Merck KGaA
XETRA:MRK
Earnings Call Analysis
Q4-2023 Analysis
Merck KGaA
As the full year 2023 comes to a close, the company proudly meets its targets and market expectations, displaying resilience in a year fraught with challenges. Despite the tough semiconductor market's down cycle affecting the company's Electronics sector, there are glimmers of hope. As the market shows signs of improvement with reduced chip inventories and a rebound in chip pricing, the company is tuned for sequential growth, especially with a stronger second half anticipated in 2024.
A dive into the financial details unearths a landscape of both triumphs and hurdles. The Group experienced a dip in net sales and profitability ratios, with reported EBITDA pre dwindling by 14.2% and EPS pre by 15.5% compared to the previous year. Operating cash flow also saw a decline. However, not all is bleak as the company managed to reduce its net debt significantly and presented a sturdy balance sheet with growing net equity, despite being partially dented by unfavorable foreign exchange outcomes.
On a brighter note, the company's commitment to sustainability remains steadfast and is evident in surpassing environmental targets, having achieved a 24.8% reduction in water intensity against a goal of 10% by 2025. Aiming higher, it now sets ambitious targets of slashing water intake per revenue by half and reaching a circularity rate of 70% by 2030.
The company's forecast reveals that while the first half of 2024 may be more subdued, there is strong confidence in recovery dynamics as the year progresses, with indications leaning towards a more robust second half. The picture painted is one where anticipations are steadily turning positive, supported by market data signaling a return to growth in key sectors as the year unfolds.
You don't have any saved screeners yet
Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Fourth Quarter 2023. [Operator Instructions]
I'm now handing over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.
Thank you very much, Heidi, and a very warm welcome to this Merck Full Year 2023 Results Call. My name is Constantin Fest. I'm Head of Investor Relations here at Merck, and I'm delighted to be joined today by Belen Garijo, CEO of the group; as well as Helene von Roeder, CFO of the group. Also for the Q&A part of this call will be joined by Matthias Heinzel, CEO, Life Science; Peter Guenter, CEO of Healthcare; as well as Kai Beckmann, CEO of Electronics.
In the next couple of minutes, we would like to run you through the key slides of this presentation. And after that, we are happy to take all of your questions in the Q&A.
With this, I'd like to directly hand over to Belen to kick off the presentation. Over to you.
Thank you, Constantin, and welcome, everybody, to our full year 2023 earnings call. I am on Slide #5 of the presentation and would like to start with some key messages for 2023.
First of all, we have landed expected and delivered on our guidance, not only that, but we have also delivered to market expectations for fiscal year 2023. I hope you would agree with me that we were confronted with major market headwinds and have operated our business in a very, very challenging environment.
In that context, we have shown great resilience with a strong support from our multi-industry business model. As we already mentioned during our Q3 earnings call, the scale with opportunities on one side and the challenges on the other side was tilting more towards the challenges. So we have met our guidance corridors for net sales, EBITDA pre and EPS pre, and this is not only good news, but it reflects our great anticipation of the way the business environment was going to be moving in 2023, but also a very disciplined execution of our plans.
Now let's move to the highlights for 2023 in the next slide, Slide #6. The strong performance of Healthcare partially compensated for the challenges that we had for Life Science and Electronics. Organically, our group sales were down by 2% and EBITDA pre declined by 9%. Healthcare was once again the best performer with 9% organic sales growth. This was driven by both our wave 1 launches, in particular, Bavencio and Mavenclad and our Fertility franchise. Life Science recorded a 2% decline in the core business, driven by continued customer destocking in Process Solutions and a deteriorating macroeconomic environment in China amid a complex SAP migration, which impact we already discussed with you in Q3 last year.
Against the backdrop of the share decline in the COVID-19 business, total sales in Life Science were down by 8% organically in 2023. This decline also had a negative effect on the EBITDA pre margin in Life Science and consequently, that of the group. Sales in Electronics were down by 5% organically due to the prolonged well-known down cycle in the semiconductors market. All that together with significant currency headwinds and a very small portfolio effect, sales declined by EUR 1.2 billion year-on-year to EUR 21 billion. While EBITDA pre came in at a EUR 5.9 billion, once again within our guidance corridor.
Moving on to Slide #7 to show you the proposed dividend. As communicated in our press release this morning, we will propose a dividend of EUR 2.20 per share to the general assembly on April 28. As you see, this is stable versus last year, speaking of the great confidence that we have on the long-term growth of our business. While it is part of our policy that the current dividend constitutes the minimum level, this assumes a stable economic environment. And as [indiscernible] laid out, our businesses were confronted with major headwinds and operated in a very challenging environment. Once again, in keeping our dividend stable, we signal strong confidence in our future growth.
Let me now provide a bit more color on 2023 on a business-by-business basis, starting with Life Science on Slide #9. Life Science had a transitional year where sales were down by 2% organically in the quarter. While COVID-related sales decline as anticipated, with an additional dampening effect of minus 6%. Therefore, total sales in Life Science declined by 8% organically. In line with our guidance, COVID-related sales fell from around EUR 800 million in 2022 to around EUR 250 million in 2023. Process Solution decreased by 8%, mainly contributing to the organic sales decline in the quarter.
Turning to profitability. The EBITDA pre margin was down to 30.4% from a high 36.2% last year, mainly driven by lower volumes and negative mix effects mainly due to the decline of the COVID-related sales, which you may remember were highly profitable. Our focus in Life Science is very clear. We aim to return to growth during 2024 while leveraging our innovative portfolio across our three business units within Life Science. Process Solutions is a key enabler of next-generation mAbs manufacturing and the production of novel modalities. Here, we can leverage our know-how to drive Life Science services in parallel. We bring new solutions to the market, taking a very active role in the area of digitalization of labs and research.
In summary, 2023 was a transitional year for Life Science with significant market headwinds for nonrepeating -- from nonrepeating COVID-related sales coupled with pronounced customer destocking. While book-to-bill was below 1 throughout 2023, it was trending in the right direction in the second half. Underlying market fundamentals remain attractive beyond temporary developments, and we have a strong confidence in the midterm growth prospects for our business in Life Science.
Moving into Healthcare, Slide #10. Sales were up by 8.5% organically, and the EBITDA pre margin has remained stable at 31.6%. Regarding EBITDA pre, positive effects from stringent cost management and half a year of full Bavencio profit repatriation were masked by additional prelaunch cost and the evobrutinib termination provision of a high double-digit million amount that Helene will confirm later. Growth in Healthcare was driven by our Oncology portfolio, which delivered organic growth of 17%, fueled by the continued ramp-up of Bavencio as well as Erbitux.
Our NNI portfolio neurology and immunology remained organically stable with a strong performance of Mavenclad, especially in the U.S., offsetting the expected Rebif decline. Our strategic franchise grew by 15% organically due to a strong underlying growth, which was amplified by competitors' stock-outs.
From a strategic perspective, we are confident that our focused leadership approach is solid and provide a promising basis for long-term growth. While the sale of EVO was no doubt a disappointment, our pipeline continues to have significant potential. In all stages of development, we have compounds with novel mechanisms that could redefine the standard of care in key therapeutic areas like oncology and -- or immunology. Development of xevinapant is going on. Our latest -- I mean, as you know, xevinapant is our latest stage blockbuster candidate in [indiscernible]. And the next step is the interim analysis of the TrilynX study, the Phase III study in unresectable patients who are eligible for treatment, which is platin.
Our TLR7/8 inhibitor enpatoran has written an important milestone in 2023 by completing the futility analysis in our Phase II program in systemic and in cutaneous lupus. We signed new collaborations and license agreement to increase the optionality of our pipeline. And all in all, we feel pretty solid and good about our positioning in Healthcare despite the [ sector ] with evobrutinib. We will remain focused on stringent execution of our strategy to both drive our existing product portfolio and to continue to increase optionality for our pipeline.
Moving into Electronics on Slide #11. Organically, sales fell by 5% in 2023, while EBITDA pre declined by 17%. Our Semi Solutions business was down 4% organically, yet outperforming the market. Our Display Solutions business saw a sales decline of 9% organically, and this was mainly due to volume losses against high comparables from H1 2022 and price reductions in liquid crystals. Surface Solutions was down by 4% due to volume declines in automotive, coatings and industrial pigment demand. The EBITDA pre margin of Electronics landed at 25% with some headwinds from currency.
The sales decline in Semiconductor Solutions driven by semiconductors materials led to underutilization cost and negative mix effects. Display Solution experienced increasing price pressure, mainly in the liquid crystal business. This affects cost and adverse underlying margin development.
Obviously, in this context, we have to take some cost actions to mitigate the impact of this effect from profitability while enabling continued investment in key growth areas. We see in Electronics excellent long-term growth prospects. Structural growth drivers such as artificial intelligence, high-performance computing and Internet of Things, all demand more material solution and cutting edge innovation for the next generation of chips. Our Semiconductor Materials business delivered two quarters of sequential growth in the second half of 2023.
We have also seen the first positive signals in the market. Chips inventories are being reduced, chip pricing is recovering, and we observed an early cycle recovery in leading-edge memory and logic chips. We anticipate sequential quarterly growth across 2024 with H2 expected stronger than H1.
To sum up, 2023 was also challenging for Electronics due to the prolonged down cycle in the semiconductors market. However, we are convinced that we will emerge stronger from this transitional year.
And with that, let me hand it over to Helene for a more detailed review of our financials.
Thank you very much, Belen, and a warm welcome also from my side.
On Slide 13 for an overview of our key figures for 2023. On a reported basis, group net sales declined by 5.6% to EUR 20.99 billion. EBITDA pre was down 14.2% to EUR 5.88 billion and EPS pre declined by 15.5% to EUR 8.49 per share. The group EBITDA pre margin came in at 28%, which represents a decrease of 280 basis points versus last year's EBITDA pre margin, which ended at 30.8%.
Operating cash flow declined by 11.2% to EUR 3.78 billion, which is down from EUR 4.26 billion last year and was hence favorable versus EBITDA pre, mainly due to lower net working capital. Trade receivables declined and inventories have remained stable. Overall, we were able to further reduce our net debt by more than EUR 800 million in 2023 to around EUR 7.5 billion.
So with that, moving on to Slide 14 for a summary of our performance by business sector. Now Belen already walked you through the highlights, so let me just add the following.
Healthcare contributed positively to organic sales growth, which was more than offset by organic sales declines, especially in Life Science, but also in Electronics. The organic EBITDA pre decline was mainly driven by Life Science, electronics having added to the development. And on top of this, FX was a headwind for all three business sectors. However, most pronounced in Healthcare.
Now let me also briefly comment on our reported results. So with that, I'm now on Slide 15. EBIT was down by 19.3% year-on-year. This was above the decline in EBITDA pre, mainly due to the high level of D&A and restructuring [indiscernible]. The financial results improved [indiscernible], which was mainly driven by higher yields on cash. The effective tax rate came in at 18.7%, which is actually below our guidance range of 21% to 23%. This was driven by a nonrecurring deferred tax benefit, which occurred in quarter 4.
We expect our effective tax rate to remain in the guidance corridor going forward, we are actually keeping our guidance range unchanged, which is 21% to 23%. Reported EPS came in at EUR 6.49 in '23, which represents a decline of 15.2% year-on-year.
So with that, let's now take a closer look at Q4. Before I go into the details by business sector, let me briefly share some headline figures for the group. You will find these in the appendix of the presentation. Organically, group net sales decreased by 1.7% in Q4. EBITDA pre was down by 13.7%. The disproportionate decline of EBITDA pre was mainly driven by the margin decline in Life Science. FX headwinds had an effect of minus 6% on group sales and minus 6.5% on group EBITDA pre.
So with that, let's take a closer look at our three business sectors, and I'm starting with Life Science, which you'll find on Slide [indiscernible]. Sales in the Life Science core business were down 4% organically in Q4, while COVID-related sales continued to decline and had an additional dampening effect. Overall, sales in Life Science declined organically by 9.7% in the fourth quarter.
So looking at Process Solutions first, the core business decreased by 11% organically in quarter 4, a slight improvement from the minus 15% in quarter 3, further amplified by the COVID-related decline of 8%. The pronounced decline in the core business was mainly driven by customer destocking. Overall, we would describe the situation in Process Solutions as hoovering around the trough.
Now taking a closer look at Science & Lab solution. Sales were down 2.1% organically, including an immaterial COVID headwind. Demand from pharma companies has remained soft in North America. And the softness in China has identified -- intensified, sorry, in Q3 with the new anticorruption campaign having added [indiscernible]. And on top of that, the SAP migration impacted our Science & Lab Solutions business by a residual low to mid-double-digit euro million amount in Q4.
Turning to our third business, Life Science Services. Sales in the core were up 14% organically, driven by positive project phasing in CDMO. Amid a significant drop off in COVID-related sales, as expected, sales in total were down 8% organically. EBITDA pre declined 26% organically in the fourth quarter, mainly due to lower volumes and negative mix effects.
And with that, let's move to Healthcare on Slide 17. Healthcare delivered organic sales growth of 9.2% in Q4. Wave 1 launches grew 17% organically. And additionally, the established portfolio was up 7% organically. By franchise, oncology was a star performer yet again at plus 18% organically, which was mainly driven by Bavencio, which is up 17%; Erbitux, which grew 16% organically on a strong performance in China.
Fertility also performed strongly again at plus 14% organic sales growth. Our N&I franchise was stable in Q4. Organic EBITDA pre was up 9.6% in the fourth quarter, which is slightly above the organic increase in [indiscernible] EBITDA pre amounted to EUR 565 million, resulting in a margin of 27.8%. This is 340 basis points below Q4 '22 and also 540 basis points below the margin in Q3 '23.
With that in mind, please remember that the EBITDA pre margin in Q4 '23 was impacted by a provision for the completion of the evobrutinib clinical trial program, which was around EUR 95 million. While FX also materialized a significant headwind on EBITDA pre with an effect of minus 20.4%. Here, the largest contribution comes from the devaluation of the Argentinian peso, where the December rate was applied for a full revaluation within Q4. Besides that, also the U.S. dollar and the Asian currencies had a pronounced effect on our EBITDA pre.
So let's move to Electronics on Slide 18. Sales were organically down by 3.2% in Q4, while FX had a negative effect of minus 5%. Semiconductor Solutions were down 3% organically, however, outperforming the market yet again. Sequentially, they were up 8% with both DS&S and semi materials having contributed to that development. Sales in Display Solutions declined 4% organically due to price pressure in liquid crystals. Surface Solutions fell organically by 6% on a softer sales in industrials and [indiscernible]. EBITDA pre amounted to EUR 206 million, resulting in a margin of 21.8%, down from 30.1% in Q4 of last year. And organically, EBITDA pre declined minus 25.3% due to unfavorable mix effects and lower sales in semiconductor solutions as well as negative pricing in liquid crystals. FX was also a stronger headwind on EBITDA pre than on sales, having had a minus 6.8% impact.
So before handing back to Belen, let me also briefly comment on our balance sheet on Slide 19. Our balance sheet is basically stable compared to the end of December 2022. On the asset side, cash and cash equivalents in [indiscernible] to EUR 2 billion from EUR 1.9 billion at the end of December 2022. Inventories were stable, while receivables decreased to EUR 4 billion from EUR 4.1 billion of the previous year. Property, plant and equipment increased driven by our investments. And last, intangible assets decreased due to amortization as well as FX.
Now looking to the liability side. Financial debt decreased by around EUR 500 million due to net repayment and pension provisions were up as a result of interest rate changes. Net equity increased, thanks to growth and profit after tax, partially offset, however, by negative FX effects. And as a result, our equity ratio strengthened further from 54% to 55%.
And with that, let me hand back to Belen.
Thank you, Helene. Please go with me to Slide #21 whereas every quarter, I'd like to provide a very brief progress update on our sustainability efforts. As part of our nonfinancial statements in the annual report that we have published this morning, you may have seen already some of the targets and some of the sustainability targets and the progress we have made against those targets. In addition to our focus area of human progress, supply chain management and diversity, we also report on our environmental targets as regards emissions, green energy, water and waste.
And I am pleased to report that we have overachieved our targets to reduce the negative impact of our water use and waste production well ahead of schedule. We managed a 24.8% reduction in our water intensity score in 2023 versus a targeted reduction of 10% by 2025. Our waste score was reduced by 11.5% in 2023 versus the base year 2016 compared with our goal to achieve a 5% reduction. So we have actually delivered twice as much reduction as expected. For this reason, we have decided to replace these targets with new ambitions and please move to Slide 22 for more details.
As a new environmental target for water, we are introducing the water intake ratio with the goal to reduce our water intake per revenues by 50% by 2030 versus the base year of 2020. On the waste metric, we now are also emphasizing the recycling component and are introducing the circularity rate with the goal of achieving a circularity rate of 70% by 2030. So overall, we made significant progress in 2023 and, of course, remain strongly committed to our sustainability ambitions.
Now moving into the outlook and guidance. Please move into Slide 24. Let me conclude the call with the guidance for 2024. As always, at this time of the year, we are providing qualitative targets. This will be followed by a quantification of these targets as part of our Q1 reporting in May. Overall, we confirm our return to organic growth in 2024. For group net sales, we forecast a slight to moderate organic growth. We no longer provide guidance excluding the effect of COVID headwinds. For group EBITDA pre, we also forecast a range from a slight to moderate organic growth. While for sales, we expect adverse currency effects of between 0 and minus 3%, we anticipate a slightly more pronounced adverse currency effect on EBITDA pre of minus 1% to minus 4%.
In the following slide, Slide #25, you will find additional color by business sector. We expect in 2024 different growth dynamics across our three business sectors. These dynamics depend on the speed of recovery of our end markets and our assumptions on other critical business levers that we can discuss during the Q&A.
For Life Science, we anticipate a slight organic decline to slight organic growth and EBITDA pre in a range from a moderate organic decline to a slight organic growth. And remember, while we no longer provide guidance excluding the effect of COVID headwinds, we expect COVID-related sales to fall to negligible levels in 2024, down from around EUR 250 million in 2023. This means that COVID-related sales will still be a headwind in 2024 of around 2.5 percentage points year-on-year for Life Science. We expect a gradual recovery of Life Science during 2024 with the second half of the year anticipated to come in stronger than the first half. Don't forget, H1 '24 compares against a very high base, especially in Process Solutions as the full impact of the customer restocking only became visible to us during Q2 '23. Therefore, we anticipate H1 to decline year-on-year.
Moving into Healthcare. We guide for moderate to solid organic sales growth and low teens organic EBITDA pre growth. We expect organic sales growth to be mainly driven by Mavenclad supported by our oncology franchise as well as by our cardio metabolic and endocrinology product portfolio.
Why do we expect a stronger organic growth on EBITDA pre than on sales for Healthcare? First of all, the evobrutinib termination provision of EUR 95 million will not repeat. Further, there will be no prelaunch cost for evobrutinib as in 2023. And as we already mentioned before, the impact on EBITDA pre of the loss of evobrutinib was turning positive in 2024 due to the significant prelaunch costs that we have foreseen.
And also remember, we will benefit from the first full year of Bavencio profit repatriation versus only 6 months in 2023.
For the Electronics business sector, we anticipate an about a stable organic sales development to moderate organic growth and for EBITDA pre, we guide for a moderate organic decline to moderate organic growth. Please note that our guidance is based on a semi market inflection in early H2 2024.
And with this, we will be all very happy to start the question-and-answer session. Thank you.
Heidi, first question, please. Thank you very much.
Thank you. We will now begin our question-and-answer session. [Operator Instructions] Your first question comes from the line of [ Colin White ] from UBS.
Colin White from UBS. Two questions from me, please. I was just wondering if you could clarify if the expectation in Life Sciences for H2 to be stronger than in H1. If that's entirely related to the COVID sales or have you have any other indication from customers or in the ordering pattern of customers or anything else, which gives you confidence in that recovery in the second quarter?
And then my second question is related to China. You have lower exposure than some of your peers, but obviously, impacted sales this year. I was just interested to get a bit more detail on how you see developments in China playing out for the rest of this year.
Colin, it's Matthias. So let me address your two questions. On the first one, indeed. So we will -- we are expecting a strong H2 to H1 dynamic, meaning that H1, obviously, in sales will be stronger than H1. Why is that? We still have a carryover effect from, if you will, the destocking and when customers will reach their target inventory levels. We expect that, as mentioned by Belen, during H1. And then with it little delay, with that, we see that obviously then translating into sales and an uptick in sales. I can also say that I would expect come H2 and kind of if you were the exit momentum, we are building that this will be then more in line with our midterm guidance.
With respect to China, our exposure to China is and has been less than 10% of the entire Life Science business. Come around mid of last year, indeed, we have seen more headwinds given the macroeconomic situation in China. We've seen also some of the impact of the action around the anticorruption law, et cetera. I would say, a lesser impact on the consumable side. As you may know, we have more than 90% of our sales in consumables, very little in equipment. As such, we feel we have seen less of an impact. But nevertheless, given the macro conditions, we have seen a decline in our China sales in Q3, in Q4. And we expect a much more muted environment in '24. Also here with probably a slight uptick in H2 versus H1.
We will take our next question. Your next question comes from the line of [ Sophia Gray ] from JPMorgan.
On Process Solutions, can you provide an update on what we're seeing in Process Solutions order recovery? And what gives you confidence that the majority of your customers will reorder in H1 2024? What book-to-bill have you seen in Q1 so far in January and February? Have you seen any indications of an improvement? And then just also on book-to-bill, when do you expect Process Solutions book-to-bill to reach above 1 in 2024? And based on this, how are you thinking about potential growth in Process Solutions in 2025?
Very good, Sophia. These are a good set of questions. So let me tackle them one by one. Obviously, we talk about PS, the book-to-bill ratio has been during Q4. These are the actual numbers flat versus Q3, below 1. And we are expecting to see the inflection point in order intake during H1.
So then your question is, so what's new now versus what you've seen a few months ago? One additional important data point, we just completed a full customer survey with 200 large and regional customers, take that as a major input. And the majority of our customers are implying that they've reached their target inventory level during Q2, which is a slight delay versus what we have seen and the results we've seen in prior customer service. It's a bit different by customer segment.
We are expecting that CDMO has reached target level a little bit earlier, originators a little bit later, large customers, a little bit later, regional customers, a little bit earlier, but by and large, during Q2.
Obviously, you're also asking, okay, what are the early signs in '24 now that we have two months under our belt? I would say the early indicators are solid. We have seen a solid start when it comes to order intake. At the same time, we need a kind of a trend, right? We need to see several months in a row trending in the right direction. But I can clearly say it was a very solid start for Process Solutions.
And then your question on the book-to-bill, how will that play out throughout the year? Look, overall, we are indicating a strong H2 versus H1. We are being -- we believe that the book-to-bill ratio will be getting to 1 -- when it will crush the 1, I would not want to predict today, could be during the year. I know others are a little bit more cautious, I would say, let's leave that probably for the next call, but we're clearly getting into the range of 1.
And then your question about PS '25, I think we -- or not I think, what I said before, applying for Life Science applies to PS for sure, meaning our exit momentum in '24 in terms of growth rate, which we see in H2, most likely in Q4 will get into the mid-range of our midterm -- or into the range of our midterm guidance, and that will apply especially also to PS.
Your next question comes from the line of [ Charlie Hayward ] from Bank of America.
Charlie here with Bank of America on behalf of Sachin Jain. I have two, please. The first is what do you see the probability of the xevinapant stopping at interim analysis in second quarter this year?
And the second question is what's at Padcev's competition is assumed in your guide for 2024? And I guess, how do you see the impact of that competition in later years and your competitive positioning to rebut this?
Yes. Thank you, Charlie. It's Peter speaking. So first on xevinapant. As you know, it's an event-driven study. EFS is the primary end point. And I can tell you that we are, of course, counting the events, and we are now close to the threshold that we need to perform the interim analysis. So we are very confident that in Q2, we will reach a threshold then obviously, you have the database lock. You have the interactions with the IDMC and so on and so forth.
Now remember that we have not given any probability, any quantification, but we have always said that our base case scenario is that the study will continue and that we consider the overwhelming efficacy with the interim analysis as an upside scenario, right? So that's to your first question.
On your second question, Padcev. Look, I don't know if you have seen it, but we have published some very interesting data at ASCO GU where basically, real-world data demonstrates that if you would start with chemotherapy and Bavencio, so the maintenance therapy followed in second line [indiscernible] that those real-world data indicates that you can reach, not less than 41 months overall survival from the start of chemotherapy. So we think that is really an important data point because you also will remember that actually 2 out of 3 patients treated with KEYTRUDA and Padcev develop neurotoxicity and that a large part of these patients will no longer be able to receive chemotherapy as a second-line drug, right?
So I think that when physicians start with the treatment options in first line, you have already to think what can I use in the second-line drug? And the data that we presented at ASCO GU have been in this respect extremely well received.
The second thing I would say that now that the USPI is available from Padcev, we see a couple of things that indeed confirm that toxicity of Padcev should not be underestimated. So treatment-related adverse events that lead to that is 3.9%. Interestingly enough, during the ESMO presentation, that number was 0.9%. Serious treatment-related adverse events 50%. At ESMO, that number was 27.7% and treatment-related adverse events leading to discontinuation was 35%.
Also remember that pricing and reimbursement discussions in Europe will not only take time, but will be relatively difficult given the budgetary impact of the combination of KEYTRUDA and Padcev. Also remember that we believe that especially in Japan, where the bulk of the patients are treated by urologists, there is a high risk aversion in that market. So I think that the toxicity will remain a hindrance for Padcev uptake in Japan. And we also believe that in the U.S., there will be probably a more rapid uptake in the academic centers compared to the nonacademic centers.
Last but not least, the U.S. piece of our global Bavencio sales is less than 30%, right? So if you take all these things into account, we continue to believe that we will continue to grow the brand. I think we have a lot of interesting data. And I can tell you that our teams are fired up to make sure that the community understands these data.
Your next question comes from the line of Falko Friedrichs from Deutsche Bank.
My first question is on Life Science. Do you think that order intake in Process Solutions should be up sequentially in Q1 or should we rather assume that it is flat again before then stepping up in Q2?
Then my second question also on Life Science. Given these volatile times in the bioprocessing market caused by the destocking, can you confirm that your market shares have remained where they were? Or have you won a little bit or maybe lost a bit here and there?
And then thirdly, on the Science & Lab Solutions business, can you provide a little bit of an outlook for the North American business and when that might start to recover again this year?
Let me tackle your three question. Look, on order intake, I don't want to repeat what I said before, right, in terms of inflection points, et cetera. I think it would be fair to assume that obviously we will see a sequential improvement throughout the year. I think that's fair to assume.
Then your second question around share. Look, I would separate China from the rest of the world. So let me start with China. And I think we've talked about that before. During COVID, we, like probably most other players in outside China have capacity constraints, we, for sure, right? And as such, we are limited in supplying our market in China. And as such, local players have gained share, that's a fact, right? I talked to customers when I visited them. That's a fact because they had to continue [indiscernible] reduction.
Now the good news is, I think we are on our way and have clearly the goals to win back that share through innovation, et cetera. But clearly, I would say, in China, [indiscernible] year.
For the rest of the world, I think give and take I would not say we have either won share or lost share during the last couple of years during COVID. And obviously, now the goal going forward is to win share, given that we have now capacity and can tackle the new opportunities.
Our Science and Lab Solutions business. I think we will see a bit of a similar dynamic in terms of H1, H2. There, we obviously have a broad -- range from pharma to industrial, to academia. As such, we are kind of depending on different trends. But if you ask specifically about North America, I would say we will see a gradual improvement in '24, maybe a bit more new than in H1 and then also an uptick in H2.
Your next question comes from the line of Gary Steventon from BNP Paribas.
First one just on the Life Science outlook again. I guess the guidance really at the midpoint, that qualitative range points to no growth on sales. So given the dynamics you've seen in Process and maybe a possible overhang from any sales that might be lost to the SAP migration in SLS, but then the more solid outlook for the smaller LSS business, can you just help frame how you're thinking about the contribution from those three businesses in 2024? And specifically, do you assume process grows in 2024 when looking at the FY number in [ CER ].
And then secondly, just a follow-up on Bavencio. You mentioned the 2024 Healthcare growth being supported by oncology. So I'm wondering how you're thinking about Bavencio in that. So would you expect Bavencio to grow each quarter through 2024, looking at the global number or could 2024 be keep your sales Bavencio if pressures build there?
Yes. Thanks for your question. Let me start with your first one. Obviously, at this point, we are not guiding on a kind of a business level IPS, LSS and SLS in a more granular detail.
What I would confirm is that in PS and especially in SLS, we will see a clear H1, H2 dynamic, more muted in H1, given obviously the factors more the destocking topic coming to an end for PS in kind of H1. And if you will, a little bit more the China topic for SLS as an input driver and as I mentioned before, we will see an uptick in H2. LSS, I think, will remain a little bit more volatile. We have seen some strong core growth in Q3, Q4. But here, given the size of the business, we are a little bit more dependent on individual customer batches, do we get a batch into this quarter or the next quarter. But overall, I think we are also there on a solid trend for '24. So that's kind of the color I can point at this time.
Yes. Gary, your question on Bavencio. Look, we are not guiding beyond 2024 today and probably even less on individual products. But I think that the elements we have at our disposal make us confident that there is a lot of good data out there. And what I can confirm again, like I said to the previous question is that we are confident that Bavencio will grow in 2024.
Your next question comes from the line of Edward Hall from Stifel.
Ed here from Stifel. Following today's results, I just wanted to get your interpretation of where you stand in regards to the [ '25 by '25 ]. What are your core drivers to get there? And then again, on the destocking and Process Solutions. Is there any further details from the survey, which you could share by like subgroup, so cell culture media filtration, for example, and in terms of the destock in the subgroups. And then maybe a further question, more abstracts. But do you see any impact from ongoing legislative news in the U.S. around Chinese health care companies, [indiscernible]?
Yes. It's Matthias. So why don't I take your question on the destocking first. Look, indeed, we did this with about 200 customers, quite a wide range in terms of size and region. In terms of customer type, what we got as a result is that apparently, CDMOs are getting delivered to the target inventory levels, meaning a higher portion of that customer group will reach that target inventory level by Q2 versus the originators where that portion is a little bit smaller. These are not huge differences, but give you a bit of a color. And equally, we are also seeing that more moderate count for the regional accounts that will reach their target level quicker.
In other words, all the higher percentage of those customers reached in during Q2. And then by product, yes, look, I think there are differences, right, between upstream, downstream. I wouldn't call them huge differences. I mean if you want to get a science range target inventory level, let's say, between 5.5 and 6.5 or 7 months, right? And then in some categories, it's 5.9 and the other it's 5.6. But I would say it's not a huge difference.
And then okay. Your other question was around the U.S. regulation. Obviously, we are monitoring about the development, about the framework -- release framework. What I would say, obviously, I cannot comment on individual companies or even customer names. I think the key takeaway, we are not depending on individual customers or put it in other words, none of our customers has a share of more than 2% to give you [indiscernible] Life Science sales. So we are very resilient. We have a very robust, very large customer portfolio. And -- but nevertheless, I mean, we are monitoring, and we're certainly dealing whatever the outcome will be of that legislation.
Let me finalize with the [ '25 by '25 question ]. We call this ambition in 2021 during our Capital Markets Day. And since then, we have many moving parts and plenty of assumptions, making or driving that ambition positively or negatively. The pandemic, mostly the challenges that I mentioned for 2023 has been extremely important on that trajectory.
And as you imagine, the teams are mobilized behind that stretch aspiration, as I said, during the Capital Markets Day and the core drivers would be our main growth pillars from the three sectors. So the launches in Healthcare, Process Solution and Semiconductor Materials.
Your next question comes from the line of [ Sam Hana ] from Jefferies.
And what gives you confidence in Semi recovery now early 2H versus the prior commentary, which I believe was year-end '24. Thank you.
Thank you. I'm taking this one. So what gives us confidence on the early H2 recovery. Looking into our current trading, gives us confidence that the guidance is correct, looking at market data. And we are a bit favorable to our kind of PS guidance on this year. According to our current data it increases the confidence levels on the trajectory discovery inflection point in early H2 2024. And of course, turning into much deeper growth in 2025, you can see from the market. So I think data confirms that.
Your next question comes from the line of Oliver Metzger from ODDO BHF. Oliver Metzger, your line is open. Please ask your question.
Sorry, can you hear me now. Hello?
Yes.
Sorry, [indiscernible]. I apologize for that. My first question is for Kai. So we've seen materials, and we've seen a better quarter. By now, we also heard some industry comments which sound encouraging. At the moment, to my understanding, it's more price driven than volume driven. But can you give us a little more color about the underlying dynamics? How you see the market? When do you see the conversion from higher prices also into higher volumes?
Second question for Matthias. So how would you describe let's say, the impact of China and also the more difficult stage [indiscernible] early biotech with regards to the steepness of recovery of Process Solutions? So you mentioned towards the end of '24, you see basically it comes to a midterm trend. But is it something where you think [indiscernible] might we also have some negative impact more beyond '24?
And my last question on Peter. So pretty conceptual. So following evobrutinib failure, basically now three months behind, and you have had a lot of time basically set to draw your conclusions. So could you share with us your view, what does it mean for your [indiscernible] and Healthcare? Has it basically been the trigger that you look more towards external innovation versus internal innovations and how to think on that? That will be quite helpful.
Yes. Thank you, Oliver, for your question. And great question. I would like to tackle that one. So you're absolutely right. The current market development is primarily price-driven on our customer side. They have to -- have turned it into volume on their side, worked to their inventories, and that then translates into our volumes. That's the sequence of events. That is, by and large, our assumption for the inflection point that I've addressed in the previous question.
Second is, there is an additional element, which is the current demand for AI-related technologies. GPUs, edge AI, high-bandwidth memory. This already is picking up. So it's not just on the price side of our customers. There is already volume impact still being proportionally small, however, it's a good indicator that these technologies are ramping and with our majority share in leading edge, the majority of our portfolio is in leading-edge technology. Of course, we do have an early benefit of that. This is how we see the market right now, and this is what supports our guidance going into the year 2024.
So on the Life Science question and kind of you asked around the implication of the headwinds kind of throughout '24 and then beyond. So I would start by saying, obviously, destocking has the biggest impact on total Life Science and by far, the biggest impact on PS. I think even in this call, we looked at it from different angles and your takeaway should be clearly that, I mean, come end of H1, the vast majority issue behind us, and that obviously drives the H1 -- H2, H1 dynamic what I implied. So I cannot imagine that this will be a major topic beyond '24.
Then in sequence of impact. I mean, China certainly has an impact on PS, has an impact on SLS. Here, we are clearly depending on the macro situation within the China economy. It has an impact of less than 10%. Our share of our China sales of total net assets less than 10%. That gives you a sizing of the potential impact. Given the caveat, what I said, dependency on macro, our expectation is that come H2 also there, we see an uptick and then the biotech funding has the least impact of those three, mostly in our LSS business, but here also less than 10% of our sales depend on biotechs by and large. And then quite less than that on the smaller biotechs.
I think too early to predict. Fully 2024 I have heard some early signals of stabilization, maybe even some positive signals. But here as well, I would -- I think it's too early to tell. But it feels like '24 is also getting us in the right direction.
Okay. Oliver, let me take your question on the post EVO inorganic agenda. I will take it from the broader perspective, and then I will invite Helene and Peter to chime in if necessary so that you have clarity on how do we see not only Healthcare, but the group overall.
So before coming into Healthcare, I would like to emphasize that our strategic priority for M&A remains with Life Science and this has not changed. And there are many reasons for that, that I will not detail at this time, but primarily our leadership position, attractive growth and margins and the optimal risk/reward profile for the group.
Having said this, how do we look at Healthcare post EVO? First of all, we are very well positioned, right? A very strong commercial performance, which you have seen over the past years despite a challenged environment even during -- or mostly during COVID, during pandemic. Still double-digit growth in 2023 for Mavenclad and Bavencio, a streamlined focus in all our four franchises.
I think this all underlines our super strong commercial capabilities by the way that we master in both mature and developing markets. In R&D, we continue to be confident on our internal pipeline. [ Chevy ] that Peter detailed before, enpatoran is the TLR7/8 inhibitor that have passed futility. Cladribine being developed in myasthenia gravis entered in Phase III in 2024 and more news to come on our ADC portfolio around ASCO.
The second wave of the R&D transformation has been implemented and our objective continues to be to bring medicines to patients faster. And in the context of some of our R&D calls, the teams underline that in future, we expect more than 50% of the launches to come from external innovation. So I am highly confident on Peter and the Healthcare team to deliver on this.
I would actually add a bit more on this because, obviously, as we continue to be extremely confident on xevinapant, and as we approach a critical milestone, we continue to look at scenarios with and without every asset. And even if xevi wouldn't work, right, Healthcare would still grow. So at this time, our key priority is to keep our strategic focus, continue to grow organically and inorganically by innovation and stay very disciplined and consistent to our focused leadership approach. And therefore, our scope will either be therapeutic areas that -- in which we already have a presence or adjacent opportunities beyond our therapeutic areas and modality footprint, example, expanding in the field of neurology.
So for Healthcare, we reiterated in the Capital Markets Day a preference for licensing because this allows us to pick the desired assets to complement our portfolio, and it also allows for uncorrelated moves as simply more short-term goal. And this is basically what the team has been doing in recent years. We have announced three deals in Q4 2023, and we will continue to do so. That complemented eventually with value-creating bolt-on acquisitions in those areas that I mentioned before.
But I don't know, Helene, if you want to add, or Peter, if you want to add anything on your perspective.
So yes, thanks, Belen. As you open this a little bit broader around business development, I mean one thing we need to remember that the track record of Merck over the past 20 years, the common denominator for success is that Merck always did what was right for the company and for the company's owners.
And actually, decisions weren't taken to achieve a certain CAGR for a specific sector. Hence, all the acquisitions for the strong and deep strategic rationale and this is basically the reason why we're in such a powerful position as we are in today.
So ultimately, what I'm saying is like no change to what we communicated at the Capital Markets Day in [indiscernible]. But looking at Healthcare, as this was the question, I mean operations performance speaks for itself. And we do not see any urgency to act regardless of whether or not the [indiscernible] study fails or not. So we stick to our approach to focus on what strategically makes most sense for the group and not just one single sector. And I'm pretty cool here because we know that even slight growth in the Healthcare business is hugely attractive in the fields that we play in. So expect us to remain very disciplined.
And ultimately, as a CFO, I can only always repeat what we're looking at when we look at external business development. It's simple. We need to create value. And what do we mean by saying we need to create value. It's basically ROCE above WACC of the company, EPS pre accretion, and of course, maintaining our strong investment-grade rating. Peter?
Nothing to add from my side. I mean, perhaps just one last comment on the deal. So you have seen that we have been quite proactive in licensing. You have seen different archetypes there. For example, pimicotinib is a bit of an adjacency, right? It's TGCT [indiscernible] benign tumor, then the deal with Inspirna in colorectal cancer. So that's really spot on in one of our strongholds.
If I look at the pipeline, for example, you see cladribine in myasthenia gravis, which, again, is an adjacency, I would call it the neuroinflammation in a rare disease. So that's basically relatively illustrative, I would say, of what you could expect moving forward.
I think we have time for one more. No, I think these were all the questions in the queue. Excellent. Well, thank you very much for asking all of these questions. Belen, if you have any closing remarks, we are also happy to hear them.
Not really. I wanted to thank everybody for their interest in our company. Obviously, we are entering a year in which we are expecting to return to growth and this is exciting. You have [indiscernible] sector heads being confident on the assumptions that are underpinning our guidance. And we are looking forward to meeting many of you for the upcoming road shows and conferences. And of course, we will keep interacting quarterly as the year goes on. Thank you very much, and have a good evening.
Thank you.
Thank you. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.