Earnings Call: Q4 2019

Mar 5, 2020

Dear ladies and gentlemen. Welcome to the Merck Investor and Analyst Conference call on the fourth quarter 2019. As a reminder, all participants will be in a listen only mode. May I now hand you over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir. Thank you, Kevin. Well, welcome from my side, to this Merck full year 2019 earnings and results call. My name is Constantin Fest, Head of Investor Relations here at Merck. It's great to have today here with me, Stefan Oschmann, our Group CEO, as well as Marcus Kuhnert, our Group CFO, and also Kai Beckmann, the CEO of Performance Materials. In the next 30 minutes or so, we'd like to run you through the key slides of this presentation, and then we'd be happy to take all of your questions. With that, I'd like to hand over to Stefan to kick off this presentation. Stefan. Thanks, Constantin, and welcome everyone to our full year earnings call. I would directly go to slide number 5 of the presentation, starting with the highlights. 2019 was a successful year for us. We saw strong operational performance across our three business sectors. We made significant progress on our strategic agenda, and we delivered on our guidance. Healthcare had a very good year overall, with slight growth in the base business and strong contributions from new products, in particular Mavenclad. At the same time, we significantly advanced our pipeline and rigorously managed our cost base. Life Science, yet again, delivered very strong above market growth, paired with further margin expansion. Cost control remained in place, and we further strengthened our position through innovations and considerable investments across the portfolio. Performance Materials faced difficult market conditions in most of its businesses last year. Yet we made meaningful progress in our Bright Future transformation program and successfully closed the landmark acquisition of Versum. That said, we are looking ahead to 2020 with optimism. While we comment on our guidance in more detail later, let me keep it simple here by repeating what we have also told you at our latest capital markets day. Merck stands for steady earnings growth at high margins and a low risk profile during turbulent times. Moving on to slide 6 with a summary of our headline promises, so to say, for last year. As you can see, we delivered on all of them. We are especially proud that despite the challenging market conditions in Performance Materials, we were able to grow sales of the group by over 5% organically, and in line with our ambition, we managed to grow earnings at an even faster rate. Now turning to the next slide, where you will find the regional perspective on the EUR 16 billion in sales we generated last year. Growth was broad based with positive organic development in all regions. Asia contributed 35% of sales, while Europe stands for about 30% and North America for about 25%. On to slide 8, dividend. As you have seen from our release this morning, we will propose a dividend of EUR 1.3 per share to the AGM on April 24th. This represents a 4% increase compared to prior year and a payout ratio of 23.4% of EPS pre, in line with our dividend policy. Overall, we aim for continuous dividend growth in line with our earnings development. Also, our commitment to deleverage quickly after the Versum acquisition remains unchanged. Let's now have a look at 2019 from a strategic perspective, starting with Healthcare on slide 10. Financial performance of Healthcare was very strong, with sales up 6.2% organically and the EBITDA pre-margin expanding by 370 basis points. The latter was obviously supported by higher non-recurring income accounting changes and effects. However, even if you were to adjust for all of these effects, the margin was still up around 100 basis points, in turn reflecting solid top-line leverage, positive mix, and stringent cost management. In terms of the main building blocks for sales, we delivered a slightly growing base business, while newly launched products added a remarkable four percentage points to organic growth. Importantly, our N&I franchise returned to growth as the uptake of Mavenclad more than offset the ongoing decline of Rebif, and this is true not only for the second half of the year as we had guided, but for the year as a whole. We also made significant progress in our pipeline, including FDA approval of Mavenclad, approvals of BAVENCIO in first line RCC in all major jurisdictions, and very recently, approval of Erbitux in first line head and neck cancer in China. Furthermore, we were granted breakthrough therapy designation for tepotinib and already filed this promising compound for approval under Sakigake in Japan, while FDA filing will follow soon. Regarding the potential blockbuster evobrutinib, the most robustly characterized BTK inhibitor in MS development, we initiated a pivotal phase III program in MS mid last year and, as communicated to you a few weeks ago, will now be going against an even stronger comparator based on exciting longer-term data from our phase II trial and without compromising on cost or timeline. Last but not least, early in 2019, we entered into a strategic alliance with GSK for development and potential commercialization of bintrafusp alfa, a compound that was developed in-house at Merck, and we feel very good about the progress we make. With that, let's move on to Life Science on slide 11. Life Science once again showed excellent performance, with organic growth of 9%, marking new highs well above market, and our industry-leading margin expanding by 120 basis points, thus significantly exceeding our own midterm ambition of 20 to 30 basis points per annum. Similar to my comments for Healthcare, please note that without the effects of IFRS 16, foreign exchange, and portfolio, the margin was still up 60 basis points, in turn reflecting good operating leverage and a continued focus on cost discipline. Regionally, Americas and APAC were the main drivers of growth, while from an end-market perspective, Process Solutions remained the strongest performer. While financial performance in 2019 speaks for itself, let me provide you with a few highlights in the context of our ambition to further strengthen our position as a differentiated Life Science player and implementing a dynamic strategy for future profitable growth. Firstly, we significantly invested in CapEx to upgrade and expand our existing infrastructure for future growth and also further enhanced our leading e-commerce platform, for which we launched the next generation in China and are now rolling it out globally. Secondly, we significantly invested in R&D to come up with new services and products, such as our BioContinuum buffer delivery platform, to meet the emerging needs of our customers and cater to new market trends such as that for continuous bioprocessing. Thirdly, we keep on pulling both organic and inorganic levers for growth. With the bolt-on acquisitions of FloDesign Sonics, we will be the first to use acoustic technology in cell therapy manufacturing. Coming to Performance Materials on the next slide. As mentioned earlier, market conditions were challenging for most businesses in Performance Materials in 2019. Nonetheless, we managed to deliver on our margin target of around 30% and keep the organic sales decline in line with our guidance. As expected, Liquid Crystals returned to its negative underlying trajectory and faced tough comps from Q3 onwards as the temporary demand boost from China came to an end. While softness in Surface Solutions was mainly due to weak end markets in automotive. On the positive side, our OLED business continued to enjoy very strong momentum, and Semiconductor Solutions outperformed in a declining market. Moreover, we made significant progress on our strategic agenda with further sound execution on our Bright Future program, and we are confident that we will deliver the targeted turnaround. We continued to streamline our operations, and most importantly, we successfully closed the acquisition of Versum, which marks a very important milestone in the transformation of Performance Materials into a leading electronics materials player. The integration of Versum is well on track, and Kai will be providing more details later. But before that, let me hand over to Markus, who will guide you through our key financials. Thanks, Stefan, and welcome also from my side. I'm now on slide number 14 with an overview of our key figures for 2019. Most of you will have had a chance to take a look at our numbers already. So let me keep it brief here by saying that we are very happy with the development of our key performance metrics overall. We saw strong sales growth and even faster earnings growth in 2019. Yes, currency played into our favor, and in Q4, we benefited from positive portfolio effects, but the underlying picture is equally encouraging, and I will comment on this in more detail in a minute. Next to the positive earnings development, please note that operating cash flow was boosted by the GSK upfront payment, while the increase in net debt and headcount mainly reflect the acquisition of Versum. Finally, just a quick comment on EPS pre. You will remember that we had quite a meaningful drag from LTIP provisions in Q3, and now the opposite is true for Q4. At the same time, we had slightly higher interest expenses in Q4 compared to Q3 and also saw an uptick in regular depreciation, mainly due to Versum and some phasing effects. While the LTIP component remains difficult to predict, as explained to you on our last earnings call, I would like to give you some guidance on the regular depreciation and say that Q4 is probably a good run rate for the next couple of quarters. With that, let's now take a closer look at our 2019 performance and the composition of growth. I'm on slide 15. Group organic sales growth came in at a solid 5.3% with strong growth in Healthcare and Life Science, more than offsetting the expected decline in Performance Materials. Earnings followed the same pattern, and Stefan Oschmann has explained the main drivers by division already. At group level, EBITDA pre reached EUR 4.4 billion, reflecting an increase of 15.4% over 2018. Organically, EBITDA pre rose 11.3%, but keep in mind that this includes tailwinds from first-time adoption of IFRS 16. Without this effect, organic EBITDA pre growth was still 7.6% for the full year and more than 13% in Q4. However, before diving into the details of the fourth quarter, let's have a quick look at the reported figures on slide 16. Our EBITDA pre increased by close to EUR 600 million in 2019 for the reasons discussed before, while EBIT increased by around EUR 400 million. The difference of the two mainly stems from higher D&A charges in the context of IFRS 16 and, to a smaller extent, higher exceptionals, in turn related to Bright Future and the acquisition of Versum. The Versum financing costs again are the main driver behind the higher financial result, although revaluation of the F-star option also played a meaningful role. The effective tax rate remained more or less unchanged and well in line with our guidance corridor, while net income and EPS dropped sharply as the 2018 base was inflated by the Consumer Health disposal gain. Now, let's move on to the review of fourth quarter results, starting with Healthcare on Slide 17. Similar to Q3, Healthcare posted very strong organic growth of 8.4% as moderate growth in the core business was complemented by significant uptake of new products, in particular Mavenclad. Within the core business, strong growth of Erbitux continued, while the slowdown in our general medicines and fertility franchise was mitigated by less pronounced declines of Rebif. However, please note that the nine-month performance of Rebif is more representative than Q4, while the moderation of growth in general medicine and fertility needs to be seen in the context of many good quarters before and comps for Erbitux will start to become more challenging. So overall, we expect our base business about stable in 2020 and still at least stable through to 2022. On the new products, Mavenclad showed further significant uptake across all regions, which we expect to continue, and landed comfortably over the EUR 300 million mark that we had guided for the year. While Bavencio delivered on the upgraded target of around EUR 100 million. Healthcare EBITDA pre surged by over 35% in Q4 to EUR 561 million and by over 25% organically and excluding tailwinds from IFRS 16. Next to the strong top line, the main driver behind this positive development was significantly higher non-recurring income compared to last year, as well as stringent cost management. On non-recurring income, in particular, we delivered in the upper half of the EUR 70 million to EUR 120 million corridor, which we flagged to you on our November earnings call, with around EUR 30 million from GSK, EUR 35 million and another EUR 20 million for the RCC approval of BAVENCIO in Europe and Japan respectively, and also some income from active portfolio management. Looking at 2020, we expect a low triple-digit million euro amount from GSK and up to a mid-double-digit million euro amount from active portfolio management in our numbers. For Q1, we expect EUR 35 million from GSK and no contribution from active portfolio management. Nonetheless, similar to last year, we expect a significantly lower margin in Q1 compared to Q4 due to the usual seasonality in our Healthcare business, while COVID-19, the spread of the coronavirus, will also have an effect. More details later. Finally, keep in mind that income from GSK can vary depending on the cost evolution in the alliance and on reaching development milestones. Let's turn to Life Science business sector on the next slide. Fourth quarter sales in Life Science rose close to 8% organically, which is quite a remarkable performance given the tough comps. Growth was driven by all three business units, and again, Process Solutions stood out with organic growth of over 13%, mainly driven by a strong demand for bioprocessing. Applied Solutions delivered solid organic growth of around 5% in Q4, with our lab water products enjoying very good momentum while Research Solutions came in at close to 3%, helped by ongoing good demand for our workflow and separation tools. Regionally, we saw mid-teens organic growth in Asia-Pacific and high single-digit organic growth in North America, while phasing played a role when it comes to low single-digit organic growth in Europe. Fourth quarter EBITDA pre increased by around 16% and by close to 10% organically and excluding the effects from IFRS 16. The picture in terms of margin expansion looks very much the same as for the full year and, as mentioned by Stefan earlier, exceeds our own midterm ambition of 20 to 30 basis points per annum increase, which we had introduced back in 2018. Let me add that we feel comfortable with the 20 to 30 basis points of margin expansion also for 2020, albeit we prefer to be less explicit in terms of magnitude for outer years. With that, let me hand it over now to Kai for a review of Performance Materials. Thank you, Marcus. Warm welcome everybody from my side as well. I am now on slide 19. As you know, market conditions have been quite challenging for most businesses in Performance Materials throughout 2019. As expected, Q4 was no different. Organically, sales declined 15% and EBITDA pre was down 13%. From a different viewpoint, down 15% organically and at the same time adjusted for positive effects from IFRS 16. Similar to Q3, the main driver behind the organic sales development was a double-digit decline in Display Solutions as strong growth in OLED was more than offset by considerable declines in Liquid Crystals against tough comparables from the previous year. The sales in Semiconductor Solutions were down 5% organically, but reassuringly well above a soft end market. Surface Solutions was down a little less, primarily driven by ongoing weakness in automotive. On a reported basis, sales and EBITDA pre both surged by 27%, in part due to FX tailwinds and of course, most importantly, significant first-time consolidation benefits from Versum. As you will have noticed, the portfolio effect on sales and EBITDA pre in Q4 is a bit shy of what we guided in terms of contribution from Versum after the closing early October. However, please keep in mind that the portfolio effect not only includes Versum, but also Intermolecular, which is generating only minor sales, but incurring cost. In addition, phasing effects also didn't help. Indeed, the underlying performance of Versum is intact and the integration is well on track. However, before giving you more color on the integration and the planned synergies, let me briefly zoom out and remind you of the bigger picture. As you can see on slide 20, with the acquisition of Versum, the contribution of Semiconductor Solutions has roughly doubled to 50% of sales in Q4, followed by Display Solutions at 36% and Surface Solutions at 14%. As such, we have made significant progress on our strategic agenda to transform Performance Materials into a leading electronics materials player exposed to attractive end market trends around digitization. Indeed, as we have outlined before, we see scope for Semiconductor Solutions to grow sales in the mid to high single digit medium term, supported by secular growth trends including artificial intelligence, 5G, and the Internet of Things. Versum and Intermolecular allow us to fill important gaps along the value chain, and we feel strongly positioned to fully capitalize on these promising trends. Also, our ongoing conversations with customers as well as several industry data points suggest that the end markets are close to their recovery from a cyclical trough and should return to growth soon. Meanwhile, we will continue to rigorously manage our Liquid Crystal business for cash. As you have heard from Stefan Oschmann earlier, we are very happy with the progress on our Bright Future program. For example, we closed our site in Chilworth, U.K. back in September and continue to drive efficient reallocation of resources to pockets of growth within Display Solutions. In particular, OLED, for example, while we further sharpen our focus in Surface Solutions. Hence, overall, we are confident that we will deliver the targeted turnaround of Performance Materials in 2020 and further leverage our investments for attractive sales and earning growth in the outer years. With that, let me move to slide 21. With an update on the integration of Versum. Overall, the integration of Versum is running smoothly and we are making progress to launch the combined organization on June 1st. We have already announced almost all managers down to the third leadership level and are working on the teams below. Synergies are also on track, and we confirm our target of EUR 75 million in cost synergies from 2020 onwards, with integration cost of EUR 125 million spread over 2020 and 2021. We look for a broadly linear ramp-up of cost synergies coming from three main areas: business optimization, procurement and supply chain, and administrative function. Our teams are working hard to identify and realize respective levers as fast as possible and of course, without disrupting the business. On the supply chain, we recently announced the first site closure. Also, admin is running very smoothly and the cultural fit is really encouraging. I am sure you will have more questions on that later, but for now, let me hand back to Markus. Thanks, Kai. I am now on slide 22 with a few remarks on the balance sheet. The expansion of our balance sheet compared to the end of 2018 mainly reflects the acquisition of Versum, which we closed in October. By the end of 2019, our equity ratio stands at 41% and our net debt to EBITDA ratio is at 2.8 times. With that in mind, and as already mentioned on our Q3 earnings call, focus for the next two years will be on deleveraging. Back in November, we also promised to update you on the Versum-related PPA, so purchase price allocation effect. Please move on with me to slide 23 for a corresponding overview. Most significant effects on the balance sheet from identified intangible assets and goodwill both amount to roughly EUR 3 billion. The biggest piece of intangible assets is attributable to Versum's customer relations, so in total, EUR 2.3 billion. All intangible assets except goodwill are amortized over their defined useful life. That means, first of all, we apply the conservative approach to the balance sheet like you know from us from earlier acquisitions. Secondly, the incremental EUR 3 billion in intangible assets will result in between EUR 230 million and EUR 250 million additional amortization per annum going forward. Last but not least, a quick word on cash flow on slide number 24. Operating cash flow was solid at EUR 690 million, while investing cash flow mainly reflects the acquisition of Versum. With that, let me hand back to Stefan for the outlook. Thanks, Marcus. I am now on slide 26. As mentioned earlier, we are looking to 2020 with optimism, with considerable optimism actually. However, before going into the details of our guidance, I would like to briefly touch on the evolving coronavirus situation. First of all, our main priority is to ensure the safety of our employees and their well-being and their families. We are also focusing very much on supply security and business continuity. We are supplying technologies for the development of production of vaccines and treatments. In line with our 352-year history of taking on responsibility for the communities in which we operate, we are supporting, inter alia, China in its fight against COVID-19 with multiple donation efforts, including Life Science products. The economic impact of this crisis in and outside of China is highly uncertain, and so are the effects on our business. However, we are confident that we will manage the situation well and that our diverse setup will pay off once more. We are currently working on different scenarios. We are looking into more or less applicable historical models of other crises. We have determined that these crises, be it recessions, be it disease threats, have an industry-specific impact, which we must take into account. We are now sharing with you a scenario which we have developed in mid-February on this slide 26. Under this scenario, we assume that the COVID-19 outbreak peaks in Q1, eases in Q2, and that the situation is sort of back to normal in the second half of the year. In total, this scenario translates into a drag on our full year sales of around 1%, mainly coming from China and mainly occurring in Q1. This is already reflected in our qualitative outlook for 2020. However, should the effects be significantly more pronounced or should the crisis result in a global recession, please note that this guidance would need to be adjusted, and we can probably go into more detail during the discussion. With that, let's move on to slide 27 for guidance. We expect solid organic sales growth in 2020, paired with positive portfolio effects from Versum in the mid-single digit percentages and partly offset by exchange headwinds in a range of zero to -3%. For EBITDA pre, we guide to strong organic growth, while Versum and FX are expected to have the same relative impact as for sales. Further to exchange, please note that our forecasts assume the euro-U.S. dollar rate for 2020 to be in a range of 1.11 to 1.16, while we have hedged about 50% of our exposure at a euro-U.S. dollar rate of 1.18, both of which are main drivers behind the anticipated exchange headwinds. On to slide 28 then. Here we share with you our summary of the key earnings drivers and underlying assumptions for 2020. In fact, these should contain little surprises for you, so just a few additional comments here. We are also consistent with the business sector guidance on our last slide. For Healthcare, we have repeatedly stated that we plan to be more balanced on other operating income, and this is reflected in our guidance for 2020. In particular, as mentioned by Marcus earlier, we currently expect a low triple-digit million amount from GSK and up to a mid-double digit EUR million amount from active portfolio management. For Life Science, as also mentioned by Marcus, we stick to our ambition of margin expansion in a range of 20 to 30 basis points for the current year, but prefer to be less explicit for outer years. For Performance Materials, please note that our guidance assumes Semiconductor Solutions to return to growth in the current year, something that we feel confident about based on conversations with customers and emerging industry data points. Now on to your questions. First question, please, Kevin. Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial star one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial star two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. Our first question comes from Matt Weston of Crédit Suisse. Thank you very much, and good morning or good afternoon. Apologies. Three questions if I can. The first, just quickly on Corona. You have very kindly given us the revenue impact. Could you give us some indication as to what margin we should assume that drops to the bottom line at? Is it at the group margin or is it at a much greater level given the operational leverage within the business? Also, I am just mindful that mid-February, we had not really seen the outbreak impact Korea, which is a very big market for semiconductor manufacturing. So can you just confirm as to whether or not you expect that to have an impact going forward? Secondly, a question on guidance. I am aware that you have solid as your adjective for sales growth, but strong for EBITDA, which essentially suggests meaningful margin expansion at the business. You've given us very clear levers for Healthcare. You've said that it's 20 to 30 basis points within Life Science, which suggests very meaningful organic margin expansion at Performance Materials. I know you've just mentioned that you assume semiconductor pickup. If you could just give us some idea of levers, that would be very helpful. Then finally, Mavenclad in the U.S., prescription trends seem to be plateauing. Can you just give us an idea as to whether or not there's something that we're missing there, or whether the IQVIA data isn't capturing that trend, and why you're confident that growth will continue? Thank you, Matthew. I would suggest that Marcus address the question regarding guidance, and then I get into your question regarding Corona and Mavenclad. Good. Hi, Matthew. Thanks for your question on guidance. First of all, let me reiterate again because we have encountered some questions regarding our qualitative guidance already this morning that, as you know, it's corporate policy of Merck that the March conference call we provide qualitative guidance for the year, which will then be made quantitative two months from now when we release our Q1 figures in May. Then we give numbers, corridors, and what we usually do. The wording indeed implies that we project a further margin increase 2020 over 2019. You have read this absolutely correctly. We expect EBITDA pre to grow faster than sales in the current year 2020. If we zoom out a little bit to the three business sectors, in Healthcare, I think it is fair to assume that we expect a slight margin growth in 2020. In Life Science, we are very explicit with our expectations to grow margins 20 to 30 basis points. Last but not least, in Performance Materials, we expect, as we already said, a recovery in Semiconductor Solutions. We expect a continued downward trend in Liquid Crystals or for display materials as a whole. We expect also a slightly better performance of Surface Solutions than in 2019. On top of that, we will get, of course, some support from Versum, which will be by and large stand alone, slightly accretive to Performance Materials in terms of margin. Plus, as you have seen, we also project that we will have realized some EUR 20 million cost synergies by the end of this year. If you take all this together, then yes, our margin shall increase in 2020 over 2019. Matthew, let me start with Mavenclad. I assume that your question was referring to U.S. market share. I would like to humbly draw your attention to slide number 40, where we are seeing actually quite the opposite of a market share plateau. We are seeing continued growth in the high-efficacy dynamic market share and in the oral class share. We are also seeing continued increases in patient access. We had some significant recent access wins and major plans including Prime Therapeutics, UnitedHealthcare, and others also covering Mavenclad. Ex-U.S., we continue with our strong launch progress. As you know, we approved in 75 countries. Right now, in terms of perception tracking, we have leading perceptions in the oral class in key markets such as Germany, the U.K., Italy, and Spain. The ex-U.S. growth will be driven by continued demand acceleration and the full year impact of market access wins in 2019. Hope that addresses your question. When it comes to Corona on margin, I would not expect any sort of radically different picture compared to the revenue situation. I assume you can appreciate that we cannot share with you guidance on corona impact on margin per week and country or so at this stage. This is evolving very fast. Yes, this scenario that we have defined was by mid-February, and it does not include an impact of Korea so far. If you look at projections by leading epidemiologists, it is quite obvious that many people think that this epidemiological development means that basically 60%, 70%, 80% of the population will get infected at some stage, and that the management of an epidemic is really about delaying onset in order not to overburden respective healthcare systems. Quite a few people expect a certain improvement of the situation as the ambient temperatures rise, and we have seen this in China that in some of the warmer regions, we have seen much less of an impact lately. Guangdong Province is reporting a very stable situation. So it is basically impossible to predict. We have looked at the impact that other epidemics or epidemic threats have had on different industries in various models or on the I know it is not 100% comparable, but to some degree, the financial crisis had a similar psychological effect. As I said early on, it is highly industry specific. We are not a cruise line. We are not an airline. Obviously, we are a company that is making biopharmaceutical drugs. We are a company that is making lab equipment and lab reagents, and that is active in biologics manufacturing. So there are obviously negative and positive factors in there. When I look at Performance Materials in terms of a ranking of how our businesses might be affected, I would say the business that probably will be least affected is semicon. Then comes display, and then comes Surface Solutions. Many thanks indeed. Our next question comes from Mark Purcell of Morgan Stanley. Thank you very much for taking my questions. Two, please. The first on China. China sales in 2019, EUR 2.3 billion. Please, could you give us a rough idea of how that breaks down by division? And then within Healthcare, you specifically called out fertility and oncology as being areas which have been impacted most. Fertility, I guess being a procedure which people wait for. Oncology, I guess, more difficult to understand. But could you help us understand what proportion of Healthcare sales come from fertility and oncology, fertility being the one I think is most impacted? Then your guidance, I guess, stepping back implies about a 10% revenue impact in China from COVID-19. Is this based on in-channel demand you saw through to the middle of February, or does this include any impact yet on the supply chain side of your business? Secondly, on TGF-beta trap. Could you please help us understand where you are in recruiting the initial 300 patients in the lung, 037 trial versus pembrolizumab? When you expect that section of the trial to complete? I mean, at this stage, will you continue to recruit patients beyond the 300 patients to, say, 500 plus to make it a pivotal trial? Will that be done irrespective of interim analysis? If interim analysis is required to expand the study, what's your best guess at this stage when that interim analysis could take place? So that's two questions. Thanks very much. Mark, let me start with your very first question. China, your overall sales guess is pretty accurate. Out of this, you can assume roughly 50% attributable to Healthcare, the rest relatively evenly spread between Life Science and Performance Materials. I am taking over with your questions. As a matter of principle, we do not report country-specific franchise data. The mechanisms for fertility and oncology are fairly simple. Fertility, the fertility business is very much based on a certain degree of consumer optimism. Couples, families, when there is some concern about the future, are seeking less fertility treatment. When it comes to oncology, obviously, oncology cases as such are not impacted by the COVID-19 crisis. However, experience shows that there is a lower degree of diagnosis in such situations. That should be a transient effect. Your question regarding bintrafusp alfa, the trial is on track for an estimated primary completion towards the end of 2021. 2020, a small group of people will look at the data, and that will not be disclosed internally or externally. Remember that data integrity, trial integrity is really important. Based on the data, a decision whether to increase trial size or not could be taken. We want to, obviously, with our partner and us, we want to get sufficient power for an OS benefit. It is already a pivotal study right now. Thank you very much. That is very useful. Lastly, on the supply chain part of the question out of China, have you seen much impact yet on your supply chain across your three businesses? No, we haven't seen any sizable impact yet. We are looking very deeply into each and every line item. We are encouraged to see how hard our employees are working in this context, how close the relationships with our suppliers and our customers are. We're monitoring that very closely. Overall, there is a lot of concern among political circles, et cetera, about drug shortages. I feel that according to what I know, that the dependence on Chinese-sourced API is being overestimated to some degree. Remember that we internally, we have a lot of biologics in our pipeline and all of these biologics that the API is being produced in Europe in either Switzerland or in Spain. We also make API for several of our oral products in Europe. The issue with supply for medicines in China might be on excipients, where as far as I know, a vast majority of pharmaceutical excipients are being produced in China. That would be a longer term topic. That's great. Thank you so much. Appreciate it. Our next question comes from Richard Vosser of JPMorgan. Hi, thanks for taking my questions. A couple, please. Firstly, I wondered if you could update us on the split of Mavenclad sales, North America, and ex-North America, just to help us there. Then you touched a little bit on the demand in Europe, but maybe you could give us an idea of the rollout that you're expecting for outside of Germany, outside of the U.K., in 2020 to further grow the product ex-U.S. Then potentially just if you could maybe talk about just Versum and the contribution from Versum on EBITDA in the fourth quarter. Obviously, you've given the breakdown for Intermolecular and Versum, but just if you could give that breakdown. Thanks very much. Thank you, Richard. I suggest that Marcus respond to the Versum question. Yeah. Richard, I go ahead with your second question on Versum. First of all, as we have already said in the call, we were a little bit shy in terms of sales and EBITDA compared to our guidance that we have given. The reasons are basically, on the one hand, as we already said, phasing effects. On the other hand, also market conditions were not especially helpful in the first quarter, so we were still dealing with a relatively difficult semiconductor market. If you make the math and if you, let's say, look on our EBITDA bridge, the portfolio part is basically Versum and Intermolecular. As we also said during the call, the Intermolecular effect is slightly negative. So then you end up with a Versum number, which is a little bit, as I said, below the EUR 80 million to EUR 90 million that we have projected. Please also note that as Versum is closed now, we will not give any more future specific Versum guidance going forward. As we have also not done the Sigma audit a couple of years ago. Richard, on Mavenclad, U.S., ex-U.S. split. As a matter of policy, I cannot provide you with exact numbers. We expect obviously growth both in the U.S. and in ex-U.S. Ex-U.S., the main driver of growth of continued penetration will be significant access improvement in 2020, namely in Spain. We have also the U.K. We had also achieved the removal of the MRI requirement, which was based on a NICE recommendation, which will also drive growth. If I may add one point, Richard, you also asked on the North America, North or ex-U.S. share. You will remember that in the November call, there was a similar question being asked, and back then we said U.S. share was in the mid-30s percentages. Given the higher dynamic in the U.S. at the moment, the share has increased by round about 10 percentage points in the meantime. Thanks very much. Very kind. Our next question comes from Vimal Kapadia of Bernstein. Please go ahead. Great. Thank you very much for taking my questions. Vimal Kapadia from Bernstein. Just to start with a clarification question on your previous comment on COVID-19 having a similar impact to revenues and EBITDA. Does that imply an impact of 1% to EBITDA, or does that suggest the 1% revenue impact, which is around EUR 180 million, will be the impact on EBITDA? My second question is just on Glucophage in China. The competitors were determined not to be quality approved, and so the VBP impact is not going to kick in wave 3, but I just wanted to get your thoughts on what impact that would have near term, and then when you think potentially these companies will be back with a quality product, so you will see a VBP impact. My final question is just on the GSK milestone payments. I appreciate you cannot be specific on the EUR million amounts for the TGF-beta milestones. Would it be possible for you to give some context on what the next milestones will be for in terms of the development cycle? Thank you. Thank you, Vimal. Let me start with the corona situation. I think, Vimal, you want us to be focused on managing the situation. We have crisis teams work day and night, and this requires a lot of work. A lot of work to maintain, to make sure that we can continue to produce, that our employees are safe, that we supply our customers. Simply, we have not put the effort into sort of sharpening the pencil when it comes to margin effect. What I said early on was not that it would be comparable. I think the language that I used was that it would not be dramatically different. Please forgive us for not being so granular on this. I think in terms of the feedback that I hear, is that quite a few people believe that we've been relatively granular when it comes to quantifying some sort of impact of this. China VBP. Again, the impact on the Chinese industry of the crisis right now, impossible for us to predict. What you should note is that contrary to our initial assumptions, Glucophage was not covered by the latest wave. We don't know whether it will be included in the next wave. We don't know whether the API nitrosamine contaminations with some API from other sources has had an effect in that or not. However, this is a slight positive. GSK milestone. Marcus has covered. Yeah. I just would want to refer back what Stefan said just a couple of minutes ago regarding expected timings for bintrafusp. Primary data completion expected for end 2021. We said that we might get the results of an interim analysis this year, but we will have no access to any details or data. However, the results could actually trigger a milestone payment if the results are good to excellent. But there is nothing included currently, obviously, in our guides. And obviously, Marcus was referring to the entire lung program. Yes. Okay, great. Thank you very much. Our next question comes from KC Arikatla of Goldman Sachs. Thank you for taking my question. I just have one. On Mavenclad, can you comment on the performance of the drug in Germany, please? The reason I ask is it has been roughly two years that you have launched in the country. Are you seeing patients drop off dramatically after two years and are you able to compensate for them? Thank you. Thank you, KC. Again, we do not report country-specific revenue numbers. What we have seen is that adherence of patients is roughly 90% when it comes to second year returns. We see a very positive development. Physicians are gaining experience with the drug. They are getting highly positive feedback from patients about the treatment regime, which is super attractive for patients, we believe. So Mavenclad in Germany is going well. Thank you. Our next question comes from Michael Leuchten from UBS. Please go ahead. Thank you. It's Michael Leuchten from UBS. A few questions, please. Firstly, just wonder if you could give a little bit more color on your commentary around not giving more granularity on the midterm margin expansion potential of Life Science. You said multiple times, you're not going to reiterate that 20 to 30 basis points. Why the specificity around that? What's changing? Secondly, thank you for your comment around the crisis teams, and the work required to manage the business. Is your workforce in Korea working at the moment or have they been working from home, have been sent home? Then thirdly, on TGF beta trap. On your slides, you do comment on safety run-in trials that are currently ongoing. Is that as before or has that changed? Have you seen any safety signal that requires additional safety work in trials outside lung cancer? Thank you. Michael. First on Life Science margin expansion. Our Life Science organization is doing a fantastic job. We are growing above market for several years. We are a margin leader, and we're expanding that margin. While we're very proud of our Life Science teams, they cannot do miracles. We want to be very clear and transparent to you that in future years, we cannot expect a similar margin expansion as we've seen happening over the past couple of years. There are exciting growth opportunities in gene therapy, in CAR T. There are many areas in which we need to invest, and we assume that we are coming close to a somewhat optimal balance in terms of delivering earnings versus investing in the future, and that's the background of this. In Korea, we have a policy that is in line with what the authorities recommend. Kai can give you more details on the PM side in Korea, but we basically are applying the same principles that we're applying in other countries, too. I will come back on TGF beta trap. Michael, I take the question on the workforce. Our workforce was, after the Chinese New Year break, always working on the production side, on the customer interface side. We have no disruptions on our side so far. This is perfectly working. Of course, we did cater specific needs on working from home wherever applicable or allowing for special commute situations. All of that has been managed quite diligently, but overall, without any disruptions on our side. So when it comes to the question of safety run in the TGF-beta trap program, this is a standard process. There is nothing negative about this. The wording safety run does not imply any safety concerns. A safety run is a component of a study during which a compound or a combination of compound is tested for tolerability and safety ahead of efficacy, and this applies predominantly to studies that were not preceded by a dedicated phase I. You should keep in mind that the setup of a safety run can vary significantly by study, depending on the preexisting understanding of the compound. In the specific case of bintrafusp alfa, for instance, the BTC first line as well as the study stage 3 in lung, both have safety run-ins and are at the same time potentially registrational. Thank you. Both were started in the course of 2019 as planned. Our next question comes from Emily Field of Barclays. Hi. Thank you. Just a couple of quick ones. One, I know Q4 2019 had some deviations from trend for both Erbitux and Rebif. I was wondering how long this bolus from China may persist in Erbitux, and do you still expect a low single-digit decline for that? Also Rebif, do you still expect a decline in line with the interferon market over time, or is this just the interferon market decline slowing? Also, I know you walked through this in the prepared remarks, but just if you could walk through again, the components of Healthcare, other operating income that are included in your guidance for this year, just for our modeling purposes. Also, I am not sure if you can comment on this, but there have been some media reports indicating that you could be considering strategic options for Surface Solutions, if this is anything you can provide further commentary on. Thank you. Thanks, Emily. I start with your first question on the Q4 development, especially for Rebif and for Erbitux. Rebif had a relatively strong fourth quarter, and remember that I have already given, I think, in the November call, the outlook that we expect the fourth quarter for Rebif, which would be better than the run rate in 2019, so the rate during the first three quarters. During the first three quarters, we had a decline or an organic decline of Rebif round about -15%. Q4 was now significantly better, owed predominantly to two effects. First one was a successful price increase that we executed at the end of September or in September, round about 5%. Secondly, also some one-time effects where we were able to release provisions that we have built for rebates. Both lifted Rebif results in the fourth quarter but are not sustainable. For 2020, you should rather assume a run rate of decline in the range of what we have seen over the first nine months in 2019. Moreover, we stick to our forecast that Rebif will develop overall in line with the interferon market. However, we do not see a slowing down of the decline of the interferon market going forward. On Erbitux, very strong first nine months, a little bit less stronger Q4. Here, I think the main explanation is that the comparables get tougher. We managed to enter the national reimbursement list in China end of 2018, and these effects now are included in the comps. That means that the growth rates going forward will inevitably slow down a little bit. Your second question, Healthcare operating income, other operating income. For 2019, we had three quarters of deferred income from the GSK partnership. That amounted to roundabout EUR 90 million. We had four full quarters still included with Pfizer deferred income, EUR 190 million. This will vanish in 2020. Then we had three milestone payments for BAVENCIO, oral and renal cell in the three major jurisdictions, altogether also roundabout EUR 90 million. And we had a milestone payment for a sale from earlier times related with the sale of Kuvan to BioMarin, EUR 75 million. This is by and large the non-recurring income in 2019. For 2020, the EUR 190 million Pfizer will go away. Instead, we would have four quarters of GSK income. If we project, let's say, a linear ramp up, we think about EUR 120 million, EUR 130 million, something in that direction. Please keep in mind, it follows the incurrence of cost going forward. And we have projected an up to double-digit million euro amount of, we say, active portfolio management income, which is by and large similar to what we have seen over the last two years. This is something we have included in 2020. This makes up for the comparison. Your question on plans for Surface Solutions, we plan to revitalize the business. We have an active portfolio management process, which all of our businesses undergo. We continuously check which one of our businesses fits well into our business model or not. And I think nobody can accuse us of not being an active portfolio manager. For those of us who have a long enough memory, we sold VWR, we sold Generics, we bought Serono, we bought Millipore, we bought AZ Electronic Materials, we sold biosimilars, we bought Sigma-Aldrich, we sold Consumer Health, we bought Versum Materials, we recently sold our allergy business. I think anybody can be assured that we take this very serious and that we're very unemotional about that. That being said, we have no plans to divest our Surface Solutions business. Thank you very much. Our next question comes from Daniel Wendorf of Commerzbank. Thanks for taking my questions. Two, if I may. One follow-up question on the margin development in Life Science, please. Can one potentially ask how elastic is the margin development in relation to the top line development here, meaning assuming you keep growing the top line at 8%-9%, is a 20 to 30 basis points margin improvement still possible also beyond 2020 under this scenario? That would be my first question. The second question is a rather strategic M&A question. With Thermo Fisher now being in the process of acquiring Qiagen, basically meaning the consolidation in the industry continuing, do you still feel comfortably positioned in all your three different businesses within the Life Science division? Thank you. Thank you, Daniel. When it comes to margin elasticity in Life Science, we obviously will continue to manage efficiency programs in Life Science and to enhance our efficiency. You heard me talk specifically about investments into the future, namely gene therapy, cell-based therapy. That is actually an important factor also in the context of what you asked about the acquisition of Qiagen by Thermo Fisher. The innovation model in the life science industry is somewhat different compared to the pharma industry, where there is a lot more M&A ongoing, and these are often bolt-on types of deals, or they are larger deals. We are never happy with where we stand with our businesses. We always want to improve. However, we do not perceive this move to be a strategic challenge to our business model. Okay. Thank you. Our next question comes from Falko Friedrichs of Deutsche Bank. Thank you. I would have three questions, please. Firstly, the EUR 20 million synergy target in Performance Materials for this year. Did I understand it correctly that this is fully baked into the guidance? How do you plan to book these synergies, and will they be part of the organic expansion? Secondly, in Performance Materials and specifically in Semis, what are you seeing in terms of fab utilization of your customers currently? Then thirdly, in Pharma, can you elaborate a bit on these cost efficiency measures and how much additional run rate potential you see going forward? Kai speaking. Farquhar, thanks for the question on Performance Materials. The synergies are, of course, to the most part in the portfolio part, they are baked in the guidance and to a smaller part, of course, on the Merck side. You will see that in our numbers in the coming months. The bigger part is portfolio. On the semiconductor utilization rate, we saw already, and this, I think, was reported at the end of last year already for some customers and in the beginning of this year, that on logic, there is a huge ramp-up compared to previous year in terms of utilization. Some of the factories seem to be already at their limits. That is what we saw as the first very strong signal of market recovery. In memory, this is still lagging behind. Overall, we see companies getting closer to the AUT in the recent weeks. When it comes to the question of the cost situation in Healthcare, I would like to mention two factors. First of all, we have made it very clear quite some time ago that when it comes to R&D spend, 2018 was an investment year. We would expect a more balanced approach in pharma R&D going forward, and that has a significant impact on the numbers here. Otherwise, we have been running a stringent cost management program across the corporation, actually. Marcus Kuhnert, the sector CEOs, and I have been working very hard on that. We expect a continued positive effect of that, which is reflected in our guidance. Let me come back to pipeline management cost allocation. We would strategically reallocate some of the savings that have been created to strategically important programs without, however, jeopardizing the base business. Okay. Thank you. Our next question comes from David Evans of Kepler Cheuvreux. Please go ahead. Thanks very much for taking my questions. Two on the Healthcare pipeline, really. Firstly, on BAVENCIO in bladder cancer. I was just wondering, any updates on timings of data presentation and filing and so on? Any indication of whether you see this as having the potential to be a really meaningful indication for the drug? You also talk about a substantial increase for BAVENCIO sales in 2020. I am just wondering if you could give some color on what would be driving that increase. If this is ex-U.S. growth, any uptick in renal cancer in the U.S., or is there any benefit at all from bladder cancer in there? Secondly, on bintrafusp alfa and the interim analysis again. Just to check, I thought you said even without expansion, the study is registrational. Is that on its own or with other studies? I understand the study has to remain blinded, but is there a plan to publicly notify the markets whether the study is being expanded or not? Thanks very much. Thank you, David. Let me start with your question on the highly positive urothelial bladder data. The data will be presented at a major conference in mid-2020. We are currently discussing the data with the relevant authorities worldwide. Remember that it is a unique study design. We have tested BAVENCIO in a switch maintenance setting. That means first chemo, then the checkpoint inhibitor, as compared to concurrent treatment. It was the first immunotherapy trial to meet OS in first-line urothelial cancer. We believe that this is a significant development. You asked a question about the bintrafusp interim analysis. Yes, this study on its own is registrational. The third question that you have asked was on BAVENCIO sales in 2020. We obviously continue our marketing in Merkel cell carcinoma. We continue the RCC rollout, and we expect a positive effect of this great urothelial cancer data that many prescribers overlap actually, when you look at renal cell cancer and urothelial cancer. Okay, great. Just to check, some non-promotional benefit from the strong bladder cancer data could come even as early as this year, you think? Let me be factual. I was saying that there is a lot of overlap between prescribers for bladder cancer and renal cell cancer. Don't forget, David, we have late in 2019 also received approval for renal cell cancer in Europe and in Japan. We have basically zero impact on that in 2019, and obviously we hope to see something coming in 2020. That will also contribute to the growth this year. Yeah. Okay. We are very much looking forward to the presentation of the data in mid 2020. That is all I can say. Thanks very much. Our final question today comes from Sachin Jain of Bank of America. Hi, thanks for taking my questions and fitting me on. Just a couple of questions, please. Firstly, on semis, I wonder if you could just give a bit more color as to what indicators you're tracking that give you comfort in a recovery, and what your lead time is on any change of those indicators. Should the macro situation change, driven by COVID-19, what's your lead time in your indicators in seeing that? Second question is back to the Life Science margins. I think I remember rightly at the September Analyst Day, you were fairly vocal that your margins were industry leading and above peers. Given the new investments in gene therapy and cell-based therapy you're talking about, is there any potential for Life Science margins to trend back to industry average? Then the final question is on the BTK, obviously expecting the phase II-B data in RA soon. Could you just frame your level of excitement around RA and how quickly you would be ready to move to a potential phase III study should the data support? Thank you. I'm going to start with the semi question. Thanks, Sachin. You asked for the indicators we are looking at. On a macro level, of course, we look into the wafer fab equipment as the equipment side of the business is concerned, as well as what we call the wafer area, the million square inch MSI, as far as the material side is concerned. That gives us a good kind of macro indication. But since that is a pretty focused market with a smaller number of customers, of course, the best indicator is our discussion with our customers and let's say the projects we are running with our customers. That gives us a much better insight. Looking at all these data points that we have, as I indicated earlier, we saw pretty early this year the ramp-up in logic, and we now see already memory recovering, which is good, which give us good insights. Of course, every project is looked at from the perspective of it as well. Is the factory operating, will there be shutdowns, and the like. That is the insights we have. Sachin, on Life Science margin, let me be very clear about that. In my previous comment, I was addressing a question about an expectation for sort of eternal margin expansion in Life Science. What I was trying to say is that there is a natural limit to that. I did not imply margin regression to anything, just to make that one clear. On BTK in rheumatoid arthritis, I cannot say much until we have communicated the data. We expect data to be available in-house in the first half of 2020 on RA and SLE. If these data are positive, we will most likely, in these indications, we might proceed with a partner, let's put it like that. Thank you. Can I just go back to Kai and just check the lead time on those indicators within semis? The macro indicators, they are always kind of the back mirror. They're the facts we know after they happened. That's why the projects give us a pretty immediate view on things. We know when they're going to order. There is no substantial lead time that we need to look into. Of course, if a factory is ramped down, that may have a lead time that we need to understand and we discuss with our customers. Thank you. That concludes our question. Thank you. I am sorry, please go ahead. Thank you very much. Just a couple of closing remarks. We believe that the fourth quarter was a very good quarter. We are very happy with the performance in that quarter. We are very happy with the performance of all businesses in 2019. We are highly optimistic when it comes to the year of 2020. There are limits to our ability to forecast what the impact of COVID-19 is going to be, but let me reiterate once more that what we said at the Capital Markets Day, Merck is a company with steady earnings growth, with three attractive, highly innovative businesses, with very attractive margins. And we therefore believe that to the markets that sometimes give us a, because they perceive us as being a conglomerate, which we obviously refute, but when the market gives us a discount, and we think that during such turbulent times, a business like ours, while we might be affected one way or the other, could actually prove to be very resilient. Thank you very much. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.