Operator: Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Fourth Quarter 2024. As a reminder, all participants will be in a listen-only mode. I am now handing over to Florian Schraeder, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir. Florian Schraeder : Thank you very much, Heidi, and welcome to everyone joining us for this Q4 and full year ‘24 earnings call.

My name is Florian Schraeder, I'm Head of Investor Relation at Merck. I'm delighted to be joined by Belen Garijo, Group CEO; as well as Helene von Roeder, Group CFO. For the Q&A part of this call, we'll also have with us here in the room, Matthias Heinzel, CEO of Life Science; Peter Guenter, CEO of Healthcare; and Kai Beckmann, CEO of Electronics. As you surely have noticed, we recently announced upcoming changes to the executive board. I'm pleased to share that Jean-Charles Wirth appointed CEO of Life Science as of June 1st, as well as Danny Bar-Zohar appointed CEO of Healthcare as of June 1st will join us later today for a brief introduction.

With this introduction, I believe we are ready to begin. Over to you, Belen to kick us off. Belen Garijo : Thank you, Florian, and welcome everybody to our full year 2024 earnings call. I am starting on Slide number 5 of the presentation, and my main message on the slide is very clear. We delivered on our guidance and our ambition to return to profitable growth in 2024.

Life Science return to organic growth during 2024 with a continuous sequential improvement quarter-on-quarter in the second half of the year. Healthcare continued to show a strong organic performance and electronics grew thanks to AI-driven demand in semiconductor solutions. As we mentioned during our Q3 earnings call, we expected the group to trend in the lower half of the sales corridor and around the midpoint of the earnings corridors. And we have delivered on our expectations for net sales, EBITDA-free and EPS-free, both for the group and for the business sectors. Let's move to the highlights for the Q4 2024 on Slide number 6.

We had a very solid organic, a very solid Q4 with organic sales growth of plus 4% for the group. And we delivered a strong profitable growth supported by all three sectors. Healthcare was once again the best performer with 7% organic sales growth. Life science confirmed return to growth in Q4 with plus 2% organic sales growth. I am particularly pleased with a very strong order intake in process solution with registered low-teens growth sequentially in Q4 and even higher growth year-on-year.

Electronics showed organic sales growth of 2% in Q4, driven once again by semiconductor solutions as the semi-market for AI and advanced nodes continues to perform very well. Back to the group, while sales increased by 4% organically in Q4, EBITDA free achieved very strong growth of plus 20% organically in the fourth quarter. Given our strong cash generation, we have improved our net leverage despite having made significant investment in both CapEx and M&A during 2024. As communicated in our press release this morning, we will propose a stable dividend of EUR2.20 per share to the annual general meeting on April 25. As a reminder, for the dividend, we aim for a target corridor of 20% to 25% of EPS free and the proposed dividend of EUR2.20 per share is marginally above that corridor.

As you also see on the slide, we are moving for the first time from guiding on a qualitative basis towards quantitative guidance already with our full-year results and expect sales in a range of EUR21.5 billion to EUR22.9 billion and EBITDA free in a range of EUR6.1 billion to EUR6.5 billion. More details will follow on the guidance later on the presentation. Let me now provide a more detailed review of 2024 starting with life science on Slide 8. The positive news is that we saw growth inflecting in the second half of the year, both for process solutions and for life science as a whole. As we move past the period of customer destocking.

In fact, growth in process solutions inflected already in Q3 and kept growing in Q4. Non-repeat COVID-19-related sales fell to negligible levels and as a result, we saw a headwind in 2024 as sales declined by 3% organically. While sales in SLS, science and lab solutions were flat organically in 2024, process solutions declined by minus 6% because of the soft H1 2024. As customer destock in life science has gradually phased out the EBITDA pre margin improved quarter-and-quarter throughout 2024, reaching 29.4% in Q4. Our focus in life science is clear.

We aim to re-accelerate growth towards our midterm growth ambition in 2025. And this is going to be driven by PS, Process Solutions as we expect the recovery to continue in 2025. And we have strong confidence in our midterm growth ambition driven by our innovative portfolio across our businesses and across various growth drivers in the industry. Process solutions continues to innovate monoclonal antibodies, manufacturing with breakthrough products and technologies, especially in the areas of intensification, perfusion, digital solutions and novel modalities. We drive innovation through our own internal capabilities, and at the same-time continue to look at external opportunities.

The acquisition of Mirus Bio is an excellent example in this context. It is an important step for us towards completing our portfolio in process solutions for vector-based cell and gene therapy applications. And it very well complements our existing commercialized portfolio. Turning to healthcare, on Slide number 9, organically, our sales were up 7%. Growth was driven by our oncology portfolio once again with deliver organic growth of plus 13% fueled by Erbitux and supported by Tepmetko.

Bavencio also grew in 2024, despite growing competitive pressure. Our CM&E portfolio delivers strong 8% organic growth supported by contributions across all regions and all segments. Our N&I portfolio, neurology and immunology showed plus 2% organic growth with a strong performance of Mavenclad growing by 12%, organically being offset by the expected decline of Rebif. Fertility sales increased 1% organically against very tough comps related to former competitor stockouts. We achieve a strong profitable growth in 2024.

Our EBITDA margin, our EBITDA pre-margin increased by 380 bps to 35.4%, mainly driven by revenue growth and temporarily lower, and the expenses coupled with a strict cost control. From a strategic perspective, we have strong confidence in our ability to drive long-term growth through internal and external innovation with around 50% of launches to be sourced external innovation. And as you have seen, we have a very resilient base to build on with our very well established franchises expected to be the back, the backbone of slight growth in the mid-term. Moving on to electronics on Slide number 10, organically sales grew by 5% in 2024. This was mainly driven by semiconductor solutions, which was up 8% organically, as semi-materials saw low-teens growth, fueled, once again, by AI-related demand.

We have grown faster than MSI yet again. MSI is less meaningful this year due to under-shipping of wafers. Yet, our internal estimates show mid to high single-digit growth in wafer starts, which we outperformed, demonstrating the strength of our semiconductor materials portfolio. Display solutions saw a sales decline of 3% organically, as our growth areas in premium liquid crystals and OLED only partially offset the decline in general liquid crystals applications. The EBITDA pre-margin was 25.6%, which represents an increase of plus 60 basis points compared with last year.

This was mainly driven by revenue growth and supported by our 2024 efficiency program. Remember, EBITDA pre in 2023 was helped by a patent agreement with UDC. We continue to see excellent mid to long-term growth prospects of this business, having tech leadership in key high-value materials. On the short-term basis, while we continue to see growth in demand for semi-materials needed for AI and advanced nodes, the broader market still has to rebound. And with that, let me hand it over to Helene for a more detailed review of our finances.

Helene

von Roeder: Thank you very much, Belen, and welcome also from my side. I'm now on Slide 12, and we'll start with an overview of our performance by business sector in Q4. Organic sales growth in the fourth quarter was 3.8%. Our key growth engine was healthcare, while life science and electronics also contributed. Life science delivered organic sales growth of 1.9%, which is largely driven by process solutions.

With 6.7% organic sales growth in healthcare, it was the largest contributor, and oncology was the strongest franchise. Electronics grew 2.2% organically as our semi-business was up 5%. For the group, FX represented a headwind of minus 0.5% on sales, which is mainly seen in healthcare. Together with the portfolio effect of plus 0.4% for the group in Q4, which was driven by the acquisitions of Mirus Bio and UnitySC, sales increased by 3.7% in the fourth quarter. Regarding earnings, EBITDA Pre came in at EUR1.491 billion, driven by very strong organic growth of 19.7%, which is an increase of EUR198 million on an absolute basis.

Healthcare was a key contributor with an organic EBITDA pre increase of 34.2%, or EUR167 million on an absolute basis, with life science and electronics also contributing. FX was a stronger headwind on EBITDA pre than on sales, mainly due to negative FX effects from hedging as well as operationally across various currencies, mainly in healthcare. And with that, let's move on to the review by business sector starting this life science on Page 13. Overall, life science confirmed its return to organic growth in Q4, sales increased by 1.9% organically and process solutions was the main growth driver also showing a positive trajectory with sales up quarter-on-quarter, while science and Lab Solutions sales increased organically, comparing with the low base in the year earlier period, Life Science services was down organically, but yet against a higher base. So looking at process solutions first, sales were up 4.1% organically.

Order intake showed very strong year-on-year growth and increased by a low teens percentage rate quarter-on-quarter and book-to-bill is now above 1. At 2.7%, Science and Lab Solutions achieved organic sales growth in Q4. Excluding the SAP migration effect, which impacted the business by a low to mid double digit euro million amount in Q4 of last year, science and lab solutions would've shown a flat performance organically. The overall spending environment remained soft. Regarding margins EBITDA pre increased by 16% organically in Q4, well above organic sales growth.

The key driver here was an increase in the growth margins against a low base. And with that, I'm now moving on to Slide 14 for an overview of the performance of a healthcare business sector. Healthcare showed strong organic sales growth and was up 6.7% in Q4. By franchise, there were two portfolios with the strongest growth. Again, oncology with 14% organic growth and CM&E with an 8% organic growth.

Our N&I franchise achieved organic growth of plus 3%, and that was driven by a very strong Mavenclad performance of 18% organically reaching record sales in Q4. Oncology is mainly driven by Erbitux, which showed a stellar performance of plus 22%, again, organically in Q4, driven by growth in all major regions. Bavencio was up slightly in Q4 with an organic performance of plus 1%. Similar to the previous quarters, we delivered double digit growth in all regions except North America, where competitive pressures led to an organic decline. Referring to a CM&E portfolio, this continues to show a strong performance with plus 8% organic growth in Q4, supported by all therapeutic areas.

Let's look at the pipeline. In N&I, we now have all the data from the Willow Study of Enpatoran, both for CLE and SLE cohorts. Even though this SLE pipe did not meet the primary endpoint, the previous success of the CLE cohort and the performance of certain predefined populations in the SLE cohort make us optimistic about the potential for further development. Regarding of [10xh] which we have been informed by our partner about negative top line data from the ongoing Phase 2 trial, meaning we will not exercise the U.S. option.

Accordingly, we expect an around EUR15 million, which is 1.5 impairment in Q1 2025. On EBITDA pre, we showed a very strong 640 basis points margin improvement in Q4. Now, that was driven on one hand by the decline in R&D expenses, both in absolute terms and as a percentage of sales, and on the other hand, by strong sales growth amid strict cost control. Overall, EBITDA pre amounted to EUR731 million in Q4, and that was up 34.2% organically. Now, on Slide 15 for electronics, sales increased organically by plus 2.3% in Q4.

Semiconductor solutions up, sales were up 5.3% organically, driven by low-teens growth in semiconductor materials. We are seeing strong demands for differentiated materials, driven by trends in AI and in Asia-centric mature nodes, while the wider market has not yet recovered. The DSNs business declined year on year in the fourth quarter, as anticipated, as products have been pushed at least to '25. Sales in display solutions decreased by 6% organically, as the decline in liquid crystals was faster than contributions from growth areas. EBITDA pre amounted to EUR242 million, resulting in a margin of 24.8%, which represents an increase of 300 basis points compared with the year earlier period, which had the lowest EBITDA pre margin last year.

This is mainly due to higher volumes driving the growth margin compared with the year earlier period. Therefore, EBITDA pre increased organically by 14.9%. And with that, let's turn to a more detailed review of our Group figures for the full year '24, which you will find on Slide 16. On a reported basis, group net sales increased by 0.8% to EUR21.16 billion. EBITDA pre was up 3.3% to EUR6.07 billion, and EPS pre increased by 1.6% to EUR8.63 per share.

The group EBITDA pre margin came in at 28.7%, which is an increase of 70 basis points versus last year's EBITDA pre margin of 28%. EPS pre grew slower than EBITDA pre in '24. That was mainly due to higher regular D&A and impairments not adjusted for, mainly in healthcare. Operating cash flow increased meaningfully by 21.2% to EUR4.59 billion, up from EUR3.78 billion of last year. Overall, we were able to further reduce our net debt by more than EUR300 million in '24 to EUR7.16 billion.

And that is despite the acquisitions of Mirus Bio and UnitySC, which we closed in '24. So let me also briefly comment on our reported results. And with that, I'm now on Slide 17. EBIT was up 1% year-on-year. That was below the increase in EBITDA, pre mainly due to the high level of D&A in turn, mainly driven by the EUR140 million asset impairment we took on Savina plant in Q2 this year.

The financial report result improved by EUR70 million and that is mainly due to a better interest result in turn driven by lower interest expenses. The effective tax rate came in at 21.2% in the bottom half of our guidance range of 21% to 23%. Please be aware that potential changes to tax regulations being discussed on both sides of the Atlantic. The implications of these changes are not yet clear. Turning to EPS, reported EPS came in at EUR6.39 in ‘23, which is in ‘24, which is a decline of 1.5% year-on-year amid a higher tax rate compared to the full year of ‘23.

Now, let's quickly turn to a cash flow statement, which you find on Slide 18. Operating cash flow came in strong at EUR4.586 billion and was up by EUR802 million compared with the full year of ‘23. While profit after tax was down by EUR48 million. The increase in operating cash flow was mainly driven by number one, compared to last year, an improvement in other assets and liabilities, which is in turn mainly due to lower performance payouts and taxes. Number two, higher D&A versus last year, which is mainly due to higher impairment in healthcare as well as higher regular D&A directly resulting from a elevated CapEx spend over the last -- over the past couple of years.

And number three, a favorable change in other operating assets and liability versus last year. A year, which contained a number of non-recurring items. The investing cash flow increased to EUR3.05 billion up from EUR1.89 billion mainly due to higher cash outs for the announced acquisitions while the financing cash flow improved in ‘24 compared with last year. So before handing back to Belen, let me also briefly comment on our balance sheet, which is on slide 19. Our balance sheet expanded by around EUR3.1 billion compared with the end of December ‘23.

On the asset side, cash and cash equivalent increased to EUR2.5 billion from EUR2 billion at the end of December ‘23. Inventories and receivables decreased by around a EUR100 million each. Property plant and equipment increased driven by investments, intangible assets increased due to FX and our acquisitions. And lastly, other assets increased mainly due to the reclassification of surface solutions, which is now classified as an asset held for sale. On the liability side, financial debt increased by around EUR400 million due to net new borrowings.

Namely the EUR800 million hybrid bond which we issued in Q3 of ‘24. Pension provisions were down due to interest rate changes and net equity increased thanks to growth and profit after tax, and currency translation differences. As a result, our equity ratios strengthened further from 55% at the year-end of '23 to 58% at year-end of '24. And with that, let me hand back to Belen for the guidance. Belen Garijo : Thank you, Helene.

I am -- before the guidance, I am on Slide number 21 to show our progress in sustainability for the year 2024. We are doing this for the first time, fully applying the European Sustainability Reporting Standards. As you see on the slide, Merck is on a path to achieving its sustainability ambitions. The amount of people treated with our healthcare products continued to grow, and we just recently announced the treatment of the first preschool-age child with our new formulation, arpraziquantel against schistosomiasis, meaning that for the first time, medication is available for all ages. In addition, we have made good progress in sustainable patterns, supplier management, and on Scope 1 and 2 emissions.

Since 2020, we have been able to nearly half our emissions, and the key reason is the successful rollout of the NF3 abatement technology, which led to a significant reduction in process emissions, and we, therefore, remain confident to achieve our 50% reduction target well ahead of 2030. Going on to the guidance on Slide number 23, we feel very confident to provide quantitative targets for net sales and EBITDA pre with our 2024 results today. As usual, we will provide quantitative targets on EPS pre as part of our Q1 reporting in May. In that context, we forecast group revenues in a range of EUR21.5 billion to EUR22.9 billion, and EBITDA pre in a range of EUR6.1 billion to EUR6.6 billion. This is based on organic sales growth between plus 3% to 6%.

We aim to show profitable underlying growth and forecast, the group EBITDA pre to grow in a range between 3% and 8% organically. While for sales, we expect an FX effect of between minus 1% and plus 2%, we anticipate a currency effect on EBITDA pre between minus 2% and plus 1%. Moving into Slide number 24, for some additional details on the sectors, we have, as you see, moved to a quantitative guidance for our three business sectors. For life science, we anticipate an organic sales growth between plus 2% and plus 7%. For organic EBITDA pre, we guide to a corridor between plus 2% to 9%, thereby expecting life science to return to a profitable growth path in 2025.

We anticipate the growth of life science to be mostly driven by process solutions, where we have seen order intake and sales have been sequentially improved throughout 2024. We also expect a more normal seasonal sales pattern for life science overall. Moving to healthcare, we guide revenue growth between plus 1% and plus 5%. We forecast profitable organic growth and guide EBITDA pre to grow organically between 3% and 9%. For Electronics, we anticipate an organic sales development between plus 2% and plus 6% and an organic EBITDA pre development between 3% and 9%.

We forecast the trend to AI and advanced nodes to continue to drive our growth in Electronics, particularly in Semiconductor Materials, while the general market inflection is yet to come with the timing challenging to predict, and this is reflected in our guidance. Please note as well that our Electronics guidance still includes Surface Solutions. However, we are on track to close the transaction in the second half of this year. And with this, let me thank you for your attention. And Florian, over to you to lead us through the Q&A.

Florian Schraeder: Thank you, Belen. With that, we are now ready for the Q&A part of the call with Belen Garijo, Helene von Roeder, Matthias Heinzel, Peter Guenter and Kai Beckmann. [Operator Instructions] Heidi, we are now ready to take the first question, please.

Operator: [Operator Instructions] Your first question comes from the line of Matthew Weston from UBS. Matthew Weston : So the first is on, I guess, geopolitics, I suppose, in Life Science.

Matthias, can you walk us through NIH funding exposure for the business and whether you'd expect that to be a pressure? And also, given the focus from the Trump administration on tariffs, can you give us some help on, I guess, geographic location of the supply chain? How much of the U.S. do you supply from the U.S.? And is there any way you can change that? And then the second question is for Peter on pharma. We've seen the first true biosimilar Erbitux approved in China. Can you tell us how much Erbitux China is of total? And should we assume that Erbitux can't grow in 2025?
Matthias Heinzel : Matthew, it's Matthias. Let me start with your first two questions.

The first one around NIH, with that as a very important question these days. So just to size it, right? So within SLS, that segment within Life Science, the segment, which will be impacted by NIH is roughly 5%, 5% of total Life Science and roughly around 10% of total SLS, just to size it. And obviously, we need to see now how that unfolds. Obviously, if there are potential cuts coming, that could have an impact. If we look at the history, there was not always the strongest correlation.

But apart from that, the question is always also, what does it mean for potential buying behaviors of customers in that field by the university. So I think it's a little bit too early to tell. But just to size it, ballpark, it has an impact, if it comes and how much it comes, but it's around 5% of total Life science. Your second question on the tariffs, look, if I look back the last three, four years, I was glad you was clearly to go to an in-region, full-region model, right, going away from big centers supplying the whole world. And we have done that obviously in parallel as the COVID situation developed.

So we have a very strong footprint in the U.S., we have more than 20 plants, we have a strong footprint in Europe. We have a high share of in-region, full-region, both in process solutions as well as in life science. It's not 100%, it can't be 100%, but we feel we are very well covered. We have some options to move, obviously, production around. Obviously, we have single use in the U.S., if in Europe, it depends a bit also on the customer demand.

But I think from a supply chain perspective, we have now a much better global and regionally diversified footprint.

Peter Guenter: Yes, Matt -- sorry Matthew your question on Erbitux biosimilars China. So first of all, Erbitux, of course, yes, China is an important growth driver, but actually the brand is very dynamic across the world. Second, China is given a 25% of total Erbitux sales. And then what is important to mention is you mentioned biosimilars in China, that's actually not totally accurate because the products that have come to the market, actually the first one in June last year and the second one recently now in January this year, are actually non-comparable biologics.

So the Chinese regulatory authority did not classify them as biosimilar. And that has, of course, relatively important implications in terms of lack of substitution, NRDL listing, VBP, et cetera, et cetera. So we do continue to see growth for Erbitux overall in 2025. We do not expect biosimilars before 2026. And I just remind you that you need four biosimilars to get into VBP, so we are pretty far away from that.

I hope this helps you.

Operator: Your question comes from the line of Richard Vosser from J.P. Morgan.

Richard Vosser: Two, please. One on business development, obviously, given the context of the interest in swing, disclosed interest in SpringWorks, could you remind us about how you're thinking about allocating the EUR15 billion of firepower you have and what you're looking for in healthcare to accelerate the growth of the business? Second question, life sciences.

Just thinking about the very good order number in the fourth quarter, and I was wondering if you could talk about your expectations on how the orders you think will develop for process solutions through the first half of '25, through the whole of '25, if you can? Should we think about continued sequential improvements and book to bills above one? Thanks very much.

Belen Garijo: Thank you, Richard. Let's start with your first question and to address the question, to take a step back. First, as you know, we evaluate inorganic growth opportunities to ensure that they do align with the sector strategies, but most importantly, with the group's overall strategy. Let me make it very clear.

Our priority remains executing on life science M&A, and accordingly, it should come as no surprise that our plan remains to allocate a substantial percentage of our capital and our M&A firepower, which is precisely your question, to the life science sector. In healthcare, our inorganic growth strategy is focusing on accelerating external innovation, primarily through later-stage in-licensing. And that said, we have also mentioned the possibility of a smaller M&A in Healthcare, limited, and this is very important, limited to clear cut, low-risk deals that create value from early on. Overall, I want to make this very, very clear for everybody and reassure all of you that we will remain extremely disciplined in executing our M&A agenda on the basis that I have described. And as we have always done, for all the rest, let me take this opportunity to ask you to finally focus on the ad hoc message that we launched a few weeks ago since we will not be able to provide any additional information on this topic during the quarter.

Matthias Heinzel: Yes. Richard, it's Matthias. Then on Life Science and then your order intake question. Indeed, we feel very good about our Q4 momentum, by the way, which we've been building over the prior quarters, right? But certainly, to be continued in Q4 with very strong sequential order intake growth, the book-to-bill, which all of you asked quite often about now suddenly above 1. So we expect, if you will, this momentum, the order intake momentum to continue because that will drive our sales obviously.

Now to your specific question, it's a little bit harder to predict, obviously, every quarter, right? But if -- let's start with Q1 this year, throughout the year, I would expect the sequential growth of order intake. Now, how much every quarter? To be seen, right, there's certainly some fluctuation, but the momentum should continue. Now Q4 to Q1, just to keep that also in mind, there's a little bit of seasonality. I mean certain customers are placing orders to achieve their buying kind of volume. So Q4, Q1, I would look at it a little bit differently.

But then certainly, Q1 throughout the year, very good continued momentum. I feel very good about that. And then the book-to-bill is, as you know, is a ratio out of that. It's a bit harder to predict because obviously, the stronger the sales, even if you have good order intake, that ratio can come down. But long story short, I think the takeaway for you and all the colleagues on the call, we feel very good about the order intake and the momentum.

Operator: The question comes from the line of James Quigley from Goldman Sachs.

James Quigley: James Quigley from Goldman Sachs. I've got two, please. So one on Life Sciences guidance range. So it's reasonably wide as all ranges are.

But at the low end, what are you assuming here as we think about the subdivisions, it seems like peers in bioprocessing are landing around the 5% to 8% range there, thereabouts. Firstly, is this what you're assuming? And second, I'm assuming that the LSS is in line with the midterm guidance. This suggests that SLS will be negative at the bottom range. So what are the scenarios for this potential decline in SLS and the bottom end of the range in Life Sciences? Second of all, on Life Science margins, could you give us an idea of the potential drag from the new investments and plants that are coming online? Were there any other impacts like this in the 2024 numbers to think about as we're thinking about the growth year-on-year? I'm just trying to get a sense of what the clean underlying margin progression could be on a year-on-year basis within the Life Sciences division.

Matthias Heinzel: James, good to have you on the line.

Sure, I'll address your questions. On the first one, let me unpack it a little bit in terms of what are the key drivers. Some of them are known. And of course, there's a few new ones. But hopefully, you all appreciate now that we already, in this time of the year, give you absolute numbers.

And indeed, initially, the range is a little bit broader. But I think you can rest assure, as we get more clarity, we will narrow the range. But I think -- so let me unpack it. So number one, key drivers, obviously, the speed of the recovery. As I said before, we are very confident about the recovery and the better it goes, obviously, the more we go to the upper end of that range.

China is the second one. So obviously, we have a certain assumption for the midpoint, but since you're asking towards the lower end, obviously, if this recovery takes longer, gets more hiccups that could certainly be a further headwind. And China is, to a large extent, impacting SLS to a lesser extent, I would say, also peers. The third one is R&D spending. We talked about that in prior quarters.

Lab spending levels with pharma companies again, impacting for the most part SLS. If that doesn't pick up, right, or is prolonged, a little bit more muted, that could have a drag and then move more to the lower end. So those three, I think, we've talked about before. The new one is obviously what your colleague asked before, the NIH funding. We need to see how that unfolds.

Depending on that, of course, that could then also gravitate a little bit to the lower end. And then we also talked about the tariffs. I think these are the main drivers, and obviously, we are taking actions to mitigate those, but if they are unfolding, they could really become a force towards below the midpoint. On the margin, look, on a high level, again, if you apply the midpoint of the ranges, we expect margin expansion, right, midpoint sales 4.5, midpoint EBITDA 5.5. So it provides a margin progression.

That's our goal, obviously, also for the following years. In '25, we have two, if you will, elements to consider. One is, like you mentioned, the additional CapEx projects going live. I'll give you one example, actually here in Darmstadt, we'll go live with our membrane line, right? It's a size of investment, which is important, right, given what we talked before about geopolitics having a more regionally diversified supply chain. This is good strategically.

But obviously, as you start it up, you don't fill it up right away with 100%. It has some start-up costs, which we need to reflect in the margin. And the other one, and that's, again, by design, it has been my big driver. We need to increase R&D spend gradually, right, year-by-year. So again, consider that as an investment into the future.

But that has, short term, also some year-over-year impact on the margin. But rest assured, we -- and by the way, the margin is clean, right? There's no major, if you will, onetime effects also on kind of making the margin opaque. The goal is to have margin accretion and navigate, obviously, all those drivers to get as high as possible.

James Quigley: Great. And best of luck to both of you and Peter in the next chapters.

Operator: The question comes from the line of Sachin Jain from Bank of America.

Sachin Jain: Two please. So firstly, just back on M&A, Belen. If you could just remind us -- or Helene, of your valuation criteria, so ROIC versus WACC and timelines of EPS accretion. The deal that you put an ad hoc out on would have been dilutive short term.

So if you could just remind us of your timeline for EPS accretion, given commentary of Healthcare value from early on, I think it was your phraseology, Belen? And then secondly, related, could you just remind us of your pharma R&D spend expectations? You've talked about 1H being lower than 2H and trending back to the 20s, if you did BD, if the deal you do in Healthcare is more commercial versus pipeline, would R&D spend stay in the mid-teens? And then I might just squeeze one in. Florian, you mentioned that new divisional CEOs were on the call. I just wondered if they had any introductory comments.

Belen Garijo: Sachin, look, I already mentioned and comment extensively on the frame on the strategic trend guiding our inorganic decisions and what are the priorities. So nothing to add from my side.

I think that on the financials guiderails that we have and that we have definitely kept intact over the years. I will ask Helene to provide further details on those. Helene

von Roeder: Yes. So Sachin, I think you know them by heart. But let's go back into it.

I mean it's like yes, indeed, we look at accretion IRR above WACC. We look at financial stability in terms of our ratings. We look at EPS accretion. And overall, of course, the most important one is like strategic sales. So I think that's all to be said, everything intact, everything the same.

And I think with that, I would move over to Peter.

Peter Guenter: Yes, Sachin, thanks for your question on R&D phasing. So what you should expect is a progressive sequential increase, both in absolute and relative numbers during the year. Actually, this is driven by more activity, for example, in the ADC space and the DDR space, but also the fully coming up to speed of the cloud mg trial and this is actually a good sign of the progress that we are making in the pipeline. And of course, the NPC can privace is very exciting in this respect.

Obviously, the base of acceleration in -- especially in the second half of the year, will be partly dependent on success of external BD and also to which extent this external BD is clinical development heavy or not.

Belen Garijo: Sachin, it's Belen again. On your third point, please allow us to close the Q&A before we have the intro comments from Jean-Charles and Danny who will join us later on.

Operator: The question comes from the line of Emily Field from Barclays.

Emily Field: I'll just have two.

The first one, you mentioned that platinum use is stabilizing in the U.S. in bladder cancer. So I was just curious if you're also expecting stable sales for Bavencio in the U.S. in '25 over '24 or just how you're expecting that to develop specifically in the U.S.? And then I know, obviously, the NIH point has been discussed many times on the call. But you did mention that the academic markets were already soft in Q4.

So I was just wondering if you could confirm within Life Sciences the share of academic and government. And regardless of NIH cuts, how are you seeing those end markets for '25 over '24?

Peter Guenter: Yes. So Emily, thanks for your question on Bavencio, [indiscernible] I also should you give you a bit more color on Bavencio Global. So the first point is, and that's important, that we see really the platinum use stabilizing in the U.S.. But of course, there is a certain inertia between what you see in internal sales and that leading indicator, which is platinum use, which is then followed by Bavencio, but we would not see the stabilization of sales of Bavencio.

On the other parts of the world, we see that in those countries where you have early access in Europe, for example, where I'm thinking about Germany or France with an early access program. We see, of course, also the platinum share going down a little bit similar to what we have seen in the U.S. and then progressively as -- gets reimbursed in other European countries. We should expect the same trend in other European countries once reimbursement kicks in. So actually, we're quite in line with our modeling.

And we have seen, of course, also that the EU, whereas it continued to grow in last year with a plus 8%, we have seen that growth slowing down recently. So from a 2025 outlook perspective, we should expect a more challenging Europe amid rising competition also in this region for --

Matthias Heinzel: Emily, it's Matthias. On your Life Science question. Indeed, we have talked in the prior quarter about a temporary, more muted market environment in the lab space in North America. We had factored -- have factored that into our view for '25.

And the NIH cut, which has been discussed over the last few weeks would be kind of a secondary or a second driver on top. Having said all that, our expectation is that SLS globally will grow. Obviously, we need to see then especially how the NIH funding will develop the cards, et cetera, but we have been expecting that the muted lab market development would ease out over '25.

Operator: Next question comes from the line of Sean [Hammer] from Jefferies.

Unidentified Analyst: Just two, please.

So I know you said that sort of semiconductor market, general market inflection is yet to come with timing difficult to predict. But can you just maybe give us some color on the indicators on the broader Semi recovery in 2025? And albeit still quite far away, how are you thinking of 2026, given it's likely a down year on the Semi cycle? And to what extent is there an offset from Display Solutions?

Kai Beckmann: Yes. Thank you. It's Kai speaking, taking the Electronics question. So how do we see 2025 developing? The strong momentum that we already saw in 2024 from PI advanced nodes will continue into 2025, specifically on the backdrop of our customers adding capacity, unlocking bottlenecks in advanced packaging and transitioning to more advanced nodes.

We have heard the announcement of into SG&A from our customers that add capacity and technology opportunity for high-value materials. . The wider market, automotive, industrial is still on a comparably low level in most countries as well as, I think, the major market for semiconductor devices being in smartphones and in end-user computing, they're still waiting for the replacement cycle from the COVID work from home, procurement boom that we had a few years ago. So another dimension for end-user compute will be AI chips, so-called Edge AI that will help, of course, to have more penetration of high-end chipsets in computer. So this will be starting more towards the second half of the year and well into 2026.

So we -- the current view on 2026 is -- will be positive since that replacement cycle will definitely span across 2025, second half 2026 full year and the data center side of the business will not be much lower going forward since the projections of the new node introductions will go well into 2026 as well. But we don't guide, of course, on 2026. This is just a very qualitative outlook on what in 2026 could happen from an industry perspective.

Operator: Your next question comes from the line of Florent Cespedes from Bernstein.

Florent Cespedes: Two quick ones, please.

First of all, on Enpatoran following the, let's say, the announcement and the headline results you announced, could you share with us why you are confident to move forward with this product? And if you could give us a little bit more color on the different dimensions, that would be great. That's my first question. And second question on fertility. As we start to see the competition coming back, some color on this environment would be great as well.

Peter Guenter: Yes, Florent, thanks.

So two questions for me, I guess. So first on Enpatoran. If you -- so what we have already disclosed, of course, is a book and actually a pretty strong book in CLE. On SLE, there is indeed a near miss on the primary endpoint. But we see, like in many lupus trials, high placebo response and high variability.

The good news is that we see clear responses in predefined subpopulation, so we can really say that the drug clearly hits the target. Couple of subpopulations, but this is by no means exhaustive. But for example, patients with skin manifestations within the lupus cluster patients with a strong interferon gene signature or also patients with high steroid use at baseline. Overall, we also have confirmation that the drug is extremely well tolerated. And if you take a step back and you go, for example, back to the [indiscernible] development, which is the AZ drug in lupus, they had actually a very similar situation in Phase 2 and made it in Phase 3 by the right adaptations and by smart development.

So yes, definitely, we have some work to do. We are confident that the data warrant further development of the drug. On the fertility. So you just have to remember that in half 1 last year, we still had high growth rates because the competitor out of stock returned only gradually during this period. So consequently, now that the out of stock is resolved, we will be still looking at relatively high comps for H1 this year and come into the new steady state, if you will, as of Q3 where we are really confident to get back to mid-single-digit growth.

Perhaps one more point. If you look at Gonal-f, only you should look at the fertility cluster in general -- in total because we have a very dynamic and positive situation with Bavencio.

Operator: The question comes from the line of Dylan van Haaften from Stifel. Dylan

van Haaften: So just firstly, I'm sorry, another tariff question. So just if we think about tariffs and kind of think about it as a shock, and we know what sort of COVID did to the system and we know that stock levels are generally pretty low and there wasn't a ton of order flushing in the fourth quarter either.

Could we see a dynamic of sort of restocking emerge? And maybe some historical context here is interesting. We know that the end market is not overly fond of big shocks to the system or also of potentially paying tariffs, even though I know that in most CDMO contracts, it's reflected. But any thoughts here would be super helpful. And then I've got a follow-up.

Belen Garijo: Dylan, let me take this question because I understand.

Is this for the group? I guess this is going to be -- this is a group-wide question? Or are you more specifically targeting Life Science?
Dylan

van Haaften: More Life Sciences bioprocessing, but I guess broader thoughts would be very welcome as well.

Belen Garijo: Okay. So let me comment for the group very briefly, and then I will hand it over to Matthias. First of all, look it's not that we haven't heard of this before, right? And this has been -- President of the U.S. has been quite vocal during the electoral campaign that this could be one of the options.

For us, the U.S. is not only a key market, but it's our largest business hub globally. We have our biggest percentage of our workforce in the U.S. We have 72 sites in more than 20 states. And it's a significant investment, both in R&D and manufacturing in the U.S.

So to say that we are a local company in the U.S., and as Matthias mentioned before, we have localized over the years our supply chain in anticipation of potential trade barriers and potential tariffs. In relation to this, the initial wave of tariffs that are already in place, so Mexico, Canada and China are not impacting us. And obviously, as we better understand the potential scenarios, we are putting in place mitigation plans across the group to cover supply in the U.S. and to stay to meet customer and patient demand in the U.S. That's basically our position today.

And with this, we believe that it is still premature to speculate what type of tarriffs can come to other regions. We are watchful, we're waiting, I can tell you.

Matthias Heinzel: Just one addition, Belen, and Dylan, just on your question. Yes, look, we are well positioned from a network standpoint. I think we talked about that multiple times.

The other point is obviously staying close to customers to understand if they're considering movement. But maybe just one recent example. We had one small example actually. And obviously, it's public right in India, where there were tariffs applied in PS, but in SLS on a specific portfolio, it was last year. And like you said, that created a little disruption than people, including us, try to reshuffle their supply chains.

And then a few weeks later, it was kind of removed the tariff. The point is I think we need to also make sure that we're not overreacting right, because that could create a lot of disruption. And then to your final point, I think, look, we are ready, right? We're ready to take also additional upside, right should it come because we talked about before, right, if the trajectory of PS is even stronger, of course, we need to be ready to supply. So we are ready. We're engaging with customers.

So far, we have not seen a major kind of reshuffling. But like you said, I mean, I think many customers are running now scenarios, and we are staying in close dialogue with them, but we are certainly prepared. Dylan

van Haaften: Awesome. That was super comprehensive. And then just one for Kai.

So just, you spend a ton of time in Life Science and pharma. But I know that in the second half, there was at least some re-comping on project activity last year, which was a little bit less favorable. And we've seen a lot of projects getting announced. Could you maybe just give us an idea of what the project business is going to look like for next year? And I know there's typically high visibility there, but just any color there would be super useful.

Kai Beckmann: Yes.

Thank you. As you remember, from 2023, we came for a real record year with multiple parallel projects that were very strong that kind of give us the -- of course, a tougher start in 2024, which again was the second highest year on project and equipment for our company and just moderately below 2023. So that was the timing, the phasing in the different quarters that has maybe given a picture of more variability, the second half was lower than the first half as it comes to projects. And in addition, we have learned from some of our customers that they have phased out or phased some of their CapEx projects into 2025, even some of them into 2026. So this impacts us in the current year.

I see some variability over the year. We see some delays on projects. But all in all, still 2025 will be on a high level in terms of projects and equipment, similar to 2024 and 2023, maybe slightly below 2024 if we would take that more precisely. So that phasing, of course, is not fully in our hands. Nothing we can influence.

We will just depend on the customer project timing.

Operator: The question comes from the line of Oliver Metzger from ODDO BHF. Oliver Metzger : Two on Life Science, please. The first one on order intake. So can you first describe the dynamics between consumables and equipment? And in this context also, how long does it take to convert these orders into revenues? Second question is at LSS.

So the testing business seems to be pretty intact. But it appears to me that over the last quarters, the volatility at the CDMO business was more skewed towards the negative side. So can you comment about any form of meaningful customer losses during this time? Or would you describe it still as a normal volatility given the scale of the business?

Matthias Heinzel: Good question. So on the first one, again, just to frame it, we are 90% a consumable business, less than 5% or so is equipment from a pure sales perspective. But on order intake, indeed, we have seen a strong order intake overall, but that applies to both obviously, consumable and equipment.

Having said that, equipment has sometimes a little bit more volatility because you have certain larger purchases. It's less if you will diversify. But the key messages momentum has been building on both consumable and equipment over the last quarters. On LSS, you're right, we have 2 parts of the business. The testing business, very strong overall throughout last year, call it like a mid-single-digit, a little bit above that kind of line.

In fact also a little bit, yes, some exposure to biotech funding or if certain customers have really a blockbuster running extremely well. So there's also a little bit of fluctuation. But overall, we feel good about the trend. CDMO. Indeed, that business, given its focus on the more novel modalities, right, where by definition, you work with fewer number of customers, where you work with early-stage customers, we are depending more on their success.

There has not been a significant customer loss, right? Some customers may have some cash limitations, right? Then they streamline their programs. We see the impact. The one thing I would like to mention, although I didn't want to talk too much about COVID anymore. If you look at that business versus Q4 '23, that still had quite some COVID revenue because we had some last time buy, if you will, in Q4 '23, that is, if you will, distorting a little bit the year-over-year comparison and makes it even a little more negative. But in a nutshell, CTS on a good growth trend, very stable.

CDMO, long-term perspective, yes, absolutely clear value proposition, but short term, still a bit more volatility depending on customers' own program progression through the pipeline.

Operator: The next question comes from the line of Rajesh Kumar from HSBC.

Unidentified Analyst: Sorry. This is [indiscernible] on behalf of Rajesh Kumar. So I've got a question on your capital allocation priority.

Is your a capital allocation priority still more skewed to Life Science? Or is it gradually moving more towards pharma?

Belen Garijo: For your question. I will reiterate what I said before, our M&A strategy and capital allocation has not changed. And accordingly, I want to emphasize that our plan remains to allocate a substantial percentage of our capital and our M&A firepower to Life Science as we have couple of times mentioned. Healthcare, inorganically, we are focusing on accelerating external innovation, primarily through late stage in-licensing. And this is obviously aiming to increase the optionality of our pipeline.

We have mentioned the possibility of a smaller inorganic moves in Healthcare, though this is going to be absolutely limited to clear cut low-risk deals that will create value for -- from very early on. So rest assured we will fully comply with this and stay extremely disciplined when executing our M&A agenda. Florian Schraeder : Heidi, this is Florian. We would have time for one more question, please.

Operator: And your final question comes from the line of Simon Baker from Redburn Atlantic.

Simon Baker: I just wanted to really come back to something that's been discussed before, but asking in a slightly different way. We talked about the evolution of orders in Life Science. I just wonder if you could just give us some idea of how that is going to translate into revenue growth throughout the year. Should we, given the performance in Q4, are we expecting to see much back-end weighting to 2025? Any color you can give on the evolution by quarter would be handy. And also the same question for Electronics.

How should we, given where we are in the cycle, think about the second half, first half weighting of growth within electronics?

Matthias Heinzel: Great. Simon, very good because I think I missed one part of Oliver's questions. I can cover it here. It was about how the orders translate into revenue. So ballpark, you can think about that the bulk of the orders were turning to revenue within 6 months.

That's a key metric we're looking at. I call it, quality of order intake, meaning which portion turns into revenue in 3 months, 3 to 6 months and so on. But this trend is also going in the right direction. It's a very important metric and kind of ballpark, the majority will turn into revenue within 6 months, which is a good trend.

Kai Beckmann: Simon, let me take the Electronics question.

So coming from last year, where we had quite a very nice picture of quarter-on-quarter growth where we, at the beginning of the year, said second half, clearly stronger than the first half. But don't underestimate, we had a quarter-on-quarter growth trajectory over all 4 quarters last year. And this momentum, specifically in the materials sector, specifically in the area of materials for advanced nodes, that momentum will continue as we're now starting to -- no transitions, using gate all around technology, using molybdenum as new material, using a more sustainable photoresist materials. So that will be kind of a continuous development apart from major inflection points in the wider market, such as what I explained earlier on end user compute and mobile phone replacement. So this is independent of that.

This is why we believe there is a gradual development for materials step-by-step, quarter-on-quarter underneath plus, of course, the market inflection point. They are more skewed towards the second half of 2025. That will give us additional support for growth in the second half.

Belen Garijo: Okay. So thanks, Florian, and thanks, everyone, for your continued interest in Merck.

We are getting to be the end of the call. And therefore, I would like to just leave a key phone message with all of you before I introduce our newly appointed members of the Executive Board. And that message is very clear. We have delivered on our commitment in 2024, returning to profitable growth, and we stay very highly confident on accelerating our profitable growth in 2025. And now of course, as we continue to execute on our strategy and for sustainable value maximization.

And now before closing the call, it's my great pleasure to welcome 2 of our 3 newly appointed members of our Executive Board, Jean-Charles Wirth, who will serve as CEO of Life Science starting in June; and Danny Bar-Zohar, who will take on the role of CEO of Healthcare as of June as well. So I will now hand it over to both of them for a few introductory remarks, and I would like to ask Jean-Charles, to begin. Jean-Charles?
Jean-Charles Wirth : Yes. Thank you, Belen, and hello to everyone on today's call. First, I want to express my sincere gratitude for the warm and supportive messages I received over the last past few days.

It truly means a lot to me. And thank you to Matthias for his partnership over the last 4 years and commitment to ensure a smooth transition. So let me introduce myself. I am Jean-Charles Wirth and I have been in the company in nearly 20 years. Throughout my career, I led various finance and business leadership role, mainly in Life Science.

Milestone includes serving as a Life Science Sector CFO integrating [indiscernible] and leading the Applied Solutions business unit from 2017 to 2021. And most recently, I led the Science and Lab Solutions business unit. With these backgrounds, I'm excited to step into the role of Life Science CEO. Life Science is a remarkable business with outstanding capabilities and extended portfolio, a vast global footprint and amazing professionals. So I move into this responsibility to lead Life Science with both optimism and excitement.

Matthias and I continue to meet regularly and have begun engaging with my new executive colleagues on critical priorities. I am incredibly excited to calibrate with our team across businesses and functions. And let me close by saying that I look forward to meeting and interacting with many, many of you in the near future. With that, I would like to hand over to Danny. Over to you, Danny.

Danny Bar-Zohar : Thank you so much, JC, and hello, everyone, from my side. Let me just start by expressing also quite a lot of gratitude to the Merck family for the trust they placed in me, to Peter for his leadership and vision that have strengthened our Healthcare business for sure and to our teams around the globe for the huge impact that we have on so many patients. Some of you know me from past interactions, I'm sure. But for those who don't, I joined Merck Healthcare at the end of 2020 as Global Head of Development and have served as Global Head of R&D and CMO since 2022. Joint physician by education and bring 2 decades of leadership experience in pharma, having worked previously at Novartis, Teva and also venture capital firm Syncona.

I'm truly excited to take on this new role and would like to share 3 important messages with you today. First, having closely worked with Peter together, you can expect nothing short of, I would say, a small transition and a very reasonable degree of continuity. Second, putting Healthcare on what I would define as a solid track to mid-single-digit growth is the top of mind for me. And for this, we will need to replenish the pipeline both advancing it internally and from external sources, as we say. Third, our established franchises will continue providing a resilient backbone.

And overall, we'll remain very disciplined on cost to allow more high-quality short-term goal for the pipeline, for the growth. So I very much look forward to our future touch points. And with that, I'll hand it back to Belen.

Belen Garijo: Okay. Thank you, Jean-Charles.

Thank you, Danny. And with this, I want to once again thank everybody for their participation and look forward to our coming interactions during the roadshows. Goodbye.

Operator: Ladies and gentlemen, thank you for your attendance. This call has been concluded.

You may disconnect.