Operator: Dear, ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on Third Quarter 2020. As a reminder, all participants will be in a listen-only mode. May I now hand you over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Constantin Fest: Thank you very much, Lauren.

Dear, ladies and gentlemen, a very warm welcome to this Merck Q3 2020 results call. My name is Constantin Fest, I'm Head of Investor Relations. And I'm delighted to have here today with me, Marcus Kuhnert, our Group CFO.

Marcus Kuhnert: Thanks a lot, Constantin. And also from my side, a warm welcome everyone to our Q3 earnings call.

I'm starting on Slide number 5 of the presentation with the highlights. Overall, Q3 was very strong and is yet another proof point for the successful execution of our strategy. Organically, Group sales increased by 7.2%, while EBITDA surged by 52.6%. As you know, earnings included a major boost from the Biogen provision release. However, even when stripping this out, organic EBITDA pre growth was remarkably strong at 19.8% despite tough comps.

We saw FX headwinds and Q3 was also the last full quarter of consolidation benefits from Versum. As a result, reported sales growth was 2.5 percentage points ahead of our organic performance and reported EBITDA pre growth was in line. The net effect of COVID-19 was about neutral in Q3. In fact, we saw a significant recovery across various franchises and also increasing tailwinds in others. Thanks to our successful crisis management, we continue to cope very well with the challenges during this pandemic and continue to adapt business processes accordingly.

This also means that in many instances, the border between COVID-19 effects and underlying performance becomes increasingly blurred. But you can rest assure that we will continue to be as transparent as possible. Based on the strong nine months performance, we are raising our earnings guidance for the full year. In particular, we now expect net sales in the range of €17.1 billion to €17.5 billion, EBITDA pre in the range of €5.05 billion to €5.25 billion, and EPS pre in the range between €6.50 and €6.80. Last but not least, we are proud to be introducing our new sustainability strategy today, and I will talk more about this later.

Constantin Fest: First question, please.

Operator: Thank you. Our first question comes from Matthew Weston with Credit Suisse.

Matthew Weston: Thank you very much and good afternoon. Two questions please.

The first is to Darren regarding the process solutions business and the fantastic growth. You’ve cautioned now for a number of quarters about the potential capacity constraints to growth in that business. But you still keep posting incremental accelerating revenue. And the order book is clearly growing. I totally understand Marcus’ comments about some of your customers are now taking risk, but can you please just walk us through how much capacity you are currently being able to add? And are we reaching levels of growth, where you’re really going to hit supply constraints and it could curtail future abilities to grow.

And then the second question, if I can is on the M7824 non-small cell lung cancer – lung study. I can see there’s a lot of detail on Slide 41 and clear commentary that you won’t share very much information. But it was very surprising to a lot of investors that you continued with the 300 patient trial. So can you just give us any color that you can, but most importantly, can you reiterate your confidence that even with only 300 patients with a PFS and OS endpoint, you are confident that this trial could have registrational potential.

Marcus Kuhnert: Thank you, Matthew.

And I would hand over the first question as you suggested directly to Darren.

Darren Verlenden: Great. Thank you, Matthew. And thank you for recognizing the great uptake in Process Solutions business showing 27% growth is just fantastic. But as you say, with that immense growth that we’re seeing, we actually do have some limitations on capacity, that we’re seeing today.

As Marcus described as well, our lead times are starting to extend as we move out into this pandemic situation. We’re in the fortunate situation of having multiple modalities by which we’re treating the pandemic, whether it be a vaccine candidate, nucleic acid or monoclonal antibody therapies out there. So with the advancement of our lead times, we have done a significant look at our short and long range planning outlooks. We actually have made some significant investments on the short-term here in capacity. We’ve actually invested about €30 million so far – north of €30 million in specifically our single use and our filtration platforms and growth.

So we’re actually looking at our order book. We’re looking at the long range plans, the short-term implications and investing it and accelerating where we need to be able to advance this demand.

Chris Ross: Matthew, this is Chris, just to add a bit here. I think in the short run in Darren’s business, it’s been really – a very strong Q3 performance as noted. And the output from our manufacturing operations significantly improved in Q3.

And we’re seeing some measures taken in place to provide allocation principles to some of our customers to redensify some of our operations and also leverage some hiring that we’ve done in many locations, really to bring up the capacity in the short run. But as Darren mentioned, the investments that we’re making into the future, particularly in filtration and single use, we’ll see the benefits of in the first part of 2021.

Marcus Kuhnert: Thank you, Chris and Darren. Matthew to your second question. So I know that our recent communication regarding the closure of recruitment at 300 patients and the change in status to active, not recruiting has resulted in some speculations regarding the potential outcome of this study.

And I’m also aware that those interpretations have a pretty broad range from quite positive, but also to a very negative interpretation. As you know, we are a little bit limited, we cannot talk too much about this topic. What I can tell you is, we have this nice clear signal from the Independent Data Monitoring Committee that we have passed futility. So that means the trial is continuing. And while it is premature to speculate on the outcome of the trial based on recruitment closing at 300 patients, however, we will continue with the trial.

And let me reiterate very clearly that yes, there is confidence. We want to reiterate the confidence, that this trial is registrational or its registration relevant. Let me also clarify one more topic again. In fact, the interim data are not known to us. The data is blinded to the study sponsors that mean, neither us nor GSK know the results of the interim data.

This was only known to the IDMC. They have reviewed the interim data and only their decision was that futility was passed that we are carrying on. And other than that nothing has changed. It is a registrational relevant study and we are – we have passed futility, I think, which is a good sign. And we are now continuing.

And with the relevant endpoint PFS and OS, we have changed in – I think in March, where we went to the adaptive trial design.

Matthew Weston: Thank you very much. I just have a quick follow-up on the Process Solutions question. I’m just trying to understand how much of the supply in revenue that was booked in Q3 was essentially manufactured live if I can put it that way or came out of inventory. And I know that a great deal of what you supply is very specialized with your customers.

So I guess the question is, if you had to ship exactly the same again, as what you shipped in Q3 in Q4? Is your manufacturing capability capable of doing that? Or we’re reaching a point where you’ve been shipping from inventory and we have to play catch up as the new capacity comes online early next year?

Chris Ross: This is Chris. I mean, I’ll add to where Darren led off with regard to lead times. I think it’s important to recognize that our lead times have extended rather significantly. So the growth in order intake in the current quarter definitely does not translate into the sales growth in a couple of quarters down the line. So we’re having a usual lead time in the two to six month range.

And order is not typically sitting in the four to six month range. So we are seeing a change in that landscape, and a heightened level and advanced order placement is happening as well with our COVID-19 regular business. So there’s an appreciation here of what’s going on in the supply constraints, but we are making progress there and we see that our strong H1 next year, it gets a little bit less clear in the second half of the year.

Matthew Weston: Many thanks indeed.

Operator: We’ll take our next question from Richard Vosser with JPMorgan.

Richard Vosser: Thanks for taking my questions. So just to follow-up on the Process Solutions, first of all. Just thinking about the vaccines and we’ve obviously have one positive vaccine, but should the AstraZeneca-Jenner vaccine make it to market or one of the others? Could you give us some perspective how we should think about that for a revenue opportunity for Merck in 2021? Second question, back on TGF beta. And just maybe you could give us a bit of an explanation for spreading out the milestone income, the upfront milestone income over a longer period of time. Why is that and how therefore should we think about the amount that less to book in 2021? And then finally just on Mavenclad.

It looks like the ex-North America revenue is about €74 million. So perhaps you could give us the split of that, or maybe not to exactly split, but talk about the revenue from returning patients and new patients in the market outside of North America. Thanks very much.

Marcus Kuhnert: Yes. So we start with the Life Science part, Chris, Darren?

Chris Ross: Yes.

Yes. Sounds good, Marcus. Thank you. So let me just start with the – I suppose the good news of the day, right? With the BioNTech, Pfizer news and the clinical results, really very exciting and a big step forward here. And we're seeing that there's an expectation of the vaccination of up to 675 million people by the end of next year.

So roughly 10% of the global population. So that's really the good news. But there's still need for other vaccines and other treatments. And we are well positioned in the COVID-19 developments for mAbs, for vaccines, for nucleic acid approaches. And we'll play a key role in the treatment strategies for the coming years.

And I'll let Darren talk about that a little bit more. An effective vaccine, of course, we see, could reduce the use of mAb cocktail treatments prophylactically, but they'll still be needed to treat patients with severe symptoms. So we still see a good outcome there. And the cold chains are required and the cost and availability of the mRNA vaccine are challenging. So overall, we expect the market to continue advancing varying modalities with differentiated technologies to meet the continued needs.

But maybe for a little bit more color, Darren, I could pass that it to you.

Darren Verlenden: Sure. Thanks, Chris. Could you actually go back to our Capital Markets Day, back in September, we were talking about over 300 different candidates we're looking at across the pipelines of these therapies and vaccines and treatments. So I think it's the benefit of the Process Solutions business, where we have a key part to play in all of those therapies, whether it be services, whether it be product, or CDM or a landscape.

So it's really great news that we're advancing in these therapies as a patient population and just world health, if you will, that we play a significant role in all of these candidates moving forward. And I think if you look at the profile of, for our business and where we're investing, the capacity, even into the R&D landscape with some of these new mRNA therapies that are coming to market. We've been significantly investing in our R&D resources and our footprint in CDMO to be able to capitalize on the full breadth and opportunity that this market gives to us today.

Marcus Kuhnert: Okay, Richard. I take the second question.

Regarding the bintrafusp alfa milestones, I would start it in a way just to give you a short reminder, all of us, how the deal is structured. So we are talking about a net present value of €3.7 billion. Thereof, we have received €300 million upfront payment, as you know. And then we have €500 million potential development milestones, and the rest of the remaining €2.9 billion are milestone payments, which due for the approvals and/or the reaching of commercial threshold. So when product is in the markets, when we hit certain sales thresholds.

So I think under discussion, the €500 million development milestones. Let me clarify so far, there was no milestone payment yet. We have only received so far in the collaboration the €300 million upfront, which as you know, we'll go buy a deferred income through our P&L over the next two to three years. One thing, no milestone payment yet, it is impossible for us to predict, let's say when those milestone payments will come. And let me just remind you again, and I think this, we already told you in our Q2 call, there was once first analysis of interim data, earlier this year.

There will be some other most likely coming. But we have never disclosed the kind of comparison between interim data readout or milestone payments we just said that eventually the outcome or data from the lung program as a whole could eventually trigger those development milestones. And there's not much more to say, Richard. The second question was revenue from returning versus new patients for Mavenclad outside of the United States. We cannot give a specific split, but we can say that we are seeing new initiations rebounding after the lowest follow-up point in April across all major ex outside of the U.S.

markets with very good performance for – sorry for year two return patients. And you can or we interpret this hope you too, as a sign of continued confidence in Mavenclad and also presume remind that there was general pause for of the entire high-efficacy market due to COVID-19. That means there were no new initiations and no retreatment of patients. And this is still a little bit ongoing. So this has still not fully recovered.

We are now navigating through this and we can confidently say that the returns are coming back.

Richard Vosser: Thanks very much, Marcus. Thanks.

Operator: Our next question comes from Sachin Jain with Bank of America.

Sachin Jain: Thanks for taking my questions.

I have few if I may. First to pass, Process Solutions, just, apologies I may be confused, but just to clarify your visibility on lead time and order book, I think you commented. And in the last question, you've got two to four months visibility on order books. So could you comment in sustainability of the existing 50% through the fourth quarter and into next year? And when you say you've got visibility on the business till 1H, it's on order book or delivery of sales, which I guess, we would give you longer visibility than that. I guess the last one question, when I'm trying to get to it, if you'll need time is, I think you also referenced is two to six months and that's lengthen that would imply that whatever you saw in 2Q order book is being delivered through 4Q.

So I just wanted to check, if I was correct? Second question is a big picture margin question into 2021. In Life Science, any color on how we think about margin uplift from the accelerated Process Solutions growth versus the prior commentary? And then healthcare can the absolute cost decline this year continue into 2021. And then a final question just on aggregate on pipeline. So any color on pipeline build, which covers both products and labs into positive for next year in current levels, what I'm trying to do is try and get like the €2 billion pipeline target for 2022 versus consensus sales around €700 million-ish this year to the 2021 pipeline number, it'd be roughly in the middle of that €1.3 million-ish or how do we think about facing a pipeline over the next 1.5 year and 2 years. Thank you.

Marcus Kuhnert: Yes. And start again with the Life Science question, Chris, Darren?

Darren Verlenden: Sure. Sachin, thanks again for the question on the order book. So as Marcus said in the opening presentation, we're actually showing our order book growing by greater than 50%, which is up from the guidance which we had in the first half of greater than 40%. What's happening is actually, we're starting to get better visibility and transparency to the orders and where they're coming from, whether they're based business, whether COVID related.

I think if you can actually appreciate the landscape that we're in right now, which some of these customers of ours actually have business in both areas of COVID, non-COVID. So really just getting down to the ability for us to actually have these very intricate discussions with our customers, to understand where the business is coming from, and it's really allowing us to sharpen our pencil as to the order book and what is tied to what and what we can actually prioritize. I think, as you've heard, we've had a whole prioritization scheme, where we have COVID and government raised orders as our first and foremost priority, moving down the line as you go through that allocation. So, yes, so as the lead time to start to extend, as Chris said, we're in this, our averages around two to six months. And again, it's really tough to say, because the product portfolio is so diverse and differentiated, whether it be filtration, whether it be so culture, media, single use, each one carries its own nuance if you will, and the ability to deliver and the lead times required from there.

But we are seeing that the lead times are going up from that two to six standpoint into the four to six month window. But again, it's dependent on the product actually that we are delivering and shipping to those customers.

Chris Ross: And I think it's important to keep in mind that COVID customers are producing at risk. And it's very unlikely that all the products currently in development will get approval. So we need to see how that plays out.

So that puts a little murkiness there. And the different products have different requirements. And we've talked about this before as well that – we, for example, sell more of our products into the manufacturing of mABs and vaccines. So there's a bit of clarity that needs to come in the second half of the year, but I agree with Darren's comments on the lead times.

Marcus Kuhnert: Okay.

And your second question, Sachin, was around potential margin uplifts in 2021. As you know, we would not precisely guide you on margins per business sector on product leverage to date. What I can say or, but I can give you a couple of hints and comments. So first of all, please keep in mind, Life Science for sure had an extraordinary quarter three 2020, not only in terms of top-line momentum, but also in terms of profitability, strongly driven by this extraordinary top-line growth, strongly driven by this still very high COVID-19 tailwind, which has or which impose a positive mix effect. What I've outlined already, a couple of minutes ago in the presentation, and also supported by strong positive pricing effects, which we have seen in the third quarter.

For 2021, even under very bullish assumptions, we actually, we do not see a scenario where organic growth in Life Science would exceed at mid-teens territory next year. While in a base case, we would be rather looking at growth similar to what we are seeing in fiscal year 2020, where we are still ahead of our recently upgraded midterm guidance. And that also then translate into the margin that this extraordinary 33%, I would not necessarily, prolong or write further into 2021. We stick however, of course, to our ambition that we say, we want to keep going forward margins, at least stable. And it goes without saying that we'll be as in such benign market environment, that then we see also potentials to further increase margins.

But in a sense of 33%, I would say also an exceptional level, which we have enjoyed this quarter. When we look on the Healthcare, for Healthcare, we have a couple of moving points in a way, on the one hand, we have benefited from the COVID-19 crisis and the related cost implications. In 2020, by roundabout – I would say estimate by end of this year by roundabout €150 million. If we let's say allocate this €150 million proportionally to the same share to the business sectors and take a little bit out whereby calls also the group functions have obviously contributed you get a feeling on the cost tailwind or cost savings tailwind that our three business sectors are currently, let's say getting a support to mitigate for the top line challenges. We should, let's say not be too bullish, in assuming everything of that can be maintained in 2021, when we come to more normal business conditions.

And now let's say, it was the most recent news on vaccine development that is not completely unrealistic. I would foresee that we do more travel – a bit more travel next year that we do more customers as this, that we do want to have a customer event also in our businesses. So while we are very strongly committed that we would not on the other end, also not return to pre-COVID cost levels that also should happen under no circumstance. We also need eventually to reinvest a little bit, let's call it in personal relationships in the broad variety – in the broadest variety of sensor. So yes, you can assume that some of the cost savings will actually go into 2021 that we will carry them over, but definitely not everything what we have also let’s say driven by the crisis environment this year, what we were able to read this year.

Last question on the pipeline. I understand where you’re coming from. Let me reiterate the main contributors for 2022 will be obviously Mavenclad and Bavencio, we expect also tepotinib eventually also bintrafusp to contribute. And I cannot give you now a precise guidance for the pipeline or new product sales for 2021. However, when you think about the gap that we still have to bridge to reach the €2 billion, you can imagine that it is in our best interest, that we do not get too much back and loaded and also that we have carried in a huge risk into 2022.

That means, we will have and continue to have pretty aggressive rollout plans to see a further strong ramp up also in 2021, more I cannot tell you.

Sachin Jain: Thank you very much.

Operator: We’ll take our next question from Peter Verdult with Citi.

Peter Verdult: Thanks, Peter Verdult here, Citi. Two questions Life Science of interest, it’s slightly boring.

This is to Chris or Marcus. Did I hear right that you said your best guess for Process Solutions growth, excluding the benefits of COVID, was around 13% to 15%. And could you just clarify that as it relates to managing inventories and preventing stock-outs, we’re not at that sort of situation yet, given the surge you’re seeing in demand. And then, on bintra, Marcus, I mean, you may made the point that you’ll still blinded to the results. So, can you explain to us on what basis it was decided then not to expand the trial, just given the prize and offer as well as the hurdle would seem like a prudent move.

So anything you can share with us that will be appreciated. And maybe one last one on bintra, the very latest in terms of next interim, or when you expect that 037 study to read out? Thank you.

Chris Ross: Coming on the Life Science and Process Solutions solution side. So, yes, organic growth as discussed in Q3 very strong at 26.5% and here, just to answer your question. So the estimated net effect from the COVID explained about 50% of the growth in Q3.

So this does imply to us still strong base business growth of about 13% so well in line, slightly above our midterm guidance for the low teens growth. Slightly below the growth rates prior that we discussed for COVID and this is likely due to some of the base business being slightly impacted by the allocation principles toward COVID.

Marcus Kuhnert: So, on your first bintrafusp question, Peter, so first of all, obviously the – this decision that we are fully recruited with 300 patients was also an outcome of the independent data review committee, which was submitted to us. And again, the criteria behind this decision are not visible to us, have not been visible to us. And so I can unfortunately also not discussed the pros and cons of this and, it was just something we had to accept after the independent data monitoring committee has reviewed the data.

They said, okay, you have past futility, which was good news, obviously. And then they said, okay, we continue with 300 patients. So, as any other trial, now coming to the second part of your question, there are multiple interim analysis scheduled. And so also for 037, between now and the end of the study in April, 2023, which is the currently estimated primary completion date, which will be of course event-driven. And again, sorry to say, I hope you understand that we cannot discuss more detail at this point.

Peter Verdult: Thank you.

Operator: Our next question comes from James Quigley with Morgan Stanley.

James Quigley: Thanks for taking my questions. Just one on the cost savings. So, you mentioned there was a €100 million provision that you’re taking in Q4 to support efficiency gains and things like that.

So what is the – sort of to go from that in terms of how much you could potentially say even in absolute terms and from margin perspective going forward. And secondly, in Process Solutions, do you have any idea how your customers inventory is looking? Really they are like it you burning through quite fast. But is anybody over-ordering in order to have a buffer for the future? Thanks.

Marcus Kuhnert: So to your first question that the €100 million. The €100 million is a set of initiatives that we are doing in health care in order to prepare ourselves for the future.

And please note, it is definitely not that we are fighting a fire, but it is that over the years, let’s say the original development plans for pipeline, et cetera. We have to get out that in some areas to reality simply has developed somewhat differently than original plans. And we think that it is now time to adapt structures accordingly. So the program has a very strong organizational or structural components, at the same time, we are addressing also cultural aspects, which are very important where we want to foster simplicity, accountability, and execution as our guiding principle and carry this even more into the entire organization. So, we’re addressing the way of working, going forward in the future.

And we addressing also in efficient organizational structures in various areas go to market and R&D, et cetera, et cetera. So this is, I would say a big organizational, but also cultural program with the aim to fully leverage our investments of the past, and use this and this initiative as a consequence next step, the context of the longer term transformation of the healthcare sector in the successful or finalizing the successful transition or securing the successful transition now into the early space, what we have promised to you. Can you repeat again, please, your second question?

James Quigley: I’m sorry. So, the second question was, do you have any sort of visibility on the inventories of your customers in Process Solutions? Clearly they’re going to be burning through their inventory…

Marcus Kuhnert: Okay. I will go to give this to Chris and Darren, of course.

Chris Ross: I can’t actually speak to our customer inventory outlooks. I can’t speak to them and what their practices are, but I can tell you, when we look at the orders that are coming in for Process Solutions business, where there are some customers are finding in advanced understanding, they need to get into the queue to ensure that they have the raw materials when they need them at the right time. So, we do see practices of customers planning in advanced, planning well ahead of time. But again, we, we still stick to our practices of allocation, which is government rated orders and COVID first, like saving therapy second, life enhancing therapies third, and then clinical programs in the last part as we move ahead.

James Quigley: Okay.

Operator: Our next question comes from Falko Friedrichs with Deutsche Bank.

Falko Friedrichs: Thank you very much for taking my questions. Firstly, on Bavencio, could you provide us with a bit of a refresher on the pickup you saw in Q3 and the feedback you’ve been able to gather from physicians in the quarter? Then secondly, you alluded to slightly higher CapEx spend this year. Could you just quickly remind what exactly this year you’re spending in and this year, and maybe also provide a bit of a glimpse into next year, whether we should expect a higher level next year as well. And then thirdly, FX is obviously a massive headwind for so many companies and then also for you this year.

So, I think it would be helpful for all of our models to have maybe a bit of an indication for what the negative impact could be in 2021, if the FX rates stay where they are?

Marcus Kuhnert: So Falko, I take, I answer your second question first. On higher CapEx, we have actually a lot of growth opportunities as you may have heard and taken already from our quarterly release and also from what Chris and Darren has told you. Um, so we are currently carefully assessing how sustainable the COVID-19 tailwind is in Life Science and which the areas are where we safely can invest in order to reap future benefits on the sustainable way. The main investment actually we have currently in mind support the growth of the Process Solutions business. So that should be not a big surprise, serving the high demand and the growing markets there.

And it doesn't fit in Q3 expansions at two of our plants in the U.S. where we will add additional capacity, especially for single use assemblies and bouncer into filtration. And also on top of that, we are reviewing our long range demand for our product portfolio against the expected capacity. And we will define prioritized list of expansions to accelerate against the current plan. On the FX headwind topic.

This is at this point in time, relatively difficult to judge. I must honestly say we have also not yet in-depth, had to look into that because we still have our planning meetings in front of us. And then we will then get acquainted on, let's say the FX developments in our businesses, in our regions and current status obviously is that FX impact in 2021 will likely be negative. but I cannot tell you much more at this point in time. On Bavencio, so you asked me to provide you with a refresh on the third quarter and some feedback from physicians in the quarter.

So, have seen a very, very nice growth. So, Bavencio in total was up 53% versus prior year and quite impressive, 41% sequentially, whereas the second quarter. And obviously that points to the fact that the major part of this increase actually is coming from first-line bladder. This is progressing extremely well with the first three months post-launch, of course, there's also note of caution three months after launch is still pretty early, but the first science we see a very encouraging and setting a strong foundation for 2021. And let me also take you now to Slide number 37 for a couple of more couple of details.

So, on this slide here on the right side, you'll see Bavencio first-line bladder, strong early launch performance. And the reception in the community validates the significant of the overall survival advantage that we have here. We have seen encouraging data points discussed in the September R&D update by Rehan continuing trending positively. Continue to increase in penetration. We believe now we have a 50% – roundabout, 50% share here.

And we have also sustained the increase in the accounts ordering Bavencio and we have leading share towards more than 50%, which is also very supportive. So all in all, I think we are off to a very good start and on track to change the standard of care within the indicated segment.

Falko Friedrichs: Okay. Thanks very much.

Operator: We’ll take our next question from Daniel Wendorff with Commerzbank.

Daniel Wendorff: Yes. Hi, thanks for taking my questions and good afternoon. Three, I have, two on process solutions and when you say that a number of your process solutions customers started to produce at own risk. Can you give us a sense about what number here we are talking about? Is it a single-digit number of customers? Is it a double-digit number of customers? And then my second question on process solutions is referring to the order intake. When you look at the order intake growth you saw in Q3, what part of this really driven by COVID-19 related demand and what is really underlying growth, order growth development.

And my last question is for healthcare and how should we think about the safety development of Glucophage over the next quarter potentially – over the next quarter, so I’m considering the VBP situation in China. Thank you.

Marcus Kuhnert: Yes. We’ll start with Life Science, over to Chris and Darren.

Darren Verlenden: All right.

So, Daniel, thank you and definitely, when we say customers are producing at risk, this is just the context that they’re producing at risk in the context of getting a treatment approved, if you will. So again, I can’t speak to what the breakdown is specifically of who’s producing at risk or what and who are not. but definitely, this is actually, letting to the order intake that we’re doing and the growth we’re seeing in the COVID linked to that idea of a lot of these customers, whether they have approval for treatments or not, they’re producing, right. And when you look at this, one of the risks that we have is, order cancellation could be one of the out layer perspectives in this context, but we – in case, you’re questioning or have one insight there, we see the limited risks there as well, because the demand is high, limited ability for these cancellation of orders moving ahead. and then I think you had a question that was related to order intake as well.

Can you just repeat the order intake please?

Daniel Wendorff: Yes. The underlying order intake growth, so what would this have been in the quarter without COVID-19 related projects?

Chris Ross: And I can take that one, Daniel, this is Chris. So, the main contributors, as you know, to the growth of the portfolio are the COVID-19 treatments and vaccines, and just as a rough number we’re working on over 50 vaccines and over 20 treatment solutions here. and the COVID versus non-COVID situation, so we’re estimating about 30% of the growth in the order book right now is tied to COVID-19 specific manufacturing processes. I think previously, we reported that as 50%.

But now we’re looking much more closely with the transparency we have with customers at the specific molecule application. and in fact, we see that the strength in the base businesses is quite strong there as well. So that’s the latest update.

Daniel Wendorff: Okay. Thank you.

Marcus Kuhnert: Okay.

Operator: We’ll take our next question...

Marcus Kuhnert: We have one more question, please open. Daniel, you asked about the VBP effect of Glucophage. So first of all, we will see first impact, obviously in the first quarter 2020.

but it will be moderate and it will be fully captured obviously, in our guidance. Secondly, I’m sure you’ve heard about it, but just to reiterate we have recently completed or finalized the negotiations with the Shanghai authorities on the so-called gradient price cut. As you know, the gradient price cut refers to the segments of public hospitals segment, where we still have access to. So, which is not reserved to the winners, where we can still compete, but where we have to accept a price cut, which is much, much more moderate than the price cut, then that the winners got. And here, I can tell you that we are very satisfied with the outcome of the negotiations.

It was significantly ahead of the worst case scenario, where we said the worst case scenario is a price cut of roundabout 30%. We are significantly better than that. And last but not least, I can only tell you so much that I say in China, of course, next year, we will see the full-blown effect of VBP. Yes. We are confident and I’d reiterate now what I said after the Q2 call that over two years’ time period.

So, from 2020 to 2021 also, the base business in China will be back to growth. I’m, let’s say not as courageous, promising you a big growth for 2021, because there as I said, we will see the VBP effect, but over two years’ period of time, China-based business will be back to growth.

Daniel Wendorff: Thank you.

Operator: And we’ll take our next question from Simon Baker with Redburn.

Simon Baker: Thanks so much for taking my questions.

One on healthcare, one on performance materials. Just on healthcare, just looking at the TRX trajectory of Mavencla, it looks stronger now than it did pre-pandemic. So, I just wonder if you could give us some color on that. is that catch up, is that a change in access change in marketing? Just some thoughts on why the performance certainly looks better than it did before the before the lockdowns. and then going back to interest, I fully appreciate you cannot and will not talk about any of the data, but presumably, the interim analyses of an at least a number of them was pre-specified in the study protocol.

So, I wonder Marcus, if you could give us a little bit more clarity on what you meant by multiple, and then just finally, on two very quick questions on the PM, would it be fair to assume the regular depreciation and amortization charges we saw in Q3 is a sensible run rate post-Versum and also related to Versum. Could you confirm that we have now lapped on the acquisition growth impact? So in Q4, the acquisition impact on growth to Versum will be essentially zero. thanks so much.

Marcus Kuhnert: Yes. A lot of questions, I try to work my way through.

So, I’ll start with the PM question. I think that the Q3 rate depreciation and amortization for PM represents a reliable run rate going forward. I do not see any disturbing effects in the third quarter. The PVA effects are fully included. So I think this is a fair assumption.

On Q4, you should assume that we have seen – or that from Q4 onwards, the Versum business will be contributing to our organic growth. So that means we have seen now three quarters as portfolio effect, Q4 will be organic. On the Mavenclad question, actually – and that’s not an easy one. It’s a combination of effects. Most importantly, COVID-19 caught Mavenclad – let’s say the very bad timing during the ramp up phase, which has set us back a little bit.

We are now on the recovery and I think it is quite natural, so that we see, let’s say an ongoing demand dynamic during a launch that we are still in a ramp up phase. Yes. So that means they are not necessarily very special reasons behind that we are now in a safe level, which is already exceeding the level pre-COVID-19, because we have seen, I think that a lot of concerns regarding the adverse effects of Mavenclad on the immune system and meanwhile, off the table, they are seeing some recommendations also out, which show that the immune system shows relatively quick recovery. And I think the main reason is actually that we just are more progressed in the launch that some more time has been gone. On the other hand, we see also still factors that are holding us back, because for example, the high-efficacy market is still depressed.

We are gaining market shares, but the market growth of the highest – or the market status of market growth of the high-efficacy market is not yet back to pre-COVID levels, which also holds us back a little bit. And if we see a kind of recovery here, then that should also have another positive effect on the further ramp up of Mavenclad. Let me share one more thing with you that was a big topic in our quarterly review meetings, and we have seen – I’ve seen an interesting presentation there, which shows that that’s a very high correlation between patient mobility and the development of the high-efficacy efficacy markets. That means in lockdown times, when people are restricted to travel that then the high-efficacy market is suffering. So, let’s say – let’s hope that the situation normalizes, if we find now, or that soon, then effective vaccination is coming, its mobility goes up, so will high-efficacy market and further than the Mavenclad states.

Is that answering your question, Simon or?

Simon Baker: Yes. Just the final question on the interims, I wonder if you could – that would be lovely? Thank you.

Marcus Kuhnert: Yes. Yes. So, as I said I mean, no standard practice that there are multiple interim analysis, but it could happen.

And as I said, I cannot tell you more. Yes. I think I made myself clear. We cannot give more details on that.

Simon Baker: Okay.

That’s great. Thank you very much.

Operator: And we’ll take our next question from Emily field with Barclays.

Emily Field: Hi, thanks for taking my question. I’ll just ask one Bavencio.

I know you commented on some of the launch metrics for first-line bladder, a few questions back. but just thinking about going into 2021 consensus for 2021 implies a significant acceleration in growth, essentially, a doubling year-over-year. I mean, is that something that as you see the launch trajectory now that you think is achievable or as another way, if you could just perhaps give any metrics on the size of that overall market in first-line bladder. Thank you.

Marcus Kuhnert: So, I think it is, let’s say, inherent to any launch that we see, especially in the earlier phases, a relatively strong ramp up.

So definitely you can assume a further acceleration of the Bavencio sale into 2021. Why I believe we are – we have meanwhile received our peak sales more or less in MCC. I do not expect much from bladder second-line to be honest. Renal is a little bit stagnant in the U.S. and quite nicely growing outside.

So the major part of the growth in 2021, and definitely product acceleration is to be provided by first-line bladder. Second question was market size, right, or potential of the market. So, I can answer this question only, let's say in terms of number of patients, and here, is this slide available in the presentation. Emily, if you would just flip to Slide number 38, as well as in the R&D update call. It is highlighting the number of patients that are actually eligible for Bavencio first-line bladder.

So we are starting with newly diagnosed metastatic UC cases, where we have some 20,000 patients in the U.S., some 30,000 in Europe, and some 9,000 to 10,000 in Japan. If we assume 85% of those patients are platinum eligible, we end up with 17,000 in the U.S., 25,000 in Europe and 8,000 in Japan. And then we have, let's say also a fraction of that which can take carboplatin or cisplatin first-line treatment. And then this reduces the number to some 8,500 patients in the United States, 21,000 in Europe and 7,000 in Japan. And then roughly 70% of that assumable will show a complete or partial response, or it stays in disease, which means that they had finally been eligible for a maintenance therapy in using our Bavencio first-line bladder.

So this is, let's say a indication that I can give you based on the available patient data. And of course, keep in mind, Emily, we have now meanwhile received approval in the United States. We also expect approval or we aim for approval in all bigger jurisdictions that means in Europe and in Japan as well in the second – sorry, in the first half of 2021. And please keep in mind why we have not received a milestone payment for the U.S. approval for bladder as we have received it for the second-line approval two years – three years ago, for potential approvals in Europe and in Japan, we would be eligible for a milestone payment.

And that is something that you should have on the radar screen for next year.

Emily Field: Would that be of a similar amount to the prior milestone?

Marcus Kuhnert: Yes. The milestones are all the same, the difference is only by region. So Europe and North America is double the amount of Japan, but I think that you have figured out already.

Emily Field: Okay.

Thank you.

Operator: Our next question comes from Krishna Arikatla with Goldman Sachs.

Krishna Arikatla: Hello, thank you for taking my questions. I have two please. Marcus on General Medicine portfolio, a big picture question there, that franchise is not being a drag on the overall healthcare growth rate.

How should we think about your priorities for the franchise there? Are you looking at managing that for cash, or should we think about divestment there? Any of those products and use those resources elsewhere in healthcare? That's the first one. The second one, I appreciate you can't say much on bintrafusp, but I'll still try. You mentioned that both GSK and Merck are blinded to the data. Will the data remain blinded to the two companies until the study is fully complete, please? And if that is the case, what forms the basis for payment of any potential milestones? Thank you.

Marcus Kuhnert: Thank you, KC.

On your first question, General Medicine has been over years a significant growth driver of our healthcare portfolio and also a good contributor of growth into the group. We actually do not see that this is going to change dramatically going forward. Actually we have to deal with the key impact, especially next year when we are for example, having tough comparables from more or less unaffected 2020. So that would be, let's say a little bit a challenge on – for China obviously, but also for the entire General Medicine’s portfolio where we believe that it will be stable in 2021, but due to that effect, but then definitely back to mid-to-high single-digit growth rate beyond 2021. At the same time, so General Medicine is not, I would say the most preferred area in our group, which we would consider for potential M&A deals.

However, I would also not, or cannot totally include this when it comes to portfolio management, it is the usual topic. That means, we are screening from time-to-time our portfolio and looking whether that, let's say businesses where we are eventually not the best strategic owner on the one hand, but also of course, whether there are areas – strong growth areas, especially which we want to strengthen. However, let me also clearly outline the focus areas for investments, and here, especially also in the M&A space, the big three, I mean, obviously the healthcare or a new product pipeline, it's more an organic or an internal investment into our pipeline and further development of pipeline, but process solutions and semiconductor solutions are the – I would say the priority areas when it comes to next M&A moves. Your second question on bintrafusp. You asked, so bintrafusp will remain blind until 2023.

What forms spaces for potential milestones? First of all, yes, the data will remain blinded until the study completion. Right now, the estimated primary completion date is in April, 2023 as you know, and as we said earlier, and this is event-driven. Analysis from the study will only be shared after the study completion and once the full dataset for the dual primary end points, which we have changed in March to PFS and OS, if you know has been obtained and analyzed. So the development milestones again, tied to the data from the lung cancer program and that is all I can say.

Krishna Arikatla: Thank you, Marcus.

Operator: Our next question comes from Florent Cespedes with Societe Generale.

Florent Cespedes: Hey, good afternoon. Thank you so much for taking my questions. Two quick ones, please. First on healthcare, for 2021, could you share with us which are the next most important milestones in your view? And my second question – on the research side I mean.

And the second question is some Research Solution. Could we have more color on whether the Q3 performance is a kind of one-off and if Q4 will be able to be more depressed or if we should still be more let’s say dynamic demand in Q4 as well in the early 2021. So just to figure out kind of the shape of the trend on this business. Thank you.

Marcus Kuhnert: Chris, do we want to start with the research question?

Chris Ross: Certainly can Marcus.

Absolutely, so thanks for the question. So yes, exceptional growth in Q3 from Research Solutions, exceptionally strong. And we estimate that the net effect of the COVID-19 portion of that growth is about 60% of the growth in Q3. So if you break it down, we see half of that growth coming from COVID underlying demand and half of it coming from actually pull in of work from Q4. And two other elements which actually offset each other a bit is we saw a pretty significant catch up effect from Q2, as you saw before, we had a very deep decline in Q2, a very significant uptake in Q3, so that catch up effect impacted Q3.

And we have to be reminded also in the balanced view that the academic labs are not fully operational yet. So we've seen global activity trending in the right direction, but certainly still far from normal. So though it was an exceptional Q3, there are some mitigating factors here in Q4 and beyond.

Florent Cespedes: Okay.

Marcus Kuhnert: Okay.

Thank you, Chris. I take the second question on healthcare. Florent, so you said milestones, I'm not 100% sure what you mean by that. I guess you mean the new slow in 2021, but just to reiterate those two milestone payments, which I just said which are for potential approvals for bladder first-line in Europe and in Japan, it's just outlined on the news flow side. This is on slide number 42 in the presentation, but I can also – it gives you the most important messages quickly now.

So from Tepotinib, MET exon 14, we expect FDA approval in the first quarter of 2021. You know Japan has already been approved midterm, we planned for going in all jurisdictions. For first-line bladder, or as already said, expected approval by the EMA in Japanese MHLW in the first half of 2021. On Bavencio lung, our lung study, we expect in the second quarter to have available in-house data. And then the data readout completed in the second half of 2021.

Bintrafusp alfa, importantly, second-line biliary tract data readout in 2021, and then in the second half of the year, the expected regulatory submissions subject then to the discussions or completion of the discussions with the health authorities. And, we have also our M5049, TLR7 and 8 antagonist – our antibody against . And here we expect to see first results in the second quarter of 2021. So this is the news flow we expect for next year.

Florent Cespedes: Thank you very much.

Constantin Fest: Thank you very much for asking all your questions today on this call. With this, I'd like to hand over to Marcus for some closing words. Thank you.

Marcus Kuhnert: Yes. Thank you, Constantin and thanks also to all of you for your strong and continued interest in Merck.

Let me summarize overall, Q3 was very strong and I think it's yet another proof of the successful execution of our strategy. We can – well, I can promise you, we remain focused on addressing the challenges that we are currently facing in light of the pandemic, while at the same time capitalizing on the new possibilities that arise. That said, we will report back to you again with our Q4 results in March and I look forward to meet many of you on the upcoming road show and conferences, this time, unfortunately again in a virtual setup, but I'm really looking forward also for the one other personal meeting again, let's hope that this will work out next year. Thank you very much and goodbye.

Operator: Ladies and gentlemen, thank you for your attendance.

This call has been concluded. You may disconnect.