now on Slide 12 for an overview of the performance of our Healthcare business sector. Healthcare continues to deliver robust organic sales, growth and was up 6.2% in Q3. By franchise, the two portfolios growing the strongest were oncology with plus 9% organic growth and CM&E with plus 8% organic growth. Our N&I franchise achieved organic growth of plus 7%. This was driven by strong Mavenclad, performance of plus 20% organically against soft comps of last year. Oncology was mainly driven by Erbitux, which showed a stellar performance of plus 14% organically in Q3, driven by growth in all major regions. Tepmetko was strongly up organically at plus 37%. Bavencio was slightly down in Q3, at minus 1%, organic performance. Similar to Q2, all regions were up except North America where increasing competitive pressures led to an organic decline. Turning to our CM&E portfolio. This showed a strong performance against Q3 with plus 8% organic growth, which was supported by contributions across all regions and all segments, especially from diabetes, cardiovascular and thyroid. Mavenclad confirmed the record sales levels from Q2 of this year with strong growth in demand from the United States, as well as Europe. Regarding the pipeline, as announced at the Capital Markets Day, in the cutaneous lupus part of a Phase 2 study of Enpatoran, we have seen a positive proof-of-concept with clinically meaningful efficacy and good safety profile. In Oncology, we are excited about the data that came from the readout of pimicotinib Phase 3 study in TGCT run by our partner Abbisko, which was announced a couple of days ago. Coming to EBITDA pre, we achieved a record margin of 39.2% in the quarter. That is 600 basis points above Q3 last year. This was driven by the decline in R&D expenses, both in absolute terms and as a percentage of sales, and by strong sales growth amid strict cost control. We also expand the shift of commercial spending from Q3 into Q4, which overall makes the EBITDA pre margin appear outstanding in Q3. As a reminder, the Bavencio repatriation came into force in Q3 last year, with its effect now, being annualized for the first time. Overall, EBITDA pre amounted to EUR 836 million in Q3 and was up 27% organically. For modeling, in the absence of a major new R&D in-licensing deal, we expect to reduce to sales ratio to remain at this low level in Q4. While seeing a higher commercial spending in Q4, compared to Q3, in line with our typical season pattern. So let’s move on to Electronics on Slide 13.Electronics showed organic growth of plus 2.4% in Q3. The key driver here was Semiconductor Solutions, which was up 7% organically. Within Semiconductor Solutions, Semiconductor Materials showed a strong double-digit percentage organic growth in the quarter, as AI-driven trends and growth in Asia-centric mature nodes persisted. Our DS&S business was down. In our last earnings call in Q2, we explained that an unanticipated increase in demand for delivery equipment compensated for decline in the project business. As a result, the DS&S business was flat in Q2. The anticipated decline in the project business was not compensated in Q3, which resulted in an overall decline of the DS&S business. Projects have been pushed out into at least 2025. Semi Materials continued to deliver strong organic growth year-on-year and also grew sequentially, as thin films and other materials for advanced nodes and AI continued to drive growth. However, a wider reflection of mainstream semiconductor end-markets has not yet happened. Turning to Display Solutions. We saw an organic sales decline of 9%, against high comps. This was mainly due to continuous price pressure and also declining volumes in liquid crystals in Q3. You will have seen that we closed the acquisition of Unity-SC just two weeks ago. We will be consolidating the business into Display Solutions with the goal of developing and delivering new products in the area of optoelectronics, with applications in semiconductors. This signified the expanded focus Display Solutions will be renamed Optronics from the financial year 2025 onwards starting with Q1 ‘25. Looking at our EBITDA pre performance in the quarter, the EBITDA pre margin increased by 280 basis points to 25.5%. This reflects our operating levels through higher volumes and Semi Materials, as well as cost efficiencies also compared against the low base. For the remainder of ‘24, the trends I mentioned earlier for our Semi Materials and DS&S business are set to continue. Further, Display Solutions usually benefits from Christmas ordering in Q3 with Q4 being quieter. Regarding EBITDA pre margins, we said we want to bring capacity expansions online such as a new plant in Taiwan that supports advanced nodes with thin films and other semiconductor materials. This results in start-up costs in the low-double-digit million euro amount, which were only partially booked for in Q3. And while we want to sustain a high level of R&D to benefit from the long-term secular growth of semiconductors, our R&D expenses have also remained stable in Q3. So before handing back to Belen, let me also briefly comment on our balance sheet and cash flow statement. As you can see on Slide 14, our balance sheet increased by EUR 1.6 billion, compared with the end of December of ‘23. Taking a closer look on the asset side. Cash and cash equivalents increased to EUR 3.2 billion from EUR 2 billion at the end of ’23, driven by a strong operating cash flow and proceeds from the issuance of our hybrid bond. Inventories went down with receivables remaining stable. Property, plant and equipment increased as a result of our CapEx investments. Other assets increased, which was mainly due to the reclassification of Surface Solutions as in assets held for sale. And lastly, intangible assets decreased, reflecting the net effect of a number of items including the impairment of Xevinapant. On the liability side, financial debt increased by EUR 1.5 billion, which was – this was partially offset by a decline in other liabilities, which in turn affected by the dividend payments in Q2. Pension provisions were down due to interest rate changes and payables decreased from EUR 3.4 billion to EUR 2.8 billion due to in-licensing deals signed in the prior period, which then resulted in payments this year, And net equity increased by EUR 1.6 billion. Thanks to growth in profit after tax. As a result, our equity ratio strengthened from 55% at the end of the December ‘23 to 57% now. Now we will turn to cash flows on Slide 15. Operating cash Flow came in strong again at EUR 1.458 billion and was up EUR 203 million, compared with Q3 of last year. That is higher than the increase in profit after tax of EUR72 million. This was mainly due to changes first, in other operating activities, which include last year's accounting treatment of the biosimilars divestment; second, in other assets and liabilities, which were in turn driven by lower bonus pay outs and taxes in the quarter; and third, in working capital. Cash out for investing activities increased due primarily to higher investments of our excess liquidity in non-financial assets and the acquisition of Mirus Bio, which closed on August 1st and it's slightly increased CapEx on property, plant and equipment. Last but not least, the difference in financing cash flow, can be explained mainly by the issuance of the hybrid bond in a nominal amount of EUR 800 million during the quarter. The proceeds from the issuance will be used to repay two hybrid bonds and the total nominal amount of EUR 1 billion in December. And with that, let me hand back to Belen for the outlook.
Belen Lopez: Sorry, I don't know if I have been heard. Okay. I continue. So I will start in case this hasn't been heard by everybody, because my microphone was off. So I was saying that, as you have seen this morning, we confirm our 2024 target corridors for the Group. That is that we continue to expect sales in a range of EUR 20.7 to EUR 22.1 billion, EBITDA pre in a range of EUR 5.8 billion to EUR 6.4 billion and EPS pre in a range of EUR 8.20 to EUR 9.30. However, with three quarters of the year now behind us, we want to offer a more precise view and are happy to point you to the lower half of the sales corridor and around the midpoint of the earnings corridor. Organically, we expect sales towards the bottom end of the range and EBITDA pre around the midpoint. Now, before you ask us about 2025, let me share confidence. Why is that? In addition, to the known positive structural trends in Healthcare, we are confident in our ability to continuously benefit from the expected positive end-market developments and trends in Life Science and Electronics and we are confident to keep Merck on the profitable growth trajectory that we have recovered in 2024. Having said these and as I mentioned repeatedly during our Capital Market Day, we will provide further qualitative guidance during our full year Q4 earning calls in March. Now, for some additional details by business sector, let's move on to Slide number 18. As for the Group, we leave the absolute sales and EBITDA pre guidance corridors and change for all the three sectors. While giving you an indication of where we believe we are currently trending within. For Life Science, our best estimate to-date is that we will end the year slightly above the respective lower end of the absolute sales and earning corridors and advance the respective bottom end of the organic growth corridors. Keep in mind that organic sales growth turn positive in Q3 amid a still somewhat soft market and we expect positive organic growth to continue in Q4. For Healthcare, we expect sales as slightly below the midpoint of both the absolute and organic growth ranges. EBITDA pre is forecasted in the upper half of the absolute range and around the top end organically. Key drivers include strongly leveraged growth, paired with cost discipline and as mentioned already temporarily lower R&D cost. For Electronics, we currently see a sales trending in the lower half of the absolute corridor and towards the bottom end organically. Remember that we raised our guidance for electronics in Q2. EBITDA pre should come in slightly above the lower end of the absolute corridor, and in the lower half of the organic growth corridor. Allow me before I close to make 1 additional technical remark on Electronics related to Surface Solutions. While it’s too early to guide on 2025, I want to remind everyone that things are progressing well, and we are on track to close the transaction in the second half of 2025. At Surface Solutions is a still part of Electronics and we are planning to still include a full 12 months of Surface Solutions in our 2025 guidance. Back to Q3 ‘24 and to conclude, please note that all our current guidance ranges remain unchanged. For the Group, let me summarize. Growth momentum is strong and allowing us to confirm our guidance bands for net sales, EBITDA pre and EPS pre. And Q3 is a good illustration of our ambition to return to profitable growth in 2024. Now, with this, we will be all happy to take your questions. Thank you.
Operator: [Operator Instructions] Your first question comes from the line of Sachin Jain from Bank of America. Please go ahead. Your line is open.
Sachin Jain: Hi there. Sachin Jain, Bank of America. Two questions please. Firstly, on Life Science margins – Helene in your commentary you referenced slower sequential growth for Life Sci margins. Should we extrapolate that commentary into ’25, 3Q margin was at 20 basis points sequentially. If that I am going to take that for ’25 over ’24, and ask the question as consensus as margins of around 200 basis points? And then the second question is just try and get a sense of the pushes both for electronics into next year. The commentary is clear that materials is doing very well with some pressure in memory unlock the SSM. So I am just wondering if you are willing to comment directionally on ’25 sales growth relative to mid-term and then we have directional color for Life Sci trending towards the mid-term. I wonder if there are any comments for Electronics from your side? Thank you.
Helene von Roeder: Hey Sachin. How are you? So on margins for Life Science, overall I would like to lead you to what we said at the Capital Markets and also our mid-term guide which is basically we're saying we used to have pre-COVID margins of 31%. We had in COVID margins of like 38% to be expecting to go mid-term back into somewhere into that range. Now as I said, it's pretty clear that the more volume we have, the better our margins will become. And I think overall with blend pointing towards us looking positively in the future, you can see that this operational leverage should be helping us. I hope that helps you in your model. As you know, we don't give ‘25 guidance.
Kai Beckmann: Sachin let’s take this one as this segue into your question on electronic as well. We don't give ‘25 guidelines yet, but if you just kind of do the math on where we land in 2024, we see that with our guidance that we provided today, we will be then for Electronic score already at the lower end of the new mid-term guidance. To give you an indication on how we maneuver going forward and already at the very upper end of our old mid-term guidance, we are outgrowing our old mid-term guidance already. How is that composed? We have seen the, continued strong performance of Semiconductor Materials Now with fifth quarter in a row of sequential growth and last two quarters have been in the mid-teens already in the performance. And course in DS&S you are comparing with extremely strong 2023 and three consecutive years of record performance this year is obviously a bit softer, but this gives then kind of the math on how that whole thing is going forward. The market itself will see continued gradual recovery. So step-by-step, we see markets coming back and of course, proven this year clearly by advanced nodes and AI needing to prong as just mentioned. So this is the systematic that you can put together in order to get an understanding on how markets will develop going forward. Of course, guidance will only be provided one quarter from now.
Sachin Jain: Thank you.
Operator: Thank you. We will take our next question. Your next question comes from the line of Jo Walton from UBS. Please go ahead. Your line is open.
Jo Walton: Thank you. Can I ask you a bit about the pharma R&D. just to think about the time frame over which you will be going back from the lower end of the number that what we saw in 3Q through to - through to um, a range is it next year? Or is it the year after just to give us some sense of how quickly you will increase that reinvestment? And in terms of Life Sciences, I wonder if you could tell us a little bit more, just thinking about the book-to-bill at one, just some of your thoughts there, please.
Peter Guenter: Hi Jo. It's Peter speaking. To your question on R&D, so first of all as mentioned already by Helene, for Q4, of course we shouldn't expect any material change in R&D spend given the fact that we haven't done any major licensing deals in that quarter. In 2025 and beyond, I think you have to look at two blocks, yeah? The internal blocks of all the products we have in the pipeline. And what we know about them and then of course, the other which is a more unknown block is future in-licensing, when does it come? How large will it be? And how many products we are talking about? What I can tell you about the internal R&D that we see a positive momentum, both in N&I and Oncology in our internal pipeline, I remind you that as mentioned also by Helene that we have the positive readout for enpatoran in the CLE cohorts and we will readout the SLE cohorts early 2025. We have our cladribine Phase 3 study in mg where the recruitment is actually ramping up very nicely. In Oncology we're going ahead with our plans for DDR (NYSE:SITC), with for example, the two receptive combinations. And then also, we have a quite exciting pipeline in ADCs, where we just started the anti-GD2 and then the anti-CEACAM5 our frontrunner is moving into Phase 1b earlier this year and is ongoing. Everything, obviously that would be external innovation would be on top of these. So, for your modeling, I would say count for 2025 to a gradual recovery of these numbers and more of a steady state beyond 2025. I hope that helps.
Jo Walton: Yes, it does. Thank you.
Sebastian Arana: For your second question here Sebastian Arana for Process Solutions. Yes, as you noticed, book-to-bill was again around one reflecting both the sequential increase in order intake and sales in Q3. But as we know and as we have shared before, we believe in the short term a better leading indicator for now is order intake. And the quality of the orders we’re receiving and I'm happy to report that we're seeing in both sides sequential improvement as we have said before there's an H2, H1 dynamic where we are seeing sequential growth both in sales and order intake in H2 versus H1. But also we are seeing a gradual improvement in order cycle time and order size coming back to pre-COVID levels. So all in all we continue to feel cautiously optimistic about the recovery in the bio processing market.
Jo Walton: Thank you.
Operator: Thank you. We will take our next question. Your next question comes from the line of Sophia Grace from JPMorgan. Please go ahead. Your line is open
Sophia Grace: Good afternoon, and thanks for taking my questions. One on Life Science. How are you seeing the Process Solution recovery vary by customer group, including pharma, CDMO, larger biotech and emerging biotech? And how do you expect this to develop going forward? And then, just on Electronics, what are your latest thoughts on the shape of recovery for the remainder of the semiconductor market into 2025? Can we expect continued momentum in the AI and advanced nodes portion of market given the strong growth we've seen this year?
Matthias Heinzel: Yeah, maybe I can start with the first question regarding Process Solutions to create context, right? We confirm again H2 versus H1 a gradual order intake and sales recovery. As we have said before, the CDMO space, customers have recovered faster than originators also regional pharma counts have recovered faster than originators. And having said that originators order intake is sequentially now coming back to a positive order intake trend. Regarding emerging biotech, we don’t have big exposure there. So, really minor percentage of our sales are coming from this segment. So it’s not impacting significantly our sales performance for next year. So all in all, the summary I would say, all major customer segments are in a positive trend, positive trajectory with the order intake sequentially and year-over-year better.
Kai Beckmann: So, let me take the Electronics question. So given the experience that the last quarter, then getting more careful on predicting the exact quarters of recovery for the semiconductor market. But I think what’s obvious is for AI-related technologies they are good drivers of growth in next year one is additional capacity and yeah, no transitions of our main customers. And second is the adoption of what is called AI, the Edge. So AI compute on end devices. Those two drivers will identifying how fast AI will be driving growth into next year. For the other areas like memory and analog, we will continue to see a gradual recovery, right? Don’t expect it at what quarter that will get steeper, but I think it will continue on the levels that we have seen for the past quarters at least for the next couple of weeks and months. And then we shall see some more drive in that process according to market analysts and according to our customers reporting currently, as well.
Sophia Grace: Thank you.
Operator: Thank you. We will take our next question. Your next question comes from the line of James Quigley from Goldman Sachs. Please go ahead. Your line is open
James Quigley: Great. Thanks for taking my question. One on Process Solutions and one on Pimicotinib. On the Process Solutions recovery, can you give us the reasons as to why are we seeing significant growth in Europe and slight declines in North America and rest of the world? And what this means in terms of the recovery going forward? Is it going to continue to be driven by Europe? At what point would the other two regions can catch up and some bio processing? And then for me, on Pimicotinib, we saw the positive data earlier this week. So what are your initial thoughts on the data that we've seen so far and particularly with respect to the competitive dynamics and how does this data influence your decision on the timing around the option exercise for global rates? Thank you.
Matthias Heinzel: So, I can start with your question around Process Solutions. And maybe I can start framing regarding order intake, our major leading indicator. We are seeing sequential improvement in order intake across all regions. So behind the EMEA, North America and APAC results, there's a positive year-over-year and sequential order intake improvement that give us confidence that the growth is coming across all regions. Right? Regarding sales performance in Q3, effectively, as you said, EMEA was driving the growth for Process Solutions reflecting that the recovery in our major customer segments in EMEA was a little bit earlier that the rest of the regions and, but we see these normalizing in the next few quarters as order intake comes back to growth and is coming back to growth as we speak. So, pretty confident of the growth projection for all regions across Process Solutions.
Peter Guenter: Yeah James. It's Peter speaking. Regarding your question on Pimicotinib, obviously we're very happy with the readout that we got very recently. Primary endpoints ORRs of 54% at week 25, which looks actually well differentiated if you would look at cross-study comparisons. Moreover, every single secondary endpoint was met - that was met like, for example, stiffness, pain, range of motion et cetera. And then, last but not least, we saw actually a very low discontinuation for treatment-related adverse events. We think TGCT is a mark of it actually very high unmet medical needs especially the diffuse forms of TGCT which actually create for those patients, very severe disabilities. Treatments today is actually surgery, which actually where patients relapse very often. And there is actually no global systemic standard-of-care. In terms of competitive dynamics, well let's say, the frontrunner which is had an FDA approval, but with a black box warning and with a REMS program and it has not made it through the EMA. And then, we have Osimertinib and then, if you compare cross-study comparison, I would say that the ORRs of PROBABLY seem to be higher. And also, when you look at the in vitro profile of the two products, you will see that Pimicotinib has actually superior potency and selectivity. So again very happy about that. Now in terms of your question, exercising the option, look, we just received the data 48 hours ago. The open label extension is going and we will decide on the option exercise in due course.
James Quigley: Thank you.
Operator: Thank you. We will take our next question. Your next question comes from the line of Charles Pitman-King from Barclays (LON:BARC). Please go ahead. Your line is open.
Charles Pitman-King: All right. Thank you very much for taking my questions. Two on Life Sciences if I may. Just firstly on Science Lab Solutions. I was wondering if you give us a few comments on how you see the funding environment evolving, particularly given your comments around the stabilizing APAC region? And then, for the US following election how it impacts NIH funding could be for your outlook? And then a question on Process Solutions. I know that we discussed the exit rate of Life Sciences going into FY ’25. But I was wondering if you could just kind of give us more of an idea of how you feel orders will progress through to FY ‘25 as an exit rate? And specifically on your - very appreciate the guide for 4Q. What has changed to provide you that visibility and how that confidence in providing that information today? Thank you.
Belen Lopez: Hey, so, on SLS, let's go through the three buckets. On Academia indeed NIH funding has been approved in March. But it has been slightly cautious. And what is important for us that it represents less than 10% of sales in SLS. If you then look at the US pharma market indeed, we have seen temporary weakness and we attribute that to the fact that like basically people are spending more money in the development part rather than the research part, that is good for Sebastian, but it's not as good for the SLS business. And then, indeed China, we have seen really at the beginning of the year, the China market bottoming out, Sorry my English. But what we haven't seen is the recovery that we have had predicted into going forward. Now, if you look at China, we can see that the market continues to remain muted and as you know, in our Capital Markets Day, we toned down our mid-term, guidance in Life Science, as a result of China, not expecting to be growing to a double-digit going forward.
Peter Guenter: If I can comment on your second question regarding order progression and 2025 confidence for Process Solutions. Well, as I said before, the sequential growth in order intake that we are seeing in H2 versus H1 across our portfolios, across our regions, is really giving us confidence in 2025, right? We see 2025 more of a normal year for us in term of growth for Process Solutions. You also ask about our exit rates even though we are not guiding 2025. We don't see, we don’t give precise quarter view. Our growth in Q4 should be trending towards our mid-term guidance. So again, we are feeling good with the order progression in 2025 as most of our customers have gone through the destocking period and is part of the past that we continuously confirm in our conversations face-to-face to customers. And also during the multiple service we're doing throughout the year.
Charles Pitman-King: Great. Thank you very much.
Operator: Thank you. We will take our next question. Your next question comes from the line of Thibault Boutherin from Morgan Stanley (NYSE:MS). Please go ahead. Your line is open.
Thibault Boutherin: Yes, thank you. Just first question on Science Lab and Solutions. You are quite precise at the CMDN and it’s like the reason for reaching the bottom end of the guidance this year for Life Science. Even adjusting for the SAP and past in Q3 last year there was still a slight growth in Q3 this year. So can you just comment on was there any SAP impact in Q4 last year? And is this kind of side growth in line with the comments you made on the biopharma on your rounding weeks. So you just – that progress to expecting to [Indiscernible] Second question on the Life Science Services, you highlighted last COVID-19 impact in Q3 last year. In Q4 that was a quite strong as well. So is there anything specific we should keep in mind in terms of comp base in Q4 for Life Science Services? Thank you.
Helene von Roeder: So, on SLS indeed, we had an SAP impact in Q4 also last year. And so we do have a relatively easy comp for Q4. I think what you need to know in SLS is something that when we look back pre-COVID, we had seen pretty clear seasonality across Q3 and Q4 with a Q4 a rather stronger quarter and Q3 a rather weaker quarter. So overall, we remain very confident in the business. We are seeing good growth in our lab order business, in our bio monitoring business. And hence, we feel like we're well on track here. If we look at LSS, I think overall nothing comps-wise that we have to keep in mind. Now to be perfectly honest, as we've said many, many times, our CDMO business is rather a start-up business. And because of the actual size of the start-up business, it could be that we have simple batches moving back and forth and we have phasing element. So to me as a CFO and Mathias I'm stepping in here for you. So changing it aside, I'm rather looking at the annual result of LSS rather than quarter-on-quarter progression.
Operator: Thank you. We will take our next question. Your next question comes from the line of Falko Friedrichs from Deutsche Bank (ETR:DBKGn). Please go ahead. Your line is open
Falko Friedrichs: Thank you. Two questions please for me on Healthcare. Firstly on the Bavencio I think this this has been the first quarter where we saw a sales decline for this drug. So could you elaborate a little bit on the reasons for that? And also how we should think about growth next year? Is it plateauing now, or is there still further growth potential with that drug? Secondly, on Erbitux, very nice growth again. Maybe you could spend a minute on the drivers behind that, and also whether that is something we could expect to continue in 2025? Thank you.
Peter Guenter: Yeah, Falko, thanks for your two questions. So first of all, let's remind us ourselves that the US part of Bavencio is round about 30% yeah. We also flagged a bit of a pricing impact in Japan. And nevertheless, we have an overall stable result and that is of course due to continued growth ex US and ex Japan, yeah. And what we also said is that we see a maturing growth profile obviously given the competitive intensity of EV 302 and that I think the market is gradually also in the US, by the way, understanding that EV 302 is not a one-stop solution for all patients and that it’s really on an individualized patient profile that bode options for EV 302 and maintenance therapy with Bavencio remain actually first-line options. So thinking about next year, obviously, we won't see growth anymore next year. But I would reserve a more precise guidance for later during 2025. And on Erbitux, actually, we see that strong momentum continuing and actually, there are a couple of reasons for that. I think the most structural fundamental reason is the fact that Erbitux is really a backbone therapy for many other let's say options in - especially in the field of colorectal cancer. And so there is a lot of studies ongoing, even some with registrational in terms of products that combine with Erbitux. And then the second element is the market expansion in China, because of NRDL listing, both by the way in colorectal as head and neck cancer. So I hope that gives you a little bit of insight.
Falko Friedrichs: Thank you.
Operator: Thank you. We will take our next question. Your next question comes from the line of Dylan Van Haaften from Stifel. Please go ahead. Your line is open.
Dylan Van Haaften: Good morning guys. Just two questions from my side. Firstly, just a clarification just on LSS. So if we take the testing business on and clearly look at CDMO business ex the COVID one-off, did you guys grow year-over-year? And then my second question just would be on Process Solutions. So, given that then you guys are guiding for another sequential order book growth and overall growth was pretty good on a soft comp. But the fourth quarter comp is also pretty weak. Why are you guys a little bit more, let's say cautious in affirming, maybe a mid-single-digit exit of the year in Process Solutions? Thank you..
Matthias Heinzel: Thank you. So let me start with the second question regarding Process Solutions. Again, we see ordering intake sequentially improving H2 versus H1. We expect Q4 to continue that trend in order intake sequentially improving. And we see our – as I said before, right? Q4, trending towards our mid-term guidance. What I think it's important to mention here is we – as we have said in the last couple of quarters, we see a gradual recovery in the order intake trends it's not going to be an hockey stick or a deeper or I should say a rapid order intake trend upwards. It's more a gradual recovery that will lead us into this growth in - exit growth in Q4 trending towards our mid-term guidance. We remain positive and I am confident in 2025, as we continue to see the market recovering back to bio processing. So, and again, I would like to reinforce this with the latest survey we did in the market in Q3 where 70% of our customers are saying that the destocking is part of the past. Still about 30% are navigating the final phase of the destocking in H2 of this year and early in 2025 again reflecting this gradual recovery, again in a very positive trend towards 2025.
Belen Lopez: On CDMO, sorry, we had to do a bit of math here and the answer is we're more or less flat. So, if you uh look at the CDMO business, you then take the one-timer off, the rest of the underlying business has been behaving pretty flat.
Dylan Van Haaften: Excellent. Thanks guys.
Operator: Thank you. We will take our next question. Your next question comes from the line of Oliver Metzger from Oddo BHF. Please go ahead. Your line is open
Oliver Metzger: Good afternoon. Thanks for taking my question. First one just as a clarification in Process Solutions. You made the comment about Q4 sales expansion improvement. Is this comment meant on absolute sales or do you see - expect also sequential improvement of the organic growth rate? Second one is on Electronics DS&S? There are different cycles to my understanding. Last year, it was more about infrastructure. And now it’s for the clipping all the steps. Can you comment about the underlying volatility and where you see the current cycle now? And the last one is on Healthcare. Comment on fertility, for last year, you have a strong tailwind from the competitor’s stock out there for very tough comps. You still achieve the in my view quite decent results. So, can you just give – say a few words about the underlying trends why this sales remains on this attractive level? Thank you..
Peter Guenter: I guess that was Process Solutions. So building on my previous statements, the answer is yes. We're expecting both a sequential improvement in both in absolute values and inorganic growth. So, again, reflecting the positive trend we are seeing in order intake.
Matthias Heinzel: Yeah, on DS&S, so lastly we saw the so-called Shell (LON:SHEL) First approach and many new construction projects and we had multiple projects at the same time that is defining kind of prescribing points are we coming from. This year it’s more a clipping – I could say, clipping the fabs with additional equipment and of course our service that part of the business – service business having used continued to grow as volumes continue to grow. We got the sweet moving parts. Okay? New factory, large projects, turnkey project, second is equipment and third is services and equipment is not continuously deployed while the – are a bit more put in the longer timeline.
Peter Guenter: Yeah. Oliver, on fertility, I think you're exactly right. Of course, we have difficult comps. And we guided towards stable to slightly growing sales. That's exactly where we are actually. But Of course the underlying fundamentals remain very healthy in this business. And actually, the main factor is of course, waiting longer to achieve the dream of parenthoods and therefore infertility rates go up and we see indeed a continuous increase in cycles in the market. Of course, there are other elements that also support additional tailwinds. For example, I was in in Korea the other day and you see that fertility rates are actually at the record low 0.73 in this country and as a result, actually, the soft Korean government declared infertility a national emergency and I think that’s absolutely warranted. And we see that then, certain subsidies come into play to also make the whole procedure of infertility treatments, not only the drugs, but the whole procedure more affordable and therefore, you see also then the volume increase. So, long story short, we remain confident in a mid-single-digit growth rate moving forward.
Oliver Metzger: Okay. Great. Thank you very much.
Operator: Thank you. We will take our next question. Your next question comes from the line of Rajesh Kumar from HSBC. Please go ahead. Your line is open.
Rajesh Kumar: Hi. Good afternoon. Thanks for taking my question. Just thinking through your 2025 expectations on Process Solutions, understandably, order books are sequentially improving and you expect a gradual recovery coming to the 7% to 9% growth and then giving towards bottom end next year and then building from there. I mean, you clearly know more about the supply chain than we do. What is it that you have seen in either the inventory levels, order patterns that makes you so certain that the growth will be towards the bottom end of the range next year, especially given the soft cons and potentially the first year of recovery, after two years of decline? Or is it conservative down here, adopting until you know better by first quarter next year? And then you would revisit this presumption?
Matthias Heinzel: Well, thank you for your question on Process Solutions. Maybe let me start clarifying a few things. We did not say bottom end next year. We we're saying we have reached towards our midterm guidance for 2025. But let me give you some color on the reasons why, right? Because that’s I think it’s an important element here. Number one, based on the data we have, we see majority of our customers have gone through the destocking process. So, most of the destocking effect is over in the industry. That's number one. Number two, the order intake pattern is coming back to normal. Again, the sequential growth improvement is reflecting that across our portfolios, across our geography. And the third element here is the quantity of the orders is also improving. The size of the orders is back to normal and this cycle time reduction, the cycle time of the order is also coming down reflecting that lead times in the industry are back to normal and for sure in our case. So that's - those are some of the market dynamics that we're seeing, as we speak that give us confidence in 2025. But again, 2025 will be more of a normal year for us in Process Solutions turning towards our mid-term guidance in terms of the growth.
Rajesh Kumar: So, just to be clear, you do not have a leading indicator that tells you what the Q4 growth would be. So you've made some assumptions there, right?
Matthias Heinzel: We have a pretty good view of Q4 based on the order intake we have for the quarter. Can you repeat please?
Rajesh Kumar: Not this quarter, the next quarter, but Q4 in ‘25, I'm assuming your visibility is to quarter one, quarter two next year, not beyond.
Matthias Heinzel: We have pretty good visibility on the order book. Of course, Q4 2025 is a way above lead times, right? So the closer the quarter, the more visibility we get. But based on the trends, we're seeing in the market and again, the destocking effect of some of the orders patterns we were reflecting. We feel pretty confident that 2025 will be more of a normal year. Having said that, it's also important to mention we don’t comment on quarter breakdown in 2025. At this time it’s more a total year view.
Rajesh Kumar: So it could be very well above the range if the recovery is stronger than you are factoring in?
Matthias Heinzel: We don't comment on that. I think we're sharing everything we're seeing now is in a very - I would say, gradual recovery towards 2025, yeah.
Constantin Fest: I think we have time, Heidi for one last question, please.
Operator: Of course, please stand by. And your final question comes from the line of Simon Baker from Redburn Atlantic. Please go ahead. Your line is open
Unidentified Analyst: Hello. This is [Indiscernible] speaking behalf of Simon Baker? Just few questions. If you could just give an update on the partnership with Helix, that would be helpful? And the second one is, can you update on the time to stabilization in display beyond ’25?
Kai Beckmann: Can you repeat the question please? We didn't get it partnership with whom? Sorry.
Unidentified Analyst: The partnership with Helix.
Kai Beckmann: Do you have a dis-context on the question, please?
Unidentified Analyst: If you could just update on how you are managing, how you're progressing with that that would be really helpful.
Kai Beckmann: This is the other Merck.
Unidentified Analyst: Looking for MSD, sorry to say. We have no partner to tell.
Kai Beckmann: Wait, wait, wait, wait.
Unidentified Analyst: Look, I mean you've got us off guard on this topic.
Belen Lopez: All right. So we need to come back to you on this topic.
Unidentified Analyst: Okay.
Belen Lopez: And yes, now, definitely the fact that the Board is not yet on the topic is a very early, supply-related partnership that that is what we can give. Because, we are not able to give you an update. We will come back to you on this topic. It's very small and it doesn't really have implications on the quarter and the future - the short term future.
Unidentified Analyst: Okay. And then the second question is on the Electronics business if you could update on the time to stabilization in display beyond ’25?
Kai Beckmann: Yes, so we said always in our strategy from 2025 onwards, we start growing again. We're a bit more ambitious at the Capital Markets Day by saying 2025 is the first thing of course this is still within the additional scope of display. It doesn’t include the recent acquisition of Unity. We just closed the acquisition of Unity SC a company in the continuous integration in haematology space very interesting technology for driving the advanced integration schemes for artificial intelligence that is just being done. This is not yet included in the guidance. So and the moving parts are increased revenues for OLED as well as increased revenues for the display patterning business then compensating for the continuous decline of our Liquid Crystal business that is what we call the stabilization of display to be well on track as per those commitments and having the development this was exactly confirming what we had said at the Capital Markets Day, as well.
Unidentified Analyst: Yes.
Constantin Fest: Thank you. Uh this is I think all the time we had for Q&A. Thank you so much for all of your questions. And with this I'd like to hand over to Belen for some closing words. Over to you, Belen.
Belen Lopez: Thank you, Constantin and thank you, everyone for joining the call. I would like to wrap it up with the three main messages. One, we have delivered a super strong quarter in which Life Science for the first time is back to organic growth with excellent in-process solutions and very well placed in the other two business units. The other two business sectors are performing as planned. Message number two, based on all leading indicators that are available to us to-date, as we have been discussing during the call, we have a strong confidence on deliver a very solid 2024. Point number three and more important, we are also confident to keep our profitable growth trajectory in 2025 and with this more to come in our coming road shows and conversations in coming days, And looking forward to meeting many of you in those road shows. Thank you so much for your interest in Merck. And goodbye.
Operator: Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.
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