Merck KGaA

XETRA:MRK

Q1-2025 Earnings Call

[Operator]

Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on First Quarter 2025. [Operator Instructions] 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, executive]

Thank you so much, Heidi, and a very warm welcome to this Merck Q1 '25 Results Call. My name is Florian Schraeder. I'm the Head of Investor Relations here at Merck. I'm delighted to be joined today by Belen Garijo, our Group CEO; as well as Helene von Roeder, our Group CFO. For the Q&A part of this call, we will also have Matthias Heinzel, CEO, Life Science; Jean-Charles Wirth, Designated CEO, Life Science; Peter Guenter, CEO, Healthcare; Danny Bar-Zohar, Designated CEO, Healthcare; as well as Kai Beckmann, CEO, Electronics.

In the first couple of minutes of this call, we would like to guide you through the key slides of the presentation. After that, we will be more than happy to take your questions. With this, I would now like to hand over to Belen to start.

[Belén Garijo López, executive]

Thank you, Florian, and welcome, everybody, from my side to our Q1 earnings call. I am now on Slide #5 of the presentation, starting with the highlights. First of all, you would agree with me that this quarter was characterized by a rapidly changing global economic landscape to say the least. And we delivered very solidly, achieving profitable growth across our 3 business sectors in Q1. Organically, group revenues increased by 3% and EBITDA pre went up by 6%. Healthcare and Life Science showed the strongest organic sales growth at 3%, while Electronics sales were up by 1%.

Now I would like to draw your attention to the highlight of the quarter, which is the remarkable progress in Process Solutions that is closing to the double-digit growth level and delivering plus 11% in Q1 as the market conditions, mainly customer destocking have been put behind. Order intake grew also very strongly and book-to-bill was again comfortably above 1. Healthcare also delivered organic sales growth of 3%, driven by a strong performance of plus 11% in our CM&E portfolio as well as mid- to high single-digit growth of Erbitux and Mavenclad, respectively.

With the recently announced acquisition of SpringWorks Therapeutics, we are securing the mid- to long-term sustainability of our pharma pillar and positioning the pharma sector to accelerate growth immediately after closing. SpringWorks is fully aligned with the business and the M&A priorities of our Healthcare sector, which is to continue to rely on external innovation via in-licensing primarily of later-stage assets. Moving to Electronics. It also showed a positive organic sales development in Q1. Once again, this was driven by the strong growth in semiconductor materials.

At the same time, we saw some projects being pushed out further in our DS&S business, as our customers are equally trying to manage the rapidly evolving business environment in which we operate. On the guidance for full year 2025, I want to remind you that we submitted a quantitative guidance for the first time already with our full year 2024 results back in March. Since then, we have gained more visibility on the macro, mainly FX and tariffs. And therefore, we are reflecting these developments in our 2025 outlook. First, I want to let you know that around 80%, 8-0 percent, of the adjustment to the absolute corridors is related to our assumptions on FX.

Second, on the tariffs, it includes a scenario where this week's trade agreement between the U.S. and China is restricted to 90 days and no more. We have clearly proven our adaptability in this evolving macroeconomic environment already in Q1, and we are confident to achieve profitable organic growth in 2025. I will come back with more details on our assumptions for the guidance later. So let's move to Slide #6 for an overview of our performance by business sector. As you may see on the slide, organic sales growth in Q1 was plus 2.5%. Life Science delivered organic sales growth of 2.5%, driven by stellar performance of Process Solutions. With 3.4% organic sales growth, Healthcare was the largest contributor. And within Healthcare, our CM&E portfolio was the strongest franchise.

Electronics grew slightly by 0.6% organically as our semi business was up plus 2%, driven by semi materials. For the group, FX represented a slight tailwind of plus 0.4% on sales due to Life Science and Electronics. Together with a portfolio effect of plus 0.2% for the group in Q1, which is driven by the acquisition of Mirus Bio and Unity-SC, group sales increased by a total of 3.1% in the quarter. Regarding earnings, EBITDA pre amounted to EUR 1.535 billion, growing more than twice as fast as organic sales and delivering 5.8% growth compared to the same quarter of last year. FX also had a slight positive effect on EBITDA pre in the quarter, while the portfolio effect was slightly dilutive.

With this, I would like to hand it over to Helene for a more detailed review of our financials.

[Helene von Roeder, executive]

Thank you very much, Belen, and a warm welcome also from my side from sunny Darmstadt. And with that, I'm now on Slide 8 for an overview of our key figures in the first quarter. I would like to emphasize that we had a solid start to 2025 in what is indeed a rapidly evolving economic environment. Net sales increased by 3.1% to EUR 5.280 billion, supported by the acquisitions of Mirus Bio and Unity-SC, while FX was still a slight tailwind in Q1. EBITDA pre was up by 5.6% to EUR 1.535 billion. Importantly, all 3 business sectors contributed to EBITDA pre growth, both on an absolute and an organic basis.

FX was slightly -- a slightly lower tailwind on EBITDA pre than on sales, while portfolio had a slightly dilutive effect on EBITDA pre. EPS pre increased by 2.9% to EUR 2.12 per share. Operating cash flow decreased by EUR 556 million, also compared against a higher base. The decline was mainly driven by an increase in receivables and inventories in anticipation of a changing tariff environment, higher bonus payments and higher tax payments. Net financial debt decreased slightly compared with the end of December last year, as operating cash flow was largely consumed by investing cash flow. Let me also briefly comment on our reported results. So I'm now on Slide 9. EBIT was up by 8% year-on-year. This was higher than the increase in EBITDA pre as D&A increased at a smaller rate compared with EBITDA pre, while adjustments were lower than in Q1 last year.

The financial results saw an adverse change of EUR 18 million from minus EUR 32 million to minus EUR 50 million, which was mainly driven by higher interest expenses and lower results from financial investments. In general, please remember that our financial results consists of more than just the interest result. It also includes, for example, outcomes from financial investments, changes in our pension and other long-term provisions as well as adjustments to the time value of the long-term incentive plan.

The effective tax rate came in at 22.8%, which is at the upper end of our guidance range of 21% to 23% and slightly above the effective tax rate of 22.2% in the year earlier period. The tax rate usually fluctuates over the quarters during the year. For example, Q4 is usually the lowest tax rate quarter for us, bringing down the average from the first 9 months. In addition, please be aware that this year is a year of additional uncertainty with all the debates around tax. Reported EPS came in at EUR 1.69, which represents an increase of 5.6% year-on-year. And with that, let's move on to the review by business sector, and I'm starting with Life Science on Slide 10.

Life Science grew organically at 2.5% in Q1. As projected, this is driven by Process Solutions, which grew organically by 11.4% in the first quarter. The vast majority of our customers have started reorder, and we're now seeing our large pharma customers back to normal ordering patterns. Consequently, order intake showed a very strong growth again in Q1 '25 and book-to-bill stayed comfortably above 1 at a similar level to Q4 of last year.

Process Solutions is carried by strong demand for consumables, which form more than 90% of our sales in this business segment. We have not seen preordering effects in Q1 '25. Now taking a closer look at Science and Lab Solutions. Sales were down by minus 2.5% organically. U.S. policy changes are, in particular, affecting academic and government lab spending amid a still cautious pharma research spending environment, as pharmaceutical customers are still prioritizing late-stage development projects. In addition, China has remained a challenging market for Science and Lab Solutions.

And turning to Life Science Services, our third and smallest business within Life Science, sales were down by 6.2% organically, mainly driven by our CDMO activities, as new project starts were impacted by funding constraints and project phasing was unfavorable. EBITDA pre was up by 3.1% organically in Q1. While our EBITDA pre margin increased on an organic basis, FX and portfolio effects were slightly dilutive. I'm now on Slide 11 for an overview of the performance of our Healthcare business sector.

Healthcare delivered solid organic sales growth of plus 3.4% in Q1, well in line with our full year guidance, which we gave in March. By franchise, our CM&E portfolio was the largest contributor to growth, up 10.6% organically against an easy comp. We saw double-digit organic growth across all therapeutic areas, supported by some favorable phasing. Oncology was down by minus 1.9% organically in Q1. While Bavencio declined in the mid-teens percentage range amid increasing competition, this was largely offset by a solid growth in Erbitux, which was up by 6.2% organically. All key regions contributed to the growth of Erbitux with Europe and China up in the double-digit percentage range.

Our N&I franchise declined by minus 3.7% organically in Q1. Declines of Rebif in line with the interferon market were largely offset by strong growth of Mavenclad, which is up 9.2% organically. Fertility was roughly stable in Q1 despite still high comps reflecting competitor stock-outs. Looking at our pipeline. For pimicotinib, we announced that we exercised the option with Abbisko for its commercialization in the U.S. and the rest of the world. We now hold commercialization rights for pimicotinib worldwide. For M9140, our CEACAM5 ADC and Phase Ib expansion, we have seen an encouraging activity so far, and we will present the data at ASCO 2025.

The robust organic sales growth in Q1, in combination with temporarily lower R&D spend as projected, helped us to achieve 11.7% organic growth in EBITDA pre. Overall, EBITDA pre amounted to EUR 796 million in Q1, resulting in a margin of 37.6%, which is an increase of 300 basis points above Q1 '24. On the further evolution of our R&D spending, let me say the following. We do expect a gradual increase of R&D costs over the coming quarters, both in absolute terms and as a percentage of sales.

Moving on to Electronics on Slide 12. Organically, sales increased slightly by 0.6% in Q1. The Electronics sector showed organic growth, thanks to the strong demand in our Semiconductor Materials business, driven by growth in AI and advanced node technologies in particular. Bear in mind, Semiconductor Materials is well over 50% of the sales in our Electronics business sector, and it is growing. The strong organic sales growth in Semiconductor Materials helped Semiconductor Solutions to grow at 2% organically amid a low double-digit percentage decline in our DS&S business. Customer projects have been pushed out further, as our customers try to manage a very dynamic market environment.

Our Optronics business was organically flat in Q1 with some stabilization in the liquid crystal market. Surface Solutions was down 6.9% organically. The completion of the divestment is on track for the second half of this year. The EBITDA pre margin went up by 30 basis points year-on-year to 25.8%, thanks to cost efficiency, positive mix effects, partially offset by start-up costs on new sites. For the further margin evolution during 2025, please note that volume growth would be the most important margin driver. And as we also have said repeatedly, we continue to be convinced of the long-term secular growth of semiconductors and therefore, sustain a high level of R&D activities and are continuing with our capacity expansions in that fast-growing segment.

Before handing back to Belen, let me also briefly comment on our balance sheet and cash flow statement. As you can see on Slide 13, our balance sheet decreased by EUR 2.2 billion compared with the end of December 2024. Now taking a closer look at the asset side. Cash and cash equivalents went down by EUR 1 billion from EUR 2.5 billion at the end of December '24 due to the repayment of the U.S. dollar bond, which took place in March of this year. Inventories were stable, while receivables went up by EUR 400 million following a quarter of strong cash collection at the end of last year. Property, plant and equipment decreased slightly due mainly to FX translation differences.

Intangible assets decreased by EUR 800 million due to FX effects and D&A. And lastly, other assets were down by EUR 100 million due mainly to divestments and revaluation effects. Looking at the liabilities side. Financial debt decreased by EUR 1.6 billion, which largely reflects the repayment of the U.S. dollar bond. Pension provisions were down, driven by actuarial gains. Payables decreased from EUR 3.1 billion to EUR 3.0 billion, as we saw declines in current payables across our 3 business sectors. Other liabilities were around flat. And net equity decreased slightly by EUR 100 million, as the increase in retained earnings was more than offset by FX differences, mainly resulting from the weakening U.S. dollar.

In summary, our equity ratio strengthened further from 58% at the end of December '24 to 61% at the end of Q1. Now turning to cash flow on Slide 14. Operating cash flow went down from EUR 1.035 billion in Q1 of last year to EUR 556 million in Q1 '25 despite an increase in profit after tax. That was mainly due to changes in other assets and liabilities in turn, driven by higher bonus payout and taxes in the quarter as well as an increase in working capital. The increase in working capital was mainly due to an increase in trade receivables, reflecting the phasing after a particularly strong quarter of cash collection in Q4 '24 and compared with the quarter of tight receivable management in Q1 of last year.

Cash out for investing activities decreased primarily due to lower payments for investments in intangible assets compared to the same quarter of last year, which were related to Healthcare investments at that time as well as lower CapEx on property, plant and equipment. Last but not least, the difference in financing cash flow can be explained by the repayment of the aforementioned U.S. dollar bond in Q1 this year. And with that, let me hand back to Belen for the outlook.

[Belén Garijo López, executive]

Thank you, Helene. Let us now take a closer look at our guidance on Slide #16. So back to my initial comments on currency and tariffs, we are adjusting our 2025 target corridors for the group, now expecting EUR 20.9 billion to EUR 22.4 billion in sales and EBITDA pre in the range of EUR 5.8 billion to EUR 6.4 billion. The majority of this adjustment, I mentioned already 80%, is the result of our assumptions regarding currency movements, which we now anticipate will be a headwind for both sales and EBITDA pre, particularly a weak U.S. dollar.

We forecast that FX will have an impact of minus 3% to 0 on revenues and minus 5% to minus 2% on EBITDA pre. Organically, we have slightly widened the corridor for sales, and now we see plus 2% to plus 6% growth on the top line, and this reflects the current volatility primarily associated with a very dynamic evolution of the tariff environment. Keeping the bandwidth, our organic growth guidance on EBITDA pre is, therefore, slightly adjusted to a corridor of plus 2% to plus 7%. As usual, at this time of the year, we are issuing our first EPS pre guidance, expecting it to be in a range of EUR 7.90 to EUR 9.0.

I repeat, our guidance considers the impact of tariffs, including our mitigation measures and integrates the recently announced agreement between the U.S. and China only on a duration of 3 months. Looking at our 3 business sectors specifically for Healthcare, the policy situation is a moving target, and we are well positioned. As you can imagine, we are working closely with trade associations in the U.S. and in Europe to improve the chances to land an acceptable deal with governments.

For Life Science, we have developed both proactive and reactive action plans, and that includes implementing a temporary surcharge in selected markets. While our mitigation measures are designed to protect our profit, profit margins are temporarily affected to a limited extent. In Electronics, our goal is to mitigate the vast majority of the potential tariff impact. Through our well-known Level Up program, we invested in localization and supply chain resiliency, and this largely balanced the tariff situation.

While we have reflected the remaining risks, which we quantify as low double-digit euro million cost, we are confident that we can mitigate the remaining part, mostly via supply chain optimizations. We include these risks at the extended bottom end of our EBITDA pre organic guidance, while at the midpoint, we reflect only minor tariff costs. Last but not least, rest assured that we are prepared to act on our cost structure, if the macro pressure further increase. For some additional color by business sector, please go with me to Slide #17.

Starting with Life Science, we are slightly narrowing the organic sales growth guidance corridor to plus 2% to plus 6% for 2025 as in particular, U.S. policy changes affecting our SLS business make it unlikely that the previous high end of the guidance will be reached. We now expect EBITDA pre to show an organic development of between plus 1% and plus 7%, which also includes the net impact of tariffs, including our mitigation measures. We expect those to have a slightly margin dilutive effect.

Moving into Healthcare, we are raising our guidance for organic growth on sales to plus 2% to plus 6%, e-- and the main drivers are the continued strong performance of our CM&E portfolio, coupled with a solid performance of Erbitux and a strong performance of Mavenclad. Our EBITDA pre organic growth guidance is increasing to plus 4% to plus 10% -- between plus 4% and plus 10%, driven by leverage growth paired with cost discipline in the pharma -- in the biopharma business sector.

For Electronics, we are widening our forecast range for organic sales to plus 1% to plus 6% and for the organic development of EBITDA pre from minus 3% to plus 8%. We once again had a strong quarter in semiconductor materials in Q1. But as mentioned already a couple of times, customer projects have been pushed out a bit further. A tariff-related economic recession is not included in our guidance. Overall, I would like to conclude by emphasizing that Q1 was a very solid start into the year in a challenging macroeconomic environment, and we remain confident to deliver profitable organic growth also in 2025. And with that, we will be very happy to take your questions. Thank you.

[Florian Schraeder, executive]

Thank you, Belen. And Heidi, we are ready to take the first question, please.

[Operator]

[Operator Instructions] And your first question comes from the line of Richard Vosser from JPMorgan.

[Richard Vosser, analyst]

Two, please. Firstly, on SLS. Could you talk about the performance you see for that division in Q2 and the remainder of the year, given impacts from NIH funding would have only hit a little bit in Q1 and how you see the general weakness in the R&D budgets continuing? Could we see a sequential decline in Q2? And maybe also how we should think about China in relation to that? Because of the tariff -- the reduced tariff window, do you expect more sales coming in from that region in Q2 because of the window?

And also, given the NIH budget cuts for '26 that are muted, how should we think about the longer term there? That would be super helpful. And then a second question, please. I think I'll also go in Life Science. Just Process Solutions, obviously, really strong in Q1. Just wondering on how you've seen the development of the orders for that business in April and early May? Should we be anticipating or thinking about further sequential growth given the environment that pharma finds itself in?

[Jean-Charles Wirth, executive]

Thank you, Richard. And by the way, it's more than one question. So Jean-Charles speaking. Let me try to answer the first one related to SLS performance looking forward, and I will try to address also your question on China as well on NIH. So let's put it this way. Overall, for SLS, we remain confident in the midterm financial ambition. That said, as mentioned by Helene, we are facing dynamic macroeconomic challenges and in a very volatile market condition, which have become more difficult.

So what you should expect for SLS, I will say you should expect relative organic growth to be better in the second half of the year versus the first half. And as a hint, we are aiming to have an exit rate, which is getting us towards the midterm guidance.

[Matthias Heinzel, executive]

Richard, it's Matthias. Let me handle the PS question. Obviously, we have been building very strong momentum in PS and pretty much it's unfolding as we predicted. The order book remains very strong. We continue to see very strong order intake and the book-to-bill ratio, as mentioned before, Belen stayed, at a very, very high rate. And so we are very comfortable about the momentum and that this momentum continues throughout the year. And we're really confident that PS will be on its path towards the midterm guidance, as we mentioned before.

[Operator]

Your next question comes from the line of Harry Sephton from UBS.

[Harry Sephton, analyst]

So the first one on the Process Solutions performance. We've seen in international trade data, the big spike in pharma imports in the U.S. You mentioned you haven't seen preordering. What makes you confident that this imports into the U.S. hasn't contributed to what you've noted as a very strong order intake in the quarter? And then maybe on a second question, on the SpringWorks deal, can you outline what to expect in terms of cost integration here? What you expect in terms of synergies and what we should be expecting in terms of onetime deal costs?

[Matthias Heinzel, executive]

Yes. On your first question, obviously, we are having a very, very strong focus after the dynamics of the last several years, right, with stocking up and destocking to monitor and really keep a close eye on the underlying business trends. And that's on a customer level, on a regional level, and we are very confident to really confirm that we haven't seen any material preordering. That doesn't mean that one single customer could have done something, but there's nothing material. We're very closely monitoring customers in discussions with them. And the order intake momentum is really broad-based across all regions, across all customer segments. So that gives us a lot of confidence that what we see is real underlying demand picking up, as we have kind of expected.

[Danny Bar-Zohar, executive]

I hope you can hear me better now. Regarding the SpringWorks question, we're talking about transaction and integration costs. As per your question, we expect the transaction to be accretive by 2027. Just as a broad statement, we expect the transaction and integration cost of EUR 150 million each. The majority of the transaction costs will be incurred still this year in 2025 and integration costs will be spread over 2025 and 2027.

Regarding synergies, the purpose behind this very exciting deal for us is to unlock potential value still in the United States and mainly outside of the U.S. for these 2 products. So we are not expecting here major cost synergies, just to frame it like that.

[Operator]

Your next question comes from the line of Sachin Jain from Bank of America.

[Sachin Jain, analyst]

A couple of questions, please. So firstly, for Belen. In the end of your introduction, you talked about Healthcare and the industry working towards an acceptable deal. I'm just wondering if you're willing to give some loose color on what would be -- what the industry has agreed as to be potentially acceptable on tariffs. Second question on Life scheme margins. Obviously, the guidance is now flattish versus prior commentary for a slight improvement this year. Wonder if you could just split out how much of that is SLS impact, slight slowdown versus tariffs.

And if I could sneak in one other just on Healthcare. CM&E growth trends, you're talking sustainable. The chart in the appendix shows accelerating growth trends. So if you could just give us some color on CM&E growth outlook from here. And maybe I could just take this opportunity to thank both Peter and Matthias for their interactions over the years. I think this is your last call. Wish you all the best for the future.

[Belén Garijo López, executive]

Sachin, it's Belen. I just want to make sure that I understood your question. Is that question related to the acquisition of SpringWorks and the acceptable level of...

[Sachin Jain, analyst]

No, apologies, Belen. I think you said in your commentary on tariffs, you're well positioned and you're confident the industry can move towards an acceptable deal with the administration. I just wonder if you could give some color on that.

[Belén Garijo López, executive]

Now, I understand better. Of course, I mean, we have taken mitigation measures in order to be dealing with potential implementation of tariffs associated to medicines, and we are not expecting any impact of tariffs in the short term in 2025.

[Sachin Jain, analyst]

Sorry, Belen, I might just try to reframe the question. The question was you said as an industry, you're working towards an acceptable deal with the administration. I wonder if you could give some color on how the industry would view a tariff deal that would -- that the industry would view as acceptable.

[Belén Garijo López, executive]

I think this is a more difficult question to answer. I mean we are absolutely committed to continue and to contribute very actively to the discussions that we have through the trade associations to make sure that we shape the environment in the U.S. as an innovation-driven environment and on several topics, not only on tariffs, but also on the most favored nation discussions, which we believe have different angles, right? And it will not be that easy to implement. But for further details, I can call on Peter, who is on the front lines of the industry associations.

[Peter Guenter, executive]

Yes. Thanks, Belen. Sachin, I think it's, of course, a lot of elements in the mix and actually a moving target. But I think it's fair to say that when you listened in to President Trump last Monday, I think it was, that he singled out a couple of things like, for example, the middleman. And now in the U.S., we have $0.50 to the dollar goes to the middleman. I think he also singled out the fact that, of course, especially European prices have been historically inadequate for innovation. And that is, of course, something we also work on as an industry to really ensure that we get adequate prices for our innovation in jurisdictions with comparable GDP per capita as the U.S.

So I think there's a lot of things ongoing. And then, of course, tariffs. As you know, a certain number of announcements have been done by pharmaceutical companies or investments in the U.S. So we're also looking at those elements. But I think all in all, we are well equipped and well prepared to navigate this complex environment.

[Florian Schraeder, executive]

Sachin, this is Florian. We had a technical issue to understand your 2 other questions on SLS and CM&E. Could you be so kind to just repeat again?

[Sachin Jain, analyst]

Apologies. I'll keep it short. CM&E, you've talked about growth trends sustainable. The chart in the appendix shows CM&E growth actually accelerating. So just any color on whether that acceleration is sustainable. And then the question for Matthias on Life scheme margins was the guidance is now flattish. If you could split out the tariff impact within that margin guidance would be great.

[Danny Bar-Zohar, executive]

So Sachin, it's Danny regarding CM&E. So a little bit of more color on that. In the first quarter, CM&E delivered, as you saw, double-digit growth with actually all therapeutic areas contributing to that growth. It's a multi-region franchise. So by region, Middle East, Africa was the main growth driver, supported by, to Helene's comment, very favorable phasing. We can touch that later, followed by China with double-digit growth and Europe with mid-single-digit growth.

And all key brands delivered double-digit organic growth. We're talking about Glucophage, Concor, Euthyrox and Saizen. The first 3 Glucophage, Concor and Euthyrox were more affected by phasing. Saizen contributed actually double-digit growth, 19% organically, driven by strong performance and supported by competitor stock-outs that we leveraged on. Regarding -- specifically regarding the phasing, so you should expect this phasing to reverse during the next quarter. But I would try to quantify it as maybe 2 or 3 percentage points, still committed to the very strong midterm guidance that we provided at mid-single-digit growth.

[Matthias Heinzel, executive]

Sachin, on your question regarding tariffs and impact on margin, obviously, the situation, as we all observe, is very dynamic, and we are managing our mitigation action to adjust accordingly. In our guidance, we've reflected a slightly positive impact from the tariffs as we know them as of today, slightly positive on the top line and a slightly dilutive effect on the margin for the full year.

[Operator]

Your next question comes from the line of James Quigley from Goldman Sachs.

[James Quigley, analyst]

I have 2, please. So the first is a follow-up on the SLS business. And Jean-Charles, you mentioned that you're expecting the growth to return in the second half. But what data points are you seeing? And what can you point to that gives you confidence in that? And linked to that, in terms of pharma R&D spending, have you had any conversations, any data points or anything to suggest that pharma will start to reinvest in early-stage development to help support that growth?

And the second question is for Danny. Belen mentioned that the CEACAM5 had encouraging data. I appreciate you're going to show some more data at ASCO. But can you give us a bit of preview about which aspects of the data you found most encouraging? What could be the next steps in development here and how quickly you can move? And we've seen CEACAM5 disappointment in lung cancer with Sanofi, but do you have any plans to extend the program?

[Jean-Charles Wirth, executive]

James, thanks for the question, Jean-Charles speaking. I mean, first of all, talking about SLS, I would like to take the opportunity to mention that SLS has a very large portfolio. We go to multichannel approach. So we have a very strong footprint. Talking about what do we expect, as mentioned by Helene, we are facing currently some geopolitical economic difficult environment and challenges. And for sure, tariff drive, I would say, uncertainty behavior in some of our customers.

The second key point I would like to highlight is the U.S. situation with the public funding, where we see also an impact. Then China remains muted. And last but not least, we mentioned that our pharma customers remain cautious in terms of investment and spending on early-stage R&D. We expect that overall the situation will ease a bit in H2.

[Danny Bar-Zohar, executive]

James, it's Danny, regarding the CEACAM5 question. So you're absolutely right. We are quite excited about this ADC. The target is CEACAM5. CEACAM5 is a well-known target expressed on a variety of gastrointestinal tumors. The leading of them is colorectal cancer, which -- where it's actually expressed in more than 95% of the patients. And here, we used in this ADC with our proprietary linker payload technology with a cleavable linker, where the warhead is a topoisomerase 1 inhibitor. And as you know, colorectal cancer, like other GI tumors are rather sensitive to topoisomerase 1. This is the basis for the irinotecan used heavily in these populations.

So the target is known and the chemotherapy part is known. You referred to the Sanofi compound. The Sanofi compound was, yes, with the same target in lung, slightly less expression of CEACAM5 in lung, but also a different payload. It was antitubulin payload. So it's very, very hard to compare different payloads, different tumors. The data that we are going to share in -- at ASCO is actually a dose optimization study in colorectal cancer where we tested 2 doses after we came up with a very encouraging dose from a Phase Ia study that we presented last ASCO.

It was good enough, I would say, ironically to be the best of ASCO with -- in heavily pretreated patients showing ORRs of 10%. This is a lot in fourth and fifth line colorectal cancer. So here, we will show -- in the upcoming ASCO, we will show data in third-line colorectal cancer. And the data is embargoed. But what I can say is that this will be well above 10%. And still with what seems to be a very encouraging safety profile, no lung toxicity, no eye toxicity known with these ADCs. So I would stay tuned to that.

[Operator]

Your next question comes from the line of Falko Friedrichs from Deutsche Bank.

[Falko Friedrichs, analyst]

My first question is on Bavencio and whether the Q1 performance is a good indication for what we should expect for the full year from this medication. My second question is on the DS&S business and whether you expect this one to recover throughout the year? And then thirdly, on Process Solutions for Matthias, I guess the destocking is now finally behind. How close to a normal environment do you witness at the moment?

[Danny Bar-Zohar, executive]

Thank you so much for the question. I'll start with Bavencio. And -- so just zooming out a little bit. For Bavencio, the -- actually the best surrogate for the dynamics in the new patients is the share of platinum initiations, which seems to have stabilized in the United States around 25% approximately a year post the approval of EV-pembro. We are seeing similar dynamics play out in the first 2 European countries, mainly Germany and France with an expanded access program, but also in Japan. And we actually expect a similar stabilization share later this year and even through 2026.

Now when it comes to sales, we have started seeing the first signs -- very, very first signs of stabilization in the U.S. It's still very volatile. In the EU and Japan, it will take more time to stabilize as a result of the ongoing platinum share dynamics and the reimbursement also of EV-pembro across the markets in different time points. You also need to remember that it takes -- the sales themselves take time to stabilize because they start being impacted 6 months after the platinum stabilization.

So what do we expect moving forward? The Bavencio regimen is clearly going to prevail because we know that from key opinion leaders that certain patient profiles are better fit for this regimen. But we expect Bavencio to decline this year pretty much at the ballpark of what you saw in the first quarter. You saw 15%. It will be very much in that range. And then moving forward, 2026 and onwards, it will stabilize.

[Kai Beckmann, executive]

Falko, this is Kai speaking. Thanks for the DS&S question. Just bear in mind -- to compare the current performance, bear in mind that we had since the acquisition of -- since the integration 2020 to last year, we had 17% CAGR in that business. That was quite successful with peak years in '23 and a second record year in '24. So we're coming from a very high base. Currently, the performance has to be seen on the backdrop of a minus 21% fab construction index so if we take external KPIs for our construction, our project business.

And on the other hand, we support our materials business with novel equipment, specifically for new technologies for advanced semiconductors. And in these areas, we see quite a good performance. So it's a combination of 2 different factors. It's only 1/5 of the Semiconductor Solutions business, and Semiconductor Solutions overall, of course, is the majority of our Electronics business, but it's only 1/5 of Semiconductor Solutions.

[Matthias Heinzel, executive]

Falko, on your question regarding PS and BIOP, look, overall, I mean, we are close to normal, right? Very robust underlying demand. We have seen that demand building over the last several quarters. We see that in our growth rate and now with the 11% in PS. So from an underlying demand standpoint in the industry, we are basically close to normal. Obviously, the additional effect is now the whole tariff situation and the impact it could have on demand patterns, right? That's why we're watching that very carefully. To the question before, are there any demand movements, and that's what we monitor. So that's the only, I would say, still a watch out. But from an overall demand perspective in the industry, very strong, very robust.

[Operator]

Your next question comes from the line of Charles Pitman-King from Barclays.

[Charles Pitman, analyst]

Just firstly, on the LSS business, just speaking if you can -- can you just give us a little bit more detail around the RFPs in this area? You kind of noted muted demand, but I know that peers in the CDMO space are kind of noting a bit of a lag between these U.S. policy decisions and actually seeing an impact on the businesses. So what is the expected lag time between policy evolution and you seeing that in your discussions?

And also just as an extension of the LSS business, and apologies for any ignorance, but do you have any -- what is your U.S. underused capacity that could potentially be benefiting from tariffs going forward? And then just a second question on SLS. On the kind of muted China dynamics within the stable APAC region, I was wondering if you could just give us a little bit more insight into how you see this region developing over the course of this year, specifically in relation to stimulus efforts that were kind of put in place last year, obviously offset by any kind of tariff overhangs.

[Matthias Heinzel, executive]

Yes. It's Matthias. Let me handle the first question on LSS, and maybe it's important just to size it. So overall, LSS is about 7% of the total Life Science business. And then within that, we have 2 parts. We obviously have a testing business, which is about 60% and a bit more than 40% is our CDMO business. So total CDMO as a percentage of total Life Science is in the 3, 3.5 percentage range. It's a start-up, right? I mean we are clearly in novel modalities where we know we depend on success of our customers. The ADC business is running very strongly, mRNA viral vectors is heavily depending on the biotech funding. Obviously, there, we see some quite a lot of volatility.

And obviously, that leads to some underutilized capacity, which I think where your question is going. We need to see how that unfolds in terms of -- yes, in this whole tariff situation. Obviously, that could create quite some opportunities. I think it's too early to say these are the exact concrete implications and results, but nevertheless, having high -- call it, high-tech right production facilities for complicated normal modalities provides an opportunities. And obviously, we'll see how our pharma companies and customers will deal with that and -- but we are certainly ready to serve.

[Jean-Charles Wirth, executive]

Talking about SLS in APAC, Jean-Charles speaking. I mean, when you peel the onion, you have, of course, as we said earlier, China, where the market is muted and you have the rest of the region without going into too much detail, Japan, Korea, India and so forth. I will say in the other region, excluding China, we are executing according to plan.

[Operator]

Your next question comes from the line of Oliver Metzger from ODDO BHF.

[Oliver Metzger, analyst]

The first one is on the Life Science guidance. So you lowered your upper end of the organic growth guidance, and I fully get your comment about reflecting the lower SLS dynamics. Simultaneously, [indiscernible] and PS and Pro Solutions was definitely significantly better than expected. And I'm wondering both businesses have a similar size. And for me, it looks like that the PS dynamic was definitely better from a relative perspective versus expectations versus the SLS underperformance?

And it would be great to hear your thoughts about why you eliminate the upper end right now despite in the mix, it doesn't look worse. Then it's also about the -- in Process Solutions. Can you make a quick comment on the sequential order? I haven't got this. And the last point is also a very quick comment on what do you see regarding the equipment momentum is where the normalization seen?

[Belén Garijo López, executive]

Oliver, it's Belen. On the guidance, very briefly, the reason why we have lowered the upper end is strictly related to SLS U.S. Then Charles, do you want to comment?

[Jean-Charles Wirth, executive]

Yes, sure, Belen. First of all, we don't guide at business unit level. But between the upper and lower case, you should assume that we may see a few drivers which will impact the upper and lower case, i.e., the trajectory of the bioprocessing recovery market. And as mentioned by Belen, we are seeing some weaker or stronger macroeconomic environment, which may impact SLS. And finally, the third big driver should be around China -- the market development in China.

[Matthias Heinzel, executive]

Yes. On your PS question, look, as I mentioned before, we continue to see a very strong order book, total size of the order book, very strong order intake. That means the book-to-bill ratio remains, as we said before, comfortably high. And as an implication, also the order intake in absolute terms remains high and between Q4, which was an extraordinary strong quarter, pretty much on a similar level in absolute terms.

And that mostly also, I think I'm not sure whether you also wanted to get there. It's highly driven by consumable sales, right? I think your question was then about equipment momentum. By and large, 90% plus in our business is consumables. That is driving a lot of the order intake momentum building in PS, while at the same time, we also see a similar trend in equipment.

[Operator]

Your next question comes from the line of Dylan van Haaften from Stifel.

[Dylan van Haaften, analyst]

So just wanted to follow up, firstly, just on Bavencio versus PADCEV-KEYTRUDA. So earlier when the PADCEV data hit, there was this message that clearly, if you look at drug sequencing cost and tox, Bavencio's protocol looks better. But then if we're seeing it also land in Europe and Japan where cost and tox is a bigger item. It looks like -- I just wanted to ask if you guys think that after this 1Q print, has your stance changed materially in regards to the momentum you can get with prescribers with this argument? Yes, I'll start there and then I have a follow-up on Electronics.

[Danny Bar-Zohar, executive]

I hope that I got the question correctly. You're asking whether the momentum in Japan and Europe will be similar to the one in the U.S.?

[Dylan van Haaften, analyst]

It's more like when you guys presented the Bavencio versus PADCEV debate, it was more about there were certain benefits to the Bavencio protocol, and it sounds or it looks like there's not that much -- at least prescribers are not really responding to that argumentation. Should we imagine that, that comes back at some point? Or have you guys also internally reevaluated this argumentation?

[Danny Bar-Zohar, executive]

So okay. I'll give it a try. I hope that I got the question correctly. So what we saw when EV-pembro came in, they came out with what seems to be very strong data of an ADC plus a PD-L1. These are 2 drugs that also from a reimbursement perspective are not trivial. And what we saw is, from their perspective, a very good market uptake in the U.S., actually declining the shares of platinum initiations, which is the first time for maintenance treatment with Bavencio to the levels of around 25% of the eligible patients.

We see similar dynamics. We see it being replicated in Europe -- in the first countries in Europe and as well as in Japan. At the beginning, we thought that there would be differences between geographies, but it seems that it is stabilizing around these shares in general. It also seems that there are certain populations and the medical community has started more than just talking about it, that are more eligible for therapy with -- for treatment with Bavencio following cisplatinum initiation.

You are talking -- when we're talking about metastatic bladder, these are relatively old patients. They are very fragile. The toxicity with EV-pembro, particularly the EV-PARP is not always trivial. Patients with local disease or more localized disease, lymph nodes only, may benefit more from Bavencio maintenance, but this is also only a fracture of the population. So as I said before, we believe that the regimen will prevail, of course, not at the levels that were in 2024, the peak year, but it will stabilize along the years.

[Dylan van Haaften, analyst]

Awesome. And just -- maybe just one follow-up on the Electronics widened range. So if we look at the fiscal there was already some weakness in the market at the time, and we've seen some of the projects already soften over fiscal year '24. So maybe to you, Kai, like have things really worsened dramatically? And is this really behind especially the widened organic EBITDA guide? Or is there also sort of a mix impact we should be thinking about?

[Kai Beckmann, executive]

I did not understand the question fully, but let me try to answer it. So on the guidance, top end of the guidance -- the top line guidance is affected by the phasing of the project. That's the impact on the sales guidance. While on the EBITDA guidance, we see, of course, in addition, the impact of the tariffs marking the lower end of the guidance. The risk of the tariffs is embedded here. Just understand that for the sales development into the rest of the year, we are coming from 5 consecutive quarters of low teens growth in the Materials business.

And the outlook here for the Materials business is unchanged. So there's no transitions happen, technology changes happen. And so we don't see anything changing from our assumptions that we had earlier this year on the Semi Materials business. The only change that we were asking for is the phasing of the projects.

[Operator]

Your next question comes from the line of Peter Verdult from BNP Paribas.

[Peter Verdult, analyst]

It's Peter here from BNP. Just 3 very quick ones, please. Belen, just the pharma industry has been keen recently to highlight that the price differentials in U.S. government channels to Europe are more like 20% to 30%. So is this the sort of magnitude of price impact that you think about that one might need to consider on the back of the recent executive orders?

Secondly, very quickly, with PBMs being brought into the debate, are you at all concerned that efforts to lower prices in government channels spills into the commercial book of business? And then switching to Peter, please, just on Europe, pharma. I know you met with the President of the European Commission recently, and that meeting has been described to me by some of the CEOs, who are present there, is pretty disappointing. So you can't help but remain skeptical. European governments are going to suddenly be willing to pay more for innovation. So I'd love to hear if you had interactions that give you more confidence or do you push back to my supposition that Europe might indeed be willing to pay more for innovation and raise drug prices?

[Belén Garijo López, executive]

Peter, Belen here. Listen, I already commented a bit before on the way we are looking at the U.S. We believe, first of all, that the U.S. market will stay highly attractive, right? In terms of the discussions around prices, and as Peter mentioned, the most favored nations or equivalent to the reference price system in the U.S. will be complex to implement, first of all. And obviously, it takes different dimensions because President Trump has been, for the first time, talking about PBMs, so the middleman.

And keep in mind that as an average, PBMs take 50% of the price burden, right? And therefore, this is going to be something that we will continuously monitor and follow and contribute to building the debate and to definitely preserve the attractiveness of the U.S. market. By the way, if you remember former discussions related to our U.S. presence, we have a low exposure in the U.S., right? Because in Healthcare -- in particular, in Healthcare, it's only 20% of our global business. So we are quite underexposed versus peers.

And at the same time, a strategic challenge that we are trying to address through inorganic moves like the recent acquisition of SpringWorks. So we are not concerned with SpringWorks because we have included all different scenarios that you can possibly think of. We have evaluated the potential impact of the environment, and we feel confident that our business case remains exactly as we have communicated, very promising and attractive. I think on Europe, believing that the European governments are going to be raising prices, I mean, it's a good -- let's say, unrealistic approach, right? It's a long shot.

You know as well as I do at the European environment, every country has their own reimbursement and pricing system. And I don't believe that this is going to change in the short term. But I don't know whether Peter wants to add anything and share some additional thoughts.

[Peter Guenter, executive]

Well, obviously, I think it's not an easy path forward to somehow equalize or harmonize prices. But you have to also compare -- try to compare apples-to-apples, right? First of all, you have to look at the government administered prices in the U.S. and not the commercial plans administered prices in U.S. with what is de facto government administered prices in Europe. So that's the first thing I would say. The second, again, if you would take out the 50% to -- or the $0.50 to the dollar and the middleman and then compare U.S. and European prices, of course, there is -- there would be already a significant degree of convergence.

And you may have also seen, Peter, on last Monday that there was a specific ask to HHS to look at prices direct to consumer or direct to patients, so to try to cut out indeed those middlemen. So again, as I said earlier, there's a lot of moving pieces. But I fundamentally believe that perhaps not immediately, but perhaps midterm that countries with comparable GDPs should also contribute to rewarding innovation and therefore, also allowing further R&D. So I think it would be not easy, but healthy ambition, I think.

[Operator]

We will take our next question, and the question comes from the line of Simon Baker from Redburn Atlantic.

[Simon Baker, analyst]

Two, if I may, please. Firstly, going back to SLS. I wonder if you could give us an idea of the relative contribution of weakness in academia and government versus the pharma commercial side of SLS. And also, presumably, at some point, strong performance by Process Solutions will lead to increased earlier activity. So I'm just wondering, is that -- is process a reasonable leading indicator of SLS? And if so, on what time frame?

And then secondly, on pharma, we've had another TIGIT termination this week from GSK. So I wonder if you could just update us on your -- the confidence in your TIGIT antibody and any points of differentiation that you would cite for that molecule?

[Jean-Charles Wirth, executive]

Jean-Charles speaking. Thanks for the question. So let's start with SLS, great point, by the way. I mean, NIH public funding weight for -- roughly has an impact on academia, and we talk about roughly 10% of the revenue of SLS to answer the first question. And I would like again to echo that we are facing some changes linked to the public funding in U.S., but also we are seeing some pharma customers being cautious on early-stage R&D spending and China is still muted. So it's a whole.

Talking about the PS performance quickly. As mentioned by Matthias, we are confident in our current order intake and current business trends we are seeing in the market. But I would like also to mention that we need to keep in mind that the year-over-year comparison H1 versus H2 will be higher. We have a higher base. And last but not least, I would like again to echo Matthias saying that the destocking is somewhat behind us. We are looking at normalization, and we continue to expect an organic growth in PS, which will be towards our midterm growth ambition for the full year.

[Danny Bar-Zohar, executive]

It's Danny. Regarding the TIGIT question. So you're absolutely right. There are many anti-TIGIT antibodies and the field has not seen, I would say, tons of success with also the recent data released by GSK a couple of days ago. Part of these anti-TIGITs have a silent-Fc component. Others don't. This is a point -- this is pretty much the only point of differentiated. Our anti-TIGIT belongs to the family that has -- might contribute to a better immune response in terms of ADCC immune response on the cancer cell.

But to cut a long story short, we are assessing our TIGIT -- anti-TIGIT antibody in a single study called the UC-Medley. This is a study that combines 3 different compounds. One of them is our anti-TIGIT on top of Bavencio in the same maintenance -- first-line maintenance in metastatic bladder cancer. And actually, the interim results of this study, there are 3 combinations there, one with the TIGIT, the other one with Trodelvy and the third one with Nektar's IL-15 compound. The interim results from this study will be presented at ASCO in a couple of weeks. So we'll need to be patient for there. But beyond that, there are no activities on TIGIT and there won't be.

[Operator]

Your next question comes from the line of Rajesh Kumar from HSBC.

[Rajesh Kumar, analyst]

Two, if I may. First, on Electronics. Do you think you have captured any tariff or cyclical risks in your electronics guidance appropriately, especially in your growth assumptions, i.e., if there was the continued weakness in the semi cycle currently extends further? Does the lower end of your guidance anticipate that? That's the first question.

And second, on Process Solutions, I appreciate orders are coming through. Inventory levels are not a headwind. What are the second order impacts from biotech funding if this drug pricing regime was to come through potentially quite a few early-stage biotech projects might not go through or be feasible. So investment in that space could go down, and that could have an impact. Alternatively, you also might see CapEx move to the U.S. So if you could talk through what are the moving parts there you have factored in your thinking about the macro environment in your Process Solutions outlook, that would be very helpful.

[Matthias Heinzel, executive]

So Rajesh, thanks for the opportunity to clarify the factors of our sales guidance in Electronics. We did not include the recession scenario in our guidance. That will be outside -- nobody has any data for that at this point in time. So this is not included. So the bottom end includes the potential further phasing of projects. If that happens, that would turn towards the bottom end. The upper end includes, of course, the continuation of the businesses in our Materials segment, AI-driven advanced nodes technology as well as an acceleration of memory, specifically NAND and analog. This would bring us more towards the top end of the guidance.

[Jean-Charles Wirth, executive]

Jean-Charles speaking on the PS question, I mean, you know that we depend mostly on the mAb commercial activities. And we said earlier that roughly 90% -- 9-0, 90% of our portfolio is consumables driven. So as such, we have limited exposure on CapEx.

[Operator]

This concludes today's question-and-answer session. I'll now hand the call back to Florian Schraeder.

[Belén Garijo López, executive]

Thank you, Florian, and thank you, everyone, for your continued interest in Merck. To summarize, we had a solid start into the year, clearly showing a proof point of our adaptability in this evolving macroeconomic environment. Obviously, we remain committed to vigorously executing our strategy and delivering on our promises for profitable growth and sustainable value maximization. And importantly, we look forward to meeting many of you at the upcoming roadshows and conferences, including ASCO 2025. Please note that we will be hosting our CMD, our Capital Markets Day on October 16 here at our headquarters in Darmstadt, as you might have already seen on our web page.

The team will send an invitation with all details in due course, and we would be delighted to welcome as many of you as possible. But now before this call is closed, I want to take the opportunity to say goodbye to Peter and Matthias, for whom it has been their final earnings call today at Merck. Both of them joined early 2021. And I have to say that when Peter and Matthias joined Merck, the seas that we were navigating were anything but smooth kind of a difficult situation like the one we are confronted with today for different reasons, at that time was post COVID -- COVID and post-COVID pandemic.

And we were very fortunate to have 2 skilled captains in command during these times. And to stay in this picture, both have played a crucial role in transforming Healthcare and Life Science during their tenure to prepare the sectors very well to overcome other stones, the current and future stones. So as they embark on their next adventures outside of Merck, I want them to know, I want you to know that your impact will be felt long after you leave and your contributions have truly shaped who we are today, and I'm grateful -- very grateful for the time we share together. A big thanks to both of you. And with this, thanks, everyone, for joining the call, and goodbye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.