Merck KGaA

XETRA:MRK

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the Merck Quarter 1, 2021 Analyst Telco Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Constantin Fest. Please go ahead.

[Constantin Fest, Head of Investor Relations]

Dear ladies and gentlemen, a very warm welcome from my side. My name is Constantin Fest. I'm here the Head of Investor Relations at Merck. And I am delighted to have with me here today for the presentation, but also for the Q&A, Belen Garijo, CEO of the Merck Group; as well as Marcus Kuhnert, CFO of the group.For the Q&A part of this call, Peter Guenter, CEO of Healthcare; and Kai Beckmann, CEO of Electronics, will also join to answer our questions on Healthcare and Electronics. Matthias Heinzel, our new CEO of Life Science will join this call for a brief introduction while Andrew Bulpin, In Charge of Life Science Process Solutions, will be available for your detailed questions on Life Science and Process Solutions in particular.Two more things, if I may. [Operator Instructions] And the second topic, please be aware that we reserve a little bit more than 1 hour for this conference call due to roadshows starting right after that.Having said this, I am very happy to now hand over to Belen in order to kick off this presentation. Over to you, Belen.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Constantin, and a very warm welcome, everyone. Before going into the details of our quarterly results, let me make some general remarks. First, starting by sharing that it's a real pleasure and a great honor to be here on my first earning calls as the CEO of Merck.I'm truly excited to lead the company forward, and it goes without saying that my aspiration is to secure an even more successful future for Merck. We have a strong vision at Merck that is widely shared by all our leaders and, of course, by the Executive Board of the company. This is to accelerate our leadership in science and technology across all our sectors, globalize our business even more and mobilize for growth everywhere.Over the coming weeks, together with my colleagues on the Executive Board and our global teams, we will further detail and complete our strategy and prepare to make important decisions, starting by capital allocation decisions to ensure long-term profitable growth and sustainable value creation. Based on the several meetings I had with many of you in recent pasts, I am acutely aware of your interest to learn more about our plans and our priorities, and we will dedicate our entire Capital Markets Day in September to share and to discuss these plans with all of you.Your feedback is very important to us. And I strongly believe in the mutual benefit of further strengthening our connection with capital markets, maintaining a spirit of transparency, clarity and a very honest dialogue. And in this context, I would like to make 2 points. First, on my pharma background, a question that I frequently receive you can expect that I stayed a business champion for all our 3 sectors. Since I joined the Executive Board in 2015, I have been deeply involved in shaping the transformation agenda of the group, which provided me with the opportunity to brush the strategic challenges and the strength of all our businesses.Second, I believe in deep content debate best led by the respective business owners and, therefore, I will sit in every quarterly call and be joined by all my colleagues on the Executive Board from now on. This will give you the opportunity to hear first-hand information from our business leaders. In addition, you can expect deep dive into selected topics, which are relevant to the quarter represented by the respective business leads. For example, our Head of Process Solutions, as Constantin mentioned, Andrew Bulpin, is here with us today.Having said this, let's focus today's discussion on our Q1 results. I am now on Slide 5 of the presentation, starting with the highlights. We are off to -- as you see on the slide, we are off to a very strong start into the year. Organically, sales increased by 12.2% in Q1 and EBITDA pre rose 36.3%. Taking into account the significant currency headwinds, reported sales and EBITDA pre came in at EUR 4.6 billion and EUR 1.5 billion, respectively.Based on this strong performance and the improved outlook for the remainder of the year, we raised our full guidance and as usual, at this time of the year, get a bit more specific, now anticipating net sales in a range of EUR 18.5 billion to EUR 19.5 billion, with EBITDA pre reaching EUR 5.4 billion to EUR 5.8 billion, and EPS pre of EUR 7.50 to EUR 8.20. More details on our assumptions later on.On Slide #6, you will find EBITDA on the contribution to growth by the prospective business sectors. As you can see, all 3 business sectors have contributed to our organic sales growth in quarter 1, once again, underscoring the strength of our portfolio, and the potential of the so-called big 3, namely increasing revenues from process; the recent Healthcare pipeline launches, and last but not least, our Semicon Solutions business.Our Life Science business had an outstanding performance with 27% organic sales growth, while Healthcare showed moderate organic growth with Electronics being slightly above the same quarter of last year. We have been confronted with significant currency headwinds of almost 6%, precisely 5.8% on group sales and small portfolio effects related to the divestment of Allergopharma at the end of Q1 last year. The remarkable growth of Life Science was led by Process Solutions, which delivered sales up 38% organically. Research Solutions also accelerated further from an already strong Q3. Both businesses saw strong underlying demand and COVID-related tailwinds. About half of the growth in Process Solutions is COVID related and about 40% in research is COVID related, while our Applied Solutions business also delivered a very solid performance.Moderate organic growth in Healthcare was supported by a broadly stable base business, and this comes despite the impacts from VBP in China and the healthy growth of new products, namely Mavenclad, Bavencio and tepo. The highlights of the quarter include an acceleration to 22% organic growth of our Fertility franchise and Bavencio sales more than doubling organically versus the same quarter last year.In Electronics, solid organic growth in Semi Solutions and Surface was offset by the continuing decline in display. Please also note that we expect momentum in Electronics to improve throughout the year as Q1 was slightly held back by some phasing effects in DS&S and Kai may provide additional detail later.Looking at the earnings, the group EBITDA pre margin expanded by 560 basis points to 32.6%. The main levers to our quarterly earnings were, first and foremost, strong growth in Life Science, Process Solutions, Bavencio milestone payments in Healthcare and, importantly, continued cost discipline across the company.Moving on to Slide #7 for the regional perspective on sales in Q1. You see that compared with previous quarters, organic sales growth further accelerated across all regions with the exception of Europe, which is mainly the result of tax comparables for our General Medicine business.In fact, aside from Europe, where growth was in the mid-single digits, we have recorded double-digit organic sales growth in all regions with Life Science being the primary driver and North America as the fastest-growing region in Q1. Above all, it is important to note that our footprint remains very nicely balanced, with significant exposure to strategically important growth markets in Asia Pacific at 36% of sales, followed by Europe at 29% and North America at 27%.I'm going to stop here and hand it over to Marcus, who will provide additional color on our financial quarterly results.

[Marcus Kuhnert, CFO & Member of Executive Board]

Many thanks, Belen, and welcome also from my side. I'm now on Slide 9 of the presentation starting with an overview of our key figures for the first quarter. As mentioned by Belen already, our results show a very strong start into the year. Despite significant currency headwinds, group net sales increased 6% to EUR 4.63 billion, while EBITDA pre rose 28% and EPS pre was up 45% compared to Q1 2020. The financial result and tax rate improved significantly, and I will comment on this in more detail in a minute.The operating cash flow more than doubled to EUR 1.2 billion, supported by sound work in capital management and also some phasing. Net debt was down by roundabout EUR 700 million compared to year-end 2020, and the net debt-to-EBITDA pre ratio sequentially improved from 2.1 to 1.8.Moving on to Slide 10 for a few comments on our reported earnings figure. The EBIT increased by EUR 327 million year-on-year, in line with EBITDA pre. The financial result improved significantly due to refinancing benefits, the progress of deleveraging the group and lower LTIP provisions. The effective tax rate came in at 24%, in line with our new guidance range of between 22% and 24%. Consequently, earnings per share rose by 63.8% to EUR 1.72 compared with EUR 1.05 in Q1 last year. Please note that we expect further downward pressure on the effective tax rate in the coming months and an increasing share of profits will be recorded in lower tax countries.It also implies that as of Q1, the underlying tax rate for the calculation of EPS pre will be 23%. We will, however, in the future, monitor carefully and closely any changes in tax regulations. So these effects are not captured here.And with that, let's continue with the review of our business sectors, starting with Healthcare on Slide #11. Overall, Healthcare had a solid start to the year with organic sales growth of 3.5%, reflecting a broadly stable base business and growth of over 40% in new products combined. By franchise, oncology performed strongly with sales up 20% organically as Bavencio sales more than doubled on further uptake in UC first line, and Erbitux rose 10% on a robust growth in China.Please note that while Erbitux sales did not include any contributions from temporary supply agreement with Eli Lilly in Q1, we expect about EUR 60 million from the remaining shipments in Q2. Fertility also had a very strong quarter with sales up 22% organically, driven by an ongoing recovery across all regions, with particularly encouraging momentum in Asia Pacific and in the U.S.Turning to N&I. Sales were down 4% organically and a 17% decline of Rebif against past comps was only partly compensated by the Mavenclad growth of 26% and is still depressed dynamic market. However, we continue to gain share and are optimistic that increased vaccine uptick paired with differentiated vaccine response data bode well for the market trend outlook.Last but not least, our CM&E franchise remained fairly resilient at minus 4% considering tough comps related to stocking effects last year, and the volume based procurement impacts on Glucophage and Concor this year. The pipeline saw no significant COVID-related delays, and we look forward to data from the Bavencio Phase III NSCLC trial later this year as well as the initiation of the Phase III study of xevinapant in cisplatin-ineligible patients for the head and neck.Regarding earnings, EBITDA pre increased 29% organically, supported by about EUR 45 million higher nonrecurring income compared with Q1 last year as well as continued cost discipline and reduced face-to-face activities. On the topic of nonrecurring income, please note that we booked about EUR 50 million milestones for UC first-line approvals of Bavencio in Europe and Japan, around EUR 20 million of deferred income from GSK and around EUR 5 million from active portfolio management.Our full year guidance for nonrecurring income remains unchanged compared to what we told you in March, while for Q2, we expect around EUR 20 million from GSK and a low double-digit million euro amount from active portfolio management in total.Moving on to Life science on Slide #12. Overall, Life Science delivered a truly outstanding performance with organic sales growth of 27%, including about 12 percentage points from COVID-related business. In other words, the core business performed very robustly with growth of about 15% supported by all business units, regions and customer segments.From a portfolio perspective, Process Solutions was once again the main driver of organic growth accelerating to 38%. This performance is a reflection of strong demand across all product lines, including those used in COVID vaccines and therapies, paired with a successful ramp-up of additional capacities. Order intake growth also came in strongly at more than 60% plus quarter-over-quarter compared to last year's first quarter.Turning to Research Solutions. Performance was equally encouraging with an impressive sales growth of 24% organically. Also here, we saw strong performance of the core business and a significant contribution from COVID-related sales in particular raw materials for diagnostic tests. Last but not least, Applied Solutions also had a robust performance with 8% organic. Like in the other 2 business units, growth was broad based across product lines, albeit COVID-related sales were negligible.In terms of customer segments, we saw growth across the board with pharma and biotech and diagnostics continuing to lead, followed by industrial and testing and academia. All customer segments saw double-digit organic growth, except academia, which showed a high single-digit increase. And in terms of regions, all showed double-digit organic sales growth across all major regions.Regarding earnings, EBITDA pre surged 50% plus organically implying significant margin expansion of 600 basis points year-on-year to 37.2%. Main drivers behind include strong operating leverage as well as positive mix and pricing. But please also do not expect the Q1 margin to continue over the year. We have to further invest to support the extraordinary growth.Moreover, also some tailwinds in Research Solutions will decline over the next coming quarters, which means less positive mix effects going forward. Still, we project a significant margin increase over prior year in our guidance, so we are roundabout 250 basis points up when taking the midpoint of sales and EBITDA pre guidance compared to 2020.And with that, let's move on to Electronics on Slide #13. Overall performance of Electronics was somewhat muted in the first quarter, with organic sales up by 0.2% as growth in Semiconductor Solutions and Surface Solutions was mitigated by ongoing declines in Display. To add some additional color here, following a very strong Q4, Semiconductor Solutions reported solid organic sales growth of 3.7% in Q1. This is below our midterm ambition of 6% to 9%, but can be explained by project phasing and our ideas for that business, as Belen already mentioned, which may also have an effect on growth in future quarters.In fact, our Semi Materials business showed healthy growth, in line with our expectations despite no logistic bottlenecks mainly from seaport congestion resulting, for example, in limited availability of containers for certain destinations. Sales of Display Solutions declined 7% organically as growth in OLED was more than offset by the continuing decline of Liquid Crystals. As explained to you before, the COVID-19 pandemic has slightly accelerated the negative trajectory of display, but we see signs of easing. Last but not least, Surface Solutions returned to organic growth of 5% in Q1, mainly due to an ongoing recovery in the automotive industry.In regards to earnings, EBITDA pre increased 2.4% organically, and despite significant currency headwinds, the margin increased by 10 basis points year-on-year to 31.8%. This development was supported by diligent cost management amid successful execution of Bright Future and delivery of Versum cost synergies in line with our latest target.I'm now on Slide 14 for a few remarks on our balance sheet. The EUR 2.1 billion expansion compared with the end of last year mainly reflects the strong growth of the business, currency effects and a significant increase in cash and cash equivalents, in turn related to the very strong operating cash flow. Hence, working capital increased, albeit slower than sales, and the equity ratio improved 2 percentage points to 43%.On Slide 15, you will find an overview on our cash flows. As mentioned before, operating cash flow was very strong at EUR 1.2 billion, mainly reflecting a significant increase in earnings paired with only moderate working capital outflows. The difference in investing cash flow is mainly due to the divestment of Allergopharma last year, while CapEx remained about stable and was largely driven by capacity expansions in Life Science. Finally, financing cash flow was close to 0, while Q1 last year included fund refinancing measures.And with that, let me hand back to Belen for the outlook.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Marcus. I'm now on Slide #17. Starting with a brief update on ESG. You already heard about our new sustainability targets, which we introduced at the end of 2020. Be reassured that this topic is of utmost importance to me, and I am convinced that an integrated sustainability approach will help Merck and our businesses to perform even better. In fact, we are not addressing sustainability as a reporting obligation, but rather as a cornerstone of our innovation agenda. The Executive Board will champion this strategy, and we are very pleased that 3 weeks ago, the Annual General Meeting approved the new Executive Board compensation system in which sustainability objectives are included.We are currently working on concrete measures to steer our way towards our sustainability targets and can now develop a set of key performance indicators to build the sustainability factor for the compensation system. Smart KPIs will help select the most effective initiatives to improve in the spirit of our sustainability approach. One example for such is the virtual power purchase agreement we signed in the first quarter with Enel Green Power. This so-called PPA is an important component of our strategy towards climate neutrality in 2040, and it will significantly increase our share of renewable electricity.With this, let's move to Slide #18 to take a look at our COVID-19 assumptions for 2021. As you can see, there is no material change to the overarching assumptions that we laid out to you back in March. By business sector, our assumptions for Healthcare and for Electronics are confirmed. However, we meanwhile became a bit more optimistic on our assumptions for Life Science. We now believe that COVID-related demand in Process Solutions will be even stronger than previously assumed, thus translating in an improved growth outlook as additional capacity comes online. Still on Life Science, the trends for the other 2 businesses are expected to be a bit more volatile as well as diverse across the different customer segments. Yet we have become more precise, now assuming that COVID-related effects will be positive in research and very limited in Applied.Moving to Slide #19. I would like to give some additional color on the outlook of Life Science in the context of the pandemic because, as you know, this is our main growth engine for the future and overall, as a business dedicated to making infinity solution possible as our new Life Science CEO would say, we put our purpose to action to fight COVID-19 through accelerated innovation and increasing investment. Following some headwinds from the initial lockdowns in the spring last year, we have significant growth acceleration amid an underlying business recovery and increasing tailwinds from COVID-related businesses.As I mentioned before, about half of the growth in Life Science since Q2 last year can be attributed to product leverage in COVID vaccines, COVID therapies and COVID diagnostics is skewed towards Process Solutions and followed by Research and minimal effects in our Applied Business.Demand across significant parts of our portfolio has been truly unprecedented. And in that context, we have acted with agility and very decisively to address the bottlenecks as needed. In the last 12 months alone, we have announced investment of over EUR 380 million in total, and we continue to make excellent progress in terms of increasing our output from our existing plants and ramping up new production sites.Most recently, we were able to accelerate very important initiatives even further, namely the one for single-use assemblies involving Danvers and Molsheim and the one for filtration involving our Jaffrey site. Paired with the strong demand across both core and COVID-related business, this is also one of the main reasons behind our guidance upgrade from Life Science. And de facto, we now expect our Life Science COVID-related sales to more than double in 2021 compared with 2020 and our Process Solutions COVID-related sales to increase by a factor of at least 2.5x.Overall, the situation, as you know, remains very dynamic, and it's still difficult to speculate on the magnitude and sustainability of COVID-related demand in the medium term, but happy to answer questions later. However, we foresee a potential need for vaccine and therapy approaches well beyond the current year. And therefore, we expect at least EUR 500 million of COVID-related sales in Process Solutions by 2022.Meanwhile, core business dynamics remain very encouraging, and we continue to review the long-term demand for the product from our portfolio against the expected capacity to be ready to act accordingly.Moving to the next slide. Let me offer a very brief update on Mavenclad in light of COVID-19. Mavenclad is an important strategic growth driver for Merck. And while Q1 performance was a bit muted related to the difficult market environment that we've described before, we continue to remain confident in the outlook of Mavenclad. 2.8 million people living with MS globally have started and will continue to be COVID-19 vaccinated over the coming weeks and months.We believe that all these patients, regardless of their background therapy, need to be reassured that the vaccination will actually work and will generate immunity. Therefore, in this upcoming vaccination era, one of the most burning questions we are receiving from the MS community is whether COVID-19 vaccines will work for patients on certain types of MS therapies.What you see here is actually the first ever published real-world study by independent investigators in Israel, and we believe it speaks of the differentiation of Mavenclad versus other high efficacy therapies in this very challenging context of increasing vaccination.The data speaks for itself. The study demonstrated that all Mavenclad-treated patients who received an mRNA COVID-19 vaccines were able to mount a full antibody response similar to that healthy people. This appears to be in stark contrast to the other 2 high efficacy drugs for which the protective humoral immunity was significantly lower. And we believe that this data are great news for the MS community and also an opportunity to uniquely position Mavenclad for future growth.With this, let's take a closer look at our upgraded guidance on Slide #21. As you see there, we expect group net sales in 2021 in the range of EUR 18.5 billion to EUR 19.5 billion; EBITDA pre margins in a range of EUR 5.4 billion to EUR 5.8 billion; and earnings per share pre in a range of EUR 7.50 to EUR 8.20. And this is based on organic sales growth of 10% to 12%, organic EBITDA pre growth adjusted for the Biogen provision reversal in a range of 16% to 20%. And significantly above what we had anticipated at the beginning of the year due to an improved demand outlook pair -- importantly paired with a continued focus on cost discipline. FX is expected to be a headwind around 2% to 4%, both on sales and EBITDA pre. So slightly less compared to what we have communicated to you in March.For details on the outlook by business sector, let's take a quick look on Slide #22. In brief, and summarizing, we expect group to sales and EBITDA pre growth to be supported by all 3 business sectors, with Life Science expected to grow fastest followed by Healthcare and Electronics. Relative to our qualitative outlook from March and already -- and as already mentioned, we have become more positive for all sectors, although Life Science clearly stands out.And with this, and before opening the Q&A, it is with great pleasure that I would like to hand it over to Matthias Heinzel, who joined us April 1 as our new CEO for Life Science, for a few introductory remarks. Matthias, over to you.

[Matthias Heinzel]

Yes. Thank you very much, Belen, and hello to everybody on today's call. First of all, a big thanks for the warm welcome, which I received from my Merck colleagues across the globe. And since many of you on the phone probably don't know me in this sector, so let me quickly introduce myself. So I'm Matthias Heinzel. As Belen mentioned, I joined as the CEO of Life Science for Merck just a few weeks ago. I came from DuPont where I spent the last 18 years holding various senior business leadership roles and working in different locations like in Germany, Denmark and the United States.Most recently, I was serving as a member of the Executive Board and President of the Nutrition and Bioscience business. Prior to that, I held various leadership roles across marketing, strategy and business development in the telecom industry in the early '90s, and I actually started my career at McKinsey. So for me, there's actually no better time than now to join Merck, and I'm really excited to be heading up Life Science. It's such a great business like what we have seen today with our results and operating so successfully in such a highly attractive market.The tremendous capabilities, the broader portfolio and vast global footprint of Life Science is such a great foundation for driving the future profitable growth of the business for the benefit of our customers, shareholders and employees. And obviously, the COVID-19 pandemic is just one example of the positive impact we can make in the critical role we play.I have already had the opportunity to engage with many of my new colleagues. I did already many virtual site visits and get engaged on many of the critical topics. So I am really looking forward to getting to know you, our investors and analysts and engage actively in discussions with you, especially after I completed my first 100 days.So that said, I'm really excited to work with Belen and my executive team colleagues to take an already great business to the next level. And with that, back to you, Constantin.

[Constantin Fest, Head of Investor Relations]

Thank you, Matthias. Kian, could we have the first question, please?

[Operator]

[Operator Instructions] We can now take our first question from Richard Vosser from JPMorgan.

[Richard Vosser, Senior Analyst]

First question to Belen, please. Belen, I realize you mentioned that the Capital Markets Day would be dedicated to a strategy update. But I was hoping if you could give us maybe your first ideas of how you see Merck's strategy? Are there areas that need some changes of focus or different emphasis or parts of the group that need strengthening, or have become less relevant in your opinion, in your sort of first look over the group, again, in your new role?And then second question, please, just on Mavenclad. The quarter was, I think, weaker than expected. Is there any price pressure in the U.S. or Europe? And you mentioned you were confident, but how do you cross the path from here with sort of annual sales of EUR 600 million to the EUR 1 billion to EUR 1.4 billion?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Richard. As mentioned, for detailed information, we will spend a full day together in early September, and this is around the corner. But let me give you the 3 principles. First, continuity. We are starting this journey from a very solid position of strength. Second, focus. Focus -- stringent focus on the 3 big and keeping our cost discipline to deliver sustainable and profitable growth of our business. Last but not least, obviously, as our cash position improves, we will be contemplating how do we strengthen our outlook by eventually considering a better balance between inorganic efforts across the sectors and eventually a string of pearls approach starting in 2022. More to come in September.

[Peter Guenter]

Richard, it's Peter Speaking. Thanks for the question on Mavenclad. So clearly, there is no price pressure for the time being nor in Europe nor in the U.S. So the relatively depressed sales in Q1 are entirely due to the depression of the high efficacy markets. There is absolutely no performance issue. We continue to gain market share in the high efficacy market, both in the U.S. as in Europe. And we are confident that with the decreasing lockdowns due to the increasing vaccinations that this high efficacy market will progressively resume to its normal levels as we -- as the year-end falls.Last, I think Belen has already mentioned this, of course, the vaccination data are absolutely key. They are extremely relevant for the neurologists and the patients at large. And we do think that it may let a unique position to further drive up our market share in the rest of the year.

[Operator]

We can now take our next question from Matthew Weston from Crédit Suisse.

[Matthew Weston, Managing Director and Co]

Two questions, please. The first on Life Science. I'm slightly confused about the outperformance in research. COVID diagnostics has obviously been a very important driver for the last 9 months that hasn't materially impacted that business. So I'd be very interested to understand why that's now a feature of 1Q. But also, I'd love to understand the trends in the non-COVID bioprocess revenue. Is there any evidence that your customers are stockpiling normal orders so that essentially revenue has been brought forward, and that is going to have to correct at some point in time when everything moves back to a more normal supply chain post-COVID?And then secondly, a finance question for Marcus. I know that you've lowered the tax guidance on core. And I completely understand that, that is driven by the mix towards Life Science. But given that we are in a period where we've got exceptional Life Science income, and we've also got a number of governments pointing towards higher corporation tax going forward, I'd be very interested to understand what you baked into those tax assumptions for the midterm? Is that something which is specifically for 2021 or something that we should assume as a useful guide going forward?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Matthew. Let me start with research, and I will ask Andrew to continue with process. So research is strong, right? Research is strong in relation to 2 factors: one, low comparables versus last year; second, a kind of catch-up effect deriving from the reinitiation of activity mainly in pharma and biotech. So we have seen an ongoing business recovery across all business lines, across all the regions and across all the customers as this pharma lab activity continues to pick up.Is this going to be going into the future? I mentioned already as part of our brief comments during the outlook, we are not expecting so. So keep in mind that during the first half of the year, we are going to have very tough comparables because Q2 will be -- Q2 2020 was also a difficult one in relation to COVID. So we are expecting that the second half of the year will not be behaving exactly as per the standards that we have seen in Q1. That is the bottom line. Then for the process, I said, Andrew, do you want to comment on Matthew's question, please?

[Andrew Bulpin, Head of Process Solutions]

Sure, absolutely, not a problem. Matthew, and hope you're well, and thanks for the question. In terms of the question as to whether or not we believe our customers are stockpiling, absolutely not. We have worked very, very closely throughout this pandemic period with all of our customers. I think one of the big challenges is with the surge demand, in many cases, where we have supply pinch points, it's very much hand to mouth. So we have worked very closely with all of our major accounts to ensure that they're getting what they need as best we can deliver when they need it, but certainly, having to manage that sort of inventory and flow of materials because of the surge demand.Overall, with respect to the base business versus COVID-19, last year was about a 50-50 split; this year, quarter 1, similar. So very strong base business. And I think there's just a lot of activity going on in the industry. The traditional modalities, the MAPs remain very, very strong. And with all the new novel modalities, there's opportunities because they're going after diseases and conditions that historically were untreatable. So robust market right now and very good tailwinds from COVID-19.

[Marcus Kuhnert, CFO & Member of Executive Board]

Matthew, I would take your tax rate question, obviously. So first of all, let me reconfirm that you are absolutely right. The main driver for having reduced the effective tax rate guidance for 2021 was indeed a changed country mix of the allocation of our profits before tax, and that is obviously predominantly driven by the strong growth dynamic in Life Science, where more gains are rising, for example, in the U.S., which currently is a country which has a below-average tax rate.So out of that, we can immediately conclude that we will see for the foreseeable future, for the near future, a continuous downward pressure on the tax rate as we believe and this was outlined by Belen also in the presentation, that also next year, we would still get at least EUR 500 million additional COVID-19 related sales, and that will unfold, obviously a similar downward pressure than what we have seen this year.Your second assumption, Matthew, is also right. We see at the moment a lot of uncertainty regarding the future development of tax regulations in countries. That is obviously to do with the fact that nations -- countries are now contemplating on how to digest the economic effects of the COVID crisis. And we believe that, in many cases, tax rate adjustments are likely to come. Please acknowledge that now in May, it is just too early to give a longer-term projection, that is why we feel secured to say the lower tax rate of 22% to 24% for the time being is only valid for 2021. But rest assured that we will give you a further update in the course of this year on, let's say, what's going on, on the tax regulation front and how this might impact then the tax rate going forward into 2022.To conclude with one last sentence. Currently, how I see it at the moment, there's only one thing, one single event that could really, I would say, change the picture significantly, and that is if we were to have a big U.S. tax reform. That is something that's being contemplated and considered, but still in a very infant stage. And as I said, we'll keep you updated when the year unfolds.

[Operator]

We can take our next question from Peter Verdult with Citi.

[Vineet R Agrawal, Research Analyst]

Can you hear me?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Yes.

[Vineet R Agrawal, Research Analyst]

This is Vineet here, on behalf of Peter. We have got 2 questions. So the first one is on Electronics. Can you talk to the ongoing uptick in the chip demand? And how that plays versus your 6% to 8% growth target at Semi Solutions? Is the double-digit growth scenario to consider in both 2021 and 2022?And the second question on Life Sciences. We appreciate that the 37% margin you posted in 1Q is unsustainable. But similarly, the 32% to 33% range you have previously guided to also looks too conservative. Now given the mix change we have seen within the Life Sciences business, what is the sensible level of profitability to assume going forward?

[Kai Beckmann]

I will go first on the Electronics question.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Yes, please, Kai, yes.

[Kai Beckmann]

Thanks for the Electronics question, and you were referring to the growth expectation and related to the Q1 situation. Just bear in mind that our Q1, of course, compares to a very high Q1 last year. And the -- our delivery systems and services business is not as steady as a material business. That's why we see quite some jumps from quarter-to-quarter. And if I could guide you to slide number, what is it, 37 in the backup, you can see the organic growth quarter-by-quarter listed there. And it demonstrates it's a steady situation, all in all, over the past 5 quarters.The outlook, that's why we are confident looking forward on the next quarter, which is included in our guidance for 2021 with a very, let's say, strong outlook that we have demonstrated here. I wouldn't want to give any outlook on 2022 right now. I think the situation doesn't permit an outlook for 2022, but you know our long-term guidance for Semi Materials -- Semi Solutions being in the up to a high single-digit growth shows that we are pretty confident on the long-term trends, and our customers announcing capacity upgrade, significant capacity upgrades that may onstream in about 18 months that gives us additional confidence about the future in Electronics.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Let me answer with the second question, and I will ask Marcus to build on that. When you look at the future, we have repeatedly said that we are extremely confident about the Process Solutions sales growth. But please take into account that we will also have to invest. We need to invest on growth of our Life Science business. We need to invest in R&D. We will need to invest also in CapEx, even if this will not be seen here. With that in mind, and we will find the right balance and stay efficient, but assume that our intention is to invest on growth of Life Science in order to keep the outlook as promising. Marcus?

[Marcus Kuhnert, CFO & Member of Executive Board]

Yes. Thanks, Belen. That is, of course, I would say, the strongest argument. My point is only a little bit to complement that or add to that. Maybe one effect what we could also mention is that while we believe that the Process Solutions tailwind will remain strong over the course of the year, what we have seen in research this first quarter was most likely quite unprecedented. And here, we might see a somewhat declining tailwind over the coming quarters. We will still see a very benign and positive business environment. But I doubt that we will see these growth rates going forward, also having in mind that we -- at the top that the comparables are getting much, much tougher.As you know, a significant portion of the margin improvements are also due to positive business mixes. And when the COVID-19 related tailwind, at least in research, declines a little bit, so will the positive business mix effect. Still, our guidance entails, if you take the midpoint in sales and EBITDA, a 260 basis points increase in margin, which would lift the margin of somewhere -- from 32% end of last year to a level of close to 35% in 2021. And I would say that's quite a nice margin expansion.

[Operator]

We can now take our next question from Sachin Jain of Bank of America.

[Sachin Jain, Managing Director]

I had a couple more on Life Sciences, if I may, and kicking off with Process Solutions. Firstly, for the quarter, I think process growth of 38% organic compares to peers in the high 50s. So when you just compare and contrast, give us any color on the performance there in terms of capacity constraints or your order book delivery time lines potentially being longer?Secondly, Belen, in your introductory comments, I think you mentioned process COVID sales of EUR 500 million by '22. I just wanted to clarify whether that was delivered in calendar year '21 or that was a comment for '21 and '22? And if it was the latter, if you could give us any color on the split across the years? And then I guess to wrap the question, I guess, the simple question that I get asked is, you've been very clear on sustainability of COVID tailwinds into '22. I guess the question is, is the COVID tailwind in '22 the same, greater or less than the tailwind in '21?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Sachin. I'm going to ask Andrew to speak about the order book for Life Science first. Andrew, can you comment on that and give a bit more color, please?

[Andrew Bulpin, Head of Process Solutions]

Sure, absolutely. I think there's a couple of things. One, I think you're correct in the analysis that the transformation of orders into actual sales really depends upon the availability of short-term capacity. And there, we certainly have some pinch points. But I think some of the elements that we are seeing is that the quick decisions we took last year to accelerate capital investments are starting to show dividends, they came onstream in early January, and we've seen the uptick of the output, as we demonstrated in the numbers for this year. And we will continue to ramp up throughout this year.We also announced an investment, for example, in Danvers, which is our single-use, that's now onstream, in Jaffrey for our filtration products. That's now on stream, and we're feeling the benefit. But also looking at it geographically, an investment in the single-use facility in the Strasburg area on our Molsheim campus, which I think gives us a little bit extra sort of protection from geo diversity, and having a more global network moving forward. So it's definitely moving into that right direction. The order intake and the order book remains strong, and we look forward to being able to deliver upon those as the capacity ramps up in these new investments.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

So Sachin, let me take your second and your third question on the COVID-19 tailwind. Once again, the magnitude on the sustainability of the COVID-related demand is kind of difficult to assess in the medium term, given the uncertainty associated about -- associated to the durability of the current approaches as well as the potential implications of mutants. However, we see a reasonable chance that the COVID-19 pandemic would turn endemic, which puts again potential requirements for boosters and hence, the need for vaccine and therapy approaches well beyond the current year.So this is our global view and actually capturing our assumptions, the ones I have shared with you before for 2021 and beyond in a way and on the view that we have for coming years. Based on the visibility that we currently have what I hinted during the presentation is that we are expecting to see at least EUR 500 million of COVID-related sales for our Process Solutions business in 2022.

[Andrew Bulpin, Head of Process Solutions]

Belen, maybe if I could just add an extra comment on that. If you look at the sort of profile, for example, of the booster shots compared with the original vaccination programs, this is actually -- you know some discussions with the main producers, these actually are a different formulation and perhaps will contain less active ingredient than in the original vaccination shot. So just as a watchout, when you hear sort of 1 billion doses in 2021 going to 3 billion doses next year, that doesn't necessarily translate to a 3x increase in the business level.

[Sachin Jain, Managing Director]

Can I just take 1 follow on. Just for that EUR 500 million you've pointed to in 2022, what is your guidance assume for '21? It looks to be about EUR 700 million to EUR 800 million. And what was that number in 2020? Again, it looks to be about EUR 200 million. I wonder if you just clarify those numbers, so we get the sequencing right across the years?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Yes. Marcus is going to take that.

[Marcus Kuhnert, CFO & Member of Executive Board]

Yes. So Sachin, I think the 2020 number was something around EUR 400 million. We project a factor at least of 2 for 2021. So that means we would end close to EUR 900 million most likely in the course of this year, total COVID tailwind, whereby the majority of that is obviously happening in Process Solutions. And for '22, as Belen just outlined, something in excess of EUR 500 million.

[Operator]

We can now take our next question from KC Arikatla from Goldman Sachs.

[Krishna Chaitanya Arikatla, Research Analyst]

I have 2, please. The first one on Mavenclad. Just trying to understand the softness here a bit more. Are you able to provide any detail if the softness is coming from fewer patients rolling into the second year of treatment? Or is this driven by fewer patient starts, please? That's the first one. The second one on COVID demand in the quarter in Life sciences. Is this predominantly driven by COVID vaccines or is there a decent chunk from COVID antibody treatments as well, please?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

KC, let me address the first question very quickly. So the majority is coming from vaccines, with a smaller percentage coming from diagnostics and therapeutics almost, very, very small so -- vaccines. Peter, Mavenclad.

[Peter Guenter]

So KC, thanks for the question. So what you have is actually 2 impacts. First, the confinements and the lack -- there is a clear correlation between mobility and new patient starts, okay? So basically, the bulk of the depression of the high efficacy market is due to lower patient starts. And there is a bit of an effect on year 2 patients because remember, last year in March, we started to see an effect on the new patients in the first COVID wave, meaning that you have a bit of an effect also on the year 2 returns of that patient cohort that was supposed to be treated in March last year, which was not treated and, therefore, also did not come back this year in March. But I would say the build of the effect would be on the new patient starts. And we see it, by the way, on both sides of the event.

[Operator]

We can now take our next question from Falko Friedrichs from Deutsche Bank.

[Falko Friedrichs, Research Analyst]

My first question is coming back to the EUR 500 million of COVID revenue in 2022. Thanks for providing this number. Did I understand it correctly that this only relates to the Process Solution side of the business? Or does that also include the potential COVID revenue in the Research Solutions business? Or would the Research solutions business come on top of the EUR 500 million? And then secondly, on this ongoing semiconductor shortage, could you maybe elaborate a bit more on how this situation should affect your business throughout the year? And to what extent your Electronics business could profit from it?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Falko. Just to clarify to your first question, this number is the floor, and it refers to our Process Solutions business.

[Kai Beckmann]

I'll take the question on the semiconductor side. So the shortage is, of course, the signal that our customers are running full steam right now in high utilization. That means there's, of course, a certain limit to current capacity. But our customers have been announcing capacity increases over the past months, which gives us a very strong confidence about the future outlook of semiconductor production capacity, basically our target market.But the current situation, the shortage situation will continue until new capacity is onstream. And this may not be much earlier. And as I said earlier in the question, 18 months from now. That's the situation we are in, but currently, full utilization across all different areas in semiconductor.

[Operator]

We can now take our next question from James Quigley from Morgan Stanley.

[James Patrick Quigley, Equity Analyst]

I've got a couple left really. So Mavenclad, I'm not sure if I've missed this in the release because you didn't give us an idea of what the U.S. versus ex U.S. split is. And then in relation to the interesting data on Slide 20, so Roche have been saying that atezo response is still maintained in patients and offering protection in patients who have other risks and the COVID vaccine. Then when we look at the infection rates in the Phase III trials for CD20 therapies, they're not significantly elevated.I mean, do you have any other evidence or real-world data to suggest that patients on CD20 therapies are more susceptible to the COVID-19 infection? And in which case, the data that you presented, it could be very, very powerful. And then also sort of on MS, could you give us an idea of what the exit rate or the latest data -- or the last month data you have shown for the high efficacy market trends in the U.S. to just sort of get a sense of the opportunity here for Mavenclad in that area?Then second question on Fertility dynamics. What are you seeing across the different regions, in sort of where are we in terms of the reopening of fertility clinics? Are we sort of close to full reopening in the U.S. and APAC where you saw particular strength or is there more to come for fertility?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Peter, please?

[Peter Guenter]

Yes. So thanks a lot for the questions, James. So first of all, the split between the ex U.S. and U.S. is roundabout 50-50. There is a little bit of variation quarter-by-quarter, but roundabout, that's what you would think about, okay? On the whole debate around B cells and T cells, humoral and cellular immunity, I would say that we have definitely very strong data that we do create a humoral response with very strong antibodies, identical really to normal subjects. And you see very, very different data coming from the other high efficacy products.Now the whole debate around T cell immunity, I wouldn't go into that space. I think that the burden of proof is on the other high efficacy products. And I think they have a bit of work to do to prove indeed that you would mount a cellular immune response.In terms of market share trends in the U.S., so in the high efficacy market, if you look at the latest dynamic share points, we're roundabout between, I would say, 5% to 6% in the dynamic, and we're roundabout 2.5% in the total market going up. We have a bit of a different situation in most European countries, where we have an average high efficacy share of roundabout 10% plus.On Fertility, so extremely excited by what we see in that market. It's really a great place to be in. There is a sustainable tailwind in terms of demographics. Obviously, there is a relatively low and weak level of competition. And after the dip in Q2, you saw actually the markets coming back relatively quickly to a normal situation. And now we have actually even a bit of a cash-up mode, which is partly explaining the quite stellar Q1 result. Don't forget, of course, that in Q2 last year, we saw a pretty dramatic impact of COVID and the consignments. So expect, of course, a very weak comp in the quarter to come.

[Operator]

We can now take our next question from Simon Baker from Redburn.

[Simon P. Baker, Head of Pharmaceutical Research]

Two, please. Firstly, on Display Solutions. You said in the slides that OLED is not yet compensating for LCD weakness. I wonder if you could tell us when you expect that to be the case? And how far off we are from OLED compensating for the LCD declines?And then secondly, for you, Marcus. It's a small point, but I just wanted to check. On Healthcare, there's been a bit of a shift in the amount of amortization of intangible assets within cost of goods and marketing and selling expenses, one is significantly higher the last year, one is significantly lower. I just wondered if Q1 is a good trend for the year and if there's been any accounting policy changes?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Kai, do you want to take the first question?

[Kai Beckmann]

Simon, I will take your OLED question. And so the OLED materials market is supposed to be on the same level as the Liquid Crystals materials market about next year. That's as far as the market data shows. But bear in mind that our position in Liquid Crystals, of course, is stronger than the OLED. In OLED, we are among the top 3 competitors and it is reflective of our position, where we're stronger than that. So it will take still some time until both businesses would be on the same level.

[Marcus Kuhnert, CFO & Member of Executive Board]

Simon, can you repeat your question again?

[Simon P. Baker, Head of Pharmaceutical Research]

Yes, certainly, Marcus. If I look at Healthcare, amortization of intangible assets within cost of goods and marketing and selling expenses, Q1 looks significantly different to last year. So the amount of amortization of intangibles in COGS is significantly higher, and the amount within marketing and selling is lower. They're relatively small numbers, but I just wondered if Q1 is a good guide for the rest of the year? And if there's been any accounting changes that have prompted that?

[Marcus Kuhnert, CFO & Member of Executive Board]

I'm not aware of -- that we have any kind of accounting changes. And regarding the to-be expected run rate for the year, I suggest the IR team is going to follow-up with you directly, Simon.

[Constantin Fest, Head of Investor Relations]

I think we have time for 1 more question, please.

[Operator]

We can now take our final question from Luisa Hector from Berenberg.

[Luisa Caroline Hector, Co]

Just in terms of the outlook this year and given that we are really, nearly halfway through the year, and you do have quite reasonable visibility with your order books, et cetera, I just wondered if you can make any more comments on what's driving the upper and lower end of your guidance range? Is it still the uncertainty of COVID that gives you that spread?And then just to come back on the Life Science investment. So you made a few comments about your capacity expansion related to COVID. Are you pretty close to those investments now being fully operational? And how should we think about the investment into the core underlying business since you've identified further demand this year, which has led to part of your increased guidance?

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Luisa, I think we have already shared as much as we can on -- based on the visibility that we have today on the -- during the presentation. So once again, looking forward to 2021, you can use the answer that I have given for Life Science as a proxy, right, because Healthcare will move on the high efficacy dynamic market progression, as Peter repeatedly said, and also the increased mobility that is actually reflected already during our Q1 results associated, implicating Fertility and other businesses. So as vaccination progress, we cannot expect anything, but better mobility and recovery, presuming the traditional Healthcare dynamics of the past pending, and this is a different question, and it's not related to mobility, the high efficacy dynamic market trends.On Life Science, I mentioned that already, we have an ongoing multi-year program to expand our Life Science capacity to support this global and growing demand. And so far, we are really on track. I mentioned how heavily we have invested in the last months, and that amounted to EUR 350 million. And it's because we believe that the trend will continue. As you see, it's an -- every vaccine manufacturer have announced new commitments, speaking of new vaccine doses being produced and committed to different countries and governments. And as we see this trend be kept to the future, this is giving us confidence that we are going to be further developing the business, mainly in Life Science on the basis of our increased capacity. And that is really the main element that could make a difference between the low and the high part of the range on revenues, obviously.

[Constantin Fest, Head of Investor Relations]

Thank you. This was the last question...

[Belen Garijo Lopez, Chair of Executive Board & CEO]

I think there was a question on capacity. I don't know if -- Andrew, do you want to add anything very briefly on capacity of Life Science and the capacity expansions beyond what I have said already.

[Andrew Bulpin, Head of Process Solutions]

Sure, sure, Belen. And you mentioned the EUR 380 million, if you look at that, it's split really across core business and the needs for COVID-19. So for example, EUR 140 million investments in Darmstadt for new membrane plant; EUR 100 million Carlsbad for viral vector; we've got EUR 60 million in Madison for high-potent APIs and for ADCs; and then EUR 21 million in Danvers for single use; EUR 19 million in Jaffrey for filtration; EUR 18 million in books, supporting our reference materials; and then the EUR 25 million investment for single use in Molsheim, so significantly investing.And then if you add to that sort of where we are with the acquisition of AmpTec in the mRNA space, the CDMO space there, and our partnership with BioNTech to accelerate lipid supply is -- there is a significant investment, both in base and COVID-19 activity across Process Solutions.

[Constantin Fest, Head of Investor Relations]

Well, thank you very much. With this, I'd like to hand over again to Belen for closing words for this call. Over to you, Belen.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Constantin. In the benefit of fine, I will be very, very brief, and I will focus on thanking everyone for making the time and for your increasing interest in Merck. We look forward to meeting all of you and many of you in the upcoming roadshows that are planned starting today. Some of them been -- keep in mind that our Q2 results are due August 5, and we will be hosting our Capital Markets Day September 9.With this, thank you very much for all your questions and your attention, and talk to you soon. Bye-bye.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.