MKKGY (MKKGY) Q1 2026 Earnings Report, Transcript and Summary

Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on First Quarter 2026. [Operator Instructions] I'm now handing over to Florian Schraeder, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Thank you, Sarah. Highly appreciate everyone joining us for our Q1 '26 earnings call. My name is Florian Schraeder, and I'm the Head of Investor Relations at Merck. I am delighted to be joined by Kai Beckmann, our Group CEO; and Helene von Roeder, Group CFO. Kai and Helene will walk us through the key slides and financial highlights of the past quarter. And Kai will also take the opportunity to provide an update on the company's strategic direction. For the Q&A part of the call, we will be further joined by Jean-Charles Wirth, CEO of Life Science; Danny Bar-Zohar, CEO of Healthcare; and Benjamin Hein, CEO of Electronics. And with that long intro, I will turn it over to Kai to get us started.

Thanks, Florian, for the introduction, and welcome, everybody, to our Q1 earnings call. Let us move to Slide 5. So what was to characterize this quarter, I would call it a solid start to 2026 despite global challenges. Organically, group sales increased by plus 2.9%, and EBITDA pre went up by plus 5.3%. Life Science & Electronics showed robust organic sales growth at plus 8% and plus 4%, respectively, overcompensating a moderate decline in health care. Now let me draw your attention to the remarkable performance in Process Solutions, delivering double-digit growth at plus 16% in the quarter. For the first time since Q1 2023, Process Solutions reported more than EUR 1 billion of sales in a single quarter. Healthcare's organic decline of minus 3% was mainly driven by generic competition for Mavenclad in the U.S. Aside from that, we saw a solid contribution of our rare disease franchise with a plus 4% portfolio impact. Moving to Electronics, which showed a positive organic sales development in Q1, this was driven by a double-digit growth in semiconductor materials. The overall solid start to the year and the particularly strong finish of the quarter that has raised our guidance for full year 2026. You may also remember that we guided just 1 week after the crisis in Middle East broke loose. Since then, we have gained more visibility on the macro trends, and therefore, we are reflecting these developments in our updated 2026 guidance today. Lastly, at the AGM on April 24, or a dividend proposal of EUR 2.2 per share was approved by our shareholders. So let's turn to Slide 6 for an overview of our performance by business sector. Life Science was the largest contributor with organic sales growth of plus 8.3%. All 3 business units within Life Science achieved organic growth, led by Process Solutions, which experienced a visible growth acceleration towards the end of the quarter, resulting in a growth rate well north of the average midterm aspiration of around 10%. Discovery Solutions and Advanced Solutions developed according to plan. Healthcare organic sales decline of minus 3.4%, driven by the anticipated decline of Mavenclad amid generic competition in the U.S. However, let me highlight CM&E, which demonstrated continued resilience as well as continued double-digit growth of over. Electronics grew by plus 4.2% organically as our semiconductor business was up driven by double-digit growth of semiconductor materials franchise. Moving now to the right side of the slide. EBITDA pre-increased by plus 5.3% organically versus the same quarter last year. FX headwinds had a negative impact of minus 5.7%. Please bear in mind that we saw a disproportionate currency headwind in Q1 relative to what we expected for the full year. As flagged in our Q4 earnings call, EBITDA pre in Q1 was supported by 2 one-off effects. First, divestment of our OLED IP portfolio to Universal Display Corporation, resulting in a gain of EUR 42 million in electronics. And secondly, we indicated that a potential recovery of cost could be incurred in connection with a supplier mislabeling dispute not related to product quality. I'm pleased to confirm that we have successfully closed this matter, resulting in an additional gain of EUR 25 million in electronics. And with that, let me hand over to Helene for a more detailed review of our financials.

Thank you very much, Kai, and a warm welcome also from my side. I'm now on Slide 8 for an overview of our key figures in the first quarter. Reported net sales fell minus 2.8% to EUR 5.134 billion. Organic growth of 3% was offset as guided in our last earnings call, by disproportionate FX headwinds this quarter, notably from the U.S. and Asian currencies. We do expect this impact to ease throughout the year. Reported EBITDA pre was down by minus 0.3% to EUR 1.530 billion. However, on an organic basis, EBITDA pre grew by 5% driven by Life Science and 2 one-offs in Electronics, as Kai just mentioned. The EBITDA pre margin improved by 70 basis points year-on-year to 29.8% and with the underlying margin remaining approximately stable. EPS pre showed a similar trend as EBITDA pre and reached EUR 2.11 per share compared to EUR 3.12 per share in Q1 '25. Also supported by lower-than-anticipated financing costs. This trend gives rise to the assumption that the midpoint of our financial result in 2026 will be 10 million vessel than guided in March. Operating cash flow increased significantly by 47.2% to EUR 880 million, reflecting changes in other assets and liabilities. You heard Kai talking about accelerated momentum in Life Science toward the end of the quarter. This, in particular, had effect on the development of our working capital as of 31st of March. In order to support future growth, we kept inventory levels high. At the same time, we saw a significant increase of trade account receivables linked to the steep sales increase at the end of the quarter. Net financial debt decreased moderately by minus 3.5% to EUR 8.318 billion compared with end of December last year, largely driven by a strong operating cash flow and focused CapEx. Now let me turn to a detailed overview of our 3 businesses, and I'm starting with Life Science. This is the first quarter in which we are reporting under a new organizational setup and based on our newly implemented go-to-market strategy. As a reminder, the scope of Process Solutions remains unchanged. While Advanced Solutions now comprises our business in lab water, diagnostics and regulated materials, biomonitoring, contract testing as well as contract development and manufacturing services. Our third unit, Discovery Solutions combines our chemistry and biology franchises. Life Science sales grew organically at 8.3% in Q1. And this is fueled by an acceleration in Process Solutions, supported by strong underlying demand for downstream processing and single-use solutions towards the end of the quarter alongside limited customer safety stock build up and new customer projects, not only actual sales, but our order intake was strong again in Q1 and book-to-bill stayed comfortably above 1. As we have closed the acquisition of JSR on April 3, we will have a broader offering in our downstream business as of Q2. This transaction adds advanced protein A chromatography capabilities, enhancing our ability to offer more efficient scalable protein purification solutions that support accelerated biopharmaceutical production. Moving on to Discovery Solutions, sales were up 1.6% organically against a low comparable basis and amid ongoing headwinds from muted spending in academia government and an evolving Chinese market environment. Advanced Solutions recorded an organic sales growth of 4% in a gradually improving market, driven by industrial testing and large pharma customers. EBITDA pre was up by 7.4% organically in Q1, with the EBITDA pre margin by up by 50 basis points year-over-year, driven primarily by volumes in Process Solutions. M&S and admin spend remain around stable, reflecting cost discipline while R&D expenses have increased as planned to ensure continued future growth and differentiation. Moving on to Slide 10 and sharing details of the developments in our health care business. Healthcare reported an organic sales decline of minus 3.4% in Q1, which is ahead of our indication provided on the Q4 earnings call. The main reasons are Mavenclad sales in the U.S. and positive phasing in China. In terms of franchises, rarely leases was the largest contributor to growth, including a 4.4 percentage point contribution from SpringWorks and initial sales from a promising launch of pimicotinib in China. As indicated in our March call, sales of Ogsiveo and Gomekli were sequentially down amid U.S. stocking effects. CM&E posted a slight organic increase of 1.2% against tough comps. This is supported by positive phasing in China, as mentioned before and offset by negative phasing in the Middle East. Fertility declined by minus 5.2% organically in Q1, mainly due to remaining pricing headwinds for Gonal-f in the U.S. Most of these will annualize in Q2, suggesting Gonal-f's trajectory should improve to around stable for the remainder of the year. Pergoveris, on the other hand, continued its very strong growth, up 20% organically in Q2. And we continue to prepare for U.S. launch in H2. Oncology sales were down minus 4.9%, mainly reflecting competition for Erbitux and Bavencio. N&I declined minus 9.2% amid continued erosion of rebids in line with the interferon market and generic competition for Mavenclad in the U.S. The Mavenclad ex U.S. business grew double digits. A few words on our pipeline before turning to margins. We announced in April the dosing of the first patient in our Phase III enpatoran program building on encouraging Phase II data. The ELOWEN studies are evaluating inpatient in lupus rest patients with an active skin manifestation. So turning to profitability, EBITDA pre declined by minus 8% organically. This is better than the organic decline in sales despite significantly higher R&D, implying swift execution on cost measures. Yet taking into account slight dilution from SpringWorks, and significant FX headwinds, the EBITDA pre margin came in at a very healthy 35%. Based on our updated guidance, which Kai will present in a minute, we continue to expect lower margins for the remainder of the year amid lower U.S. margin flat sales and launch investments such as for pimicotinib and for Pergoveris. Moving on to the Electronics on Slide 11. Organically, sales increased by 4.2% in Q1, while currency headwinds of minus 7.5% were most pronounced in this segment and a portfolio effect of minus 10.6% from the divestment of Surface Solutions led to a decline of reported sales by minus 13.9%. The solid organic growth was driven by strong performance in our Semiconductor Solutions business, which grew organically by 7.5%, fueled by continued growth in semi materials at low double-digit organic growth rate. Healthy growth continues to be driven by AI, advanced notes alongside specialty and mature nodes in Asia. Our DS&S business performed in line with our expectations in Q1, with sales stabilizing quarter-over-quarter. In Optronics, the Q1 development is consistent with the dynamics we flagged during our last quarterly call. To strengthen our position in metrology and inspection, we recently opened a new site near Grenoble, expanding our production capacity for tools that enable our customers to develop the next generation of items. On profitability, EBITDA pre increased significantly by 30.1% organically with EBITDA pre margin at 34.6%. And among strong currency headwinds and positive portfolio effect. It is important to note that the EBITDA pre margin was significantly elevated by one-off items totaling EUR 68 million related to the divestment of the OLED IP portfolio to UDC and by cost recovery tied to a nonquality supplier mislabeling dispute. So before handing back to Kai, let me also briefly comment on our balance sheet and cash flow. As you can see on Slide 12, our balance sheet increased by EUR 1.6 billion compared with the end of December 25. It increased from EUR 51.5 million to EUR 53.1 billion, which is more than EUR 1.1 billion and is related to an increase in net equity driven by profit after tax of EUR 669 million and an increase of OCI by more than EUR 550 million. Our equity ratio remains stable at 56%. Taking a closer look at important movements on the asset side, please remember this is a comparison versus December 2025. I Receivables increased from EUR 3.9 billion to EUR 4.3 billion, driven by FX effects and a strong sales performance closer to the end of the quarter. Inventories were slightly up from EUR 4.6 billion to EUR 4.8 billion, mainly due to FX effects. Goodwill and other intangible assets increased from EUR 25.6 billion to EUR 26 billion and other assets were up from EUR 4.7 billion to EUR 5.1 billion, both mainly due to FX effects. So moving to the last slide in the financial section, the year-over-year comparison of cash flows. Operating cash flow increased significantly from EUR 556 million in Q1 '25 to EUR 818 million in Q1 '26 despite a decrease in profit after tax. Changes in other assets and liabilities turned positive, contributing EUR 30 million compared to minus EUR 224 million in Q1 '25 and driven by higher deferred income for goods in transit and increased bond interest accruals. Changes in working capital improved by EUR 75 million year-on-year to minus EUR 322 million. Investing cash flow increased significantly to minus EUR 755 million from EUR 419 million in Q1 and which is a change of EUR 336 million, driven by the short-term investments and payment from the acquisition of JSR chromatography. Financing cash flow improved significantly from minus EUR 1.6 billion in Q1 '25 to minus EUR 62 million in Q1 '26. As the prior year financing cash flow included a repayment of EUR 1.5 billion of U.S. dollar-denominated bonds. And with that, let me hand back to Kai for the outlook.

Thank you, Helene. Let's now turn to Slide 15 to share our upgraded guidance with you. You have my initial comment on better visibility after navigating 2 more dynamic months and the strong momentum we continue to build across the businesses. Based on that, we are adjusting our 2026 target corridor for the group now expecting EUR 20.4 billion to EUR 21.4 billion in sales and EBITDA pre in the range of EUR 5.7 billion to EUR 6.1 billion. The majority of this adjustment is the result of our assumptions regarding a stronger momentum in our Life Science business in health care, navigating well in a challenging environment. As a consequence, the implied corridor for organic growth of group sales moved to 0% to plus 3%, up from minus 1% to plus 2%. Our guided FX impact on sales was previously minus 4% to minus 2% and is now expected to be at minus 3% to minus 1%. And -- the group EBITDA pre organic growth rate is now expected to be in a range of minus 2% to plus 2%, up from minus 4% to plus 1%. And -- the expected FX impact on EBITDA pre has been updated to minus 5% to minus 2%, up from previously minus 7% to minus 3%. EPS pre guidance is now at EUR 7.50 to EUR 8.20 per share, up from the prior EUR 7.10 to EUR 8 range. For some additional color by business sector, let's take a look at Slide 16. Starting with Life Science, we are increasing our organic sales growth guidance core resulting in plus 4% to plus 7%, up from plus 3% to plus 6%. This is underpinned by the strong performance of our Process Solutions business at the end of the quarter. For Advanced and discovery solutions, our underlying assumptions have not changed. We anticipate improving market conditions in biotech funding and academic research stabilization while we navigate evolving market environment in China. We now expect EBITDA pre to show an organic increase of between plus 4% and plus 8%, up from plus 2% to plus 6%. Moving on to health care. We raised our guidance for organic sales growth by 1 percentage point to minus 6% to minus 3%, mainly reflecting 2 additional months of U.S. Mavenclad sales. Consequently, we also increased our organic EBITDA pre guidance resulting in minus 12% to minus 8%, up from minus 14% to minus 10% previously. Regarding Mavenclad U.S., please note that our forecasting methodology remains unchanged. We take into account what is in the books and take a conservative view on the remainder of the year. There may be some near-term upside to this assumption. However, visibility beyond the next couple of weeks is limited amid additional generic entries. Relative to Q1, we expect weaker organic growth in Q2 amid phasing effects and likely lower Mavenclad contribution while H2 will see contributions from SpringWorks becoming organic. Also, note that as part of our ongoing efforts to streamline our health care business, we are remodeling our franchise into 4 therapeutic areas to align our product offering with the commercial capabilities required. The 4 TAs are rare diseases, cardiometabolic, fertility and endocrinology and specialty care, the latter being the combination of oncology and N&I. We will report in the new structure as of Q2 and to support your modeling will share historical numbers for the new structure with you in due course. For Electronics, we confirm our organic sales guidance and EBITDA pre growth projections, including the ranges of the guidance. In summary, Q1 was a solid start to the year in a challenging environment. Through disciplined execution, we captured opportunities across our portfolio. While macro conditions remain demanding, we now have a greater clarity on the actions we will take and the markets we can win. Our updated guidance reflects these assumptions. So with that, let me now zoom out to give you my initial views on the strategic direction of the Merck Group going forward. Merck is operating from a position of strength. We are strategically positioned in growth markets from NAP to customers and patients operating across the entire value chain of the broader life science spectrum. Our expertise in biology, chemistry and physics combined with our unique position as both an enabler and a user of AI gives us a powerful foundation to drive next-gen innovation. We observe customer and patient needs are changing. The profound technological transformation is accelerating, the digital and physical worlds are converging, driven by artificial intelligence. AI dramatically accelerates discovery and early-stage R&D, reducing the time it takes to identify promising drugs, materials and biologic candidates. As innovation cycles compress, competitive advantage shifts downstream towards companies that can rapidly validate manufacture, scale and commercialize innovations. Against this backdrop, Merck is uniquely positioned to lead with our diverse portfolio and our inherent capabilities. How are we going to address that? To make the most of these opportunities, I'm sharing our new strategic direction. It is designed to create superior value for customers and patients and in turn, to deliver stronger structural growth at attractive margins for Merck. Specifically, we will leverage 4 streams, which I will come back to in a moment. Ultimately, we will not only adapt our offering vertically will also bundle and integrate our capabilities. In short, we'll optimize for speed and scalability where it matters, leveraging our unique footprint. Having said this, we remain firmly committed to our midterm guidance shared with you during our Capital Markets Day last year. We plan to unlock growth and value creation through 4 strategic streams. This will help to elevate our company towards higher speed and better scaling. Sailing will be crucial for the implementation of our strategy. First, we will focus on high-growth value drivers. We continue to take disciplined portfolio management approach prioritizing products and businesses that deliver the highest value. Second, we will shift selected product portfolios towards integrated workflow solutions. This means expanding from stand-alone products to integrated end-to-end solutions where we can solve high-value customer problems and build on our existing expertise. Third, we'll leverage platform capabilities across businesses. We will identify abilities to integrate and platform across the enterprise enabling us to better support our businesses and improve our agility, speed and scale. Fourth, we will source and scale innovation through M&A and in-licensing. We see M&A as a growth lever for all businesses clearly aligned to high-growth value drivers. Above all, we will implement those 4 pillars over time, expecting their financial impact to materialize progressively while supporting our midterm guidance. In select high-value markets. I'm now on Page 20, I will build on strong expertise ranging from stand-alone products to integrated end-to-end offerings. We observed a shift in a number of areas towards higher demand for solutions that cut across different parts of the value chain, such as materials, consumables, equipment, tools, software and services. This is essential to solve our customers' problems and call that integrated workflow solutions. In order to address those more integrated requirements, we have to work in a more integrated way in our company as well. We call that platform capabilities. For example, in AI deployment, post-merger integration, carve-out and an integrated management systems approach we will plan to build. While this serves as a strategic direction, not just mid but also long term, it's an important journey we embark on. And we are not starting from scratch. Let me highlight 2 of our highly successful examples in bioprocessing and heterogenous integration. In bioprocessing, we have already made strong progress into becoming a provider of integrated workflow solutions, combining consumables, like our banks, with instruments like our bioreactors, supporting processing steps across multiple critical control points and controlled by software products like our VAT solution. In the fast-growing area of heterogenous integration for advanced semiconductors. We complement our advanced materials with tools like metrology and inspection to offer a more integrated approach to our customers. Now on Page 21. You won't be surprised we will leverage inorganic moves to invest in the opportunities ahead of us. M&A always was and continues to be a crucial component and we will broaden our M&A scope. Having said this, we will remain disciplined in line with our strategic direction. Above all, we'll optimize our portfolio across the group, aligning to identified high-growth value drivers. M&A will also be an important component in the context of programmatic innovation. This covers targeted transactions to improve our product offering and accelerate our integrated solutions approach. And we could also expand into opportunities to foster our internal capabilities. Next, we will drive external innovation to build a risk-balanced pharma pipeline, strengthening the early and mid-stage development. And we are committed to manage health care north of 30% EBITDA pre margin with an R&D to sales ratio towards 25% in the midterm. Our financial criteria are unchanged. Above WACC, EPS pre accretion, post synergies and strong investment-grade rating at all times. So I'm now on Slide 22. The executive board and I are confident in our way forward. We built our strategic direction on a strong foundation, connecting our capabilities, identifying new sources of growth. By combining our core strength in biology, chemistry and physics with data NAI will become a more agile company that delivers at greater speed and scale. And this is how we will best serve customers and patients. Merck has tremendous potential, and we have an exciting journey ahead of us unlocking more of it. Hence, it's time to get to work. We'll keep you updated on an ongoing basis, and we currently envisage a dedicated stand-alone event in the course of next year. I hope you are as excited as we are on the journey ahead of us. Having said this, Florian, now over to you to kick us off for Q&A.

Thank you so much, Kai. Before we move on, just a minor clarification on the Q1, we had negative portfolio effects in electronics. With that, I'll hand it back to Sarah to moderate our Q&A session.

[Operator Instructions] And the first question today is from Richard Vosser from JPMorgan.

First question, please, on Process Solutions. Could you give us a bit more color around the growth in the quarter from an underlying basis what was safety stock build? And what was the fill of the customer warehouse. And aligned to that, how should we think about that business going forward? Would you anticipate a quick reversal of some of those elements on the safety stock? Or would you expect this to linger given the uncertainty on the geopolitical environment? And one, your thoughts on the underlying business, which does seem very, very strong as well. So just your thoughts on that going forward. And then second question, just on the strategic elements that you've just highlighted, Kai, M&A clearly a key driver. It does like the elements around the health care pipeline have taken a sort of a higher level within the thoughts in terms of M&A. Is that right? Or is M&A sort of more - actually, should we think of it as more balanced across the Group? So how should we think about business development going forward?

Jean-Charles speaking. So let me answer the first question. So overall processing Q1 performance was driven by 3 effects. First, I would like to mention operational efficiency gain, which had a stronger impact than anticipated. It was driven by improved inventory management and fill rates to enhance customer experience linked to our new go-to-market model. So if you remember, I announced the new go-to-market model where we want to make sure that our business will work closely with our supply chain and manufacturing capabilities, and today, it's paying off. The second key driver it's about the contributions from new customer projects this quarter, which boosted results based on their strong performance in their molecules as well as an effect of stocking of new warehouse. And finally, the third driver relates to the fact that we observed stronger buying patterns, particularly from APAC customer, partially due to the fact that it's mainly related to the global crisis, it didn't strain in March. So excluding these effects, we will still be closer to the upper end of the 8% to 12% range. We talked about during the Capital Markets Day last year and during the March conference call. So while some of these exceptional effects of Q1 may persist in Q2, their impact is expected to be less pronounced over the course of the second half of the year, leading to return to an anticipated normalized average underlying growth rate in the range of 10% in the future. So overall, to answer your direct question about the underlying business, the underlying business is very solid. We have a very solid and strong order book. And as mentioned earlier by Helene, our book-to-bill ratio is far above 1. Last comment from my side, if you think about our midterm guidance. Our midterm guidance remains unchanged for process to around 10%.

So Richard, let me take the M&A question. So let me start with health care. So on health care specifically, we -- health care will be managed, as I indicated in my speech, north of 30% EBITDA pre-margin that means it's accretive to the group margins, and we will focus to strengthen the pipeline predominantly in early and in the mid-stage part. Here, we leverage internal excellent innovation might be M&A or in-licensing. Now to zoom out to the group level, that's the bigger picture. Look at the group overall, we will invest in opportunities ahead of us, which fit to our strategic direction. It includes targeted transactions to improve our product offering and accelerate our integrated solutions part, as I've stated in the speech, and we could also expand into opportunities to foster our internal capabilities. The 2 examples I mentioned earlier in terms of bioprocessing and heterogenous integration, they can serve as a good direction in general. So we will be anchored around what we call the broader life sciences value chain, so this bigger picture that we have mentioned.

Next question today comes from Sachin Jain, Bank of America.

Just a couple, please. One, the first actually for Kai, just to clarify some commentary from your strategic remarks. So I think within the health care comment, you mentioned R&D spend, you're now targeting 25%. I wonder if you could just comment on how quickly you get to that level and maintaining EBITDA above 30%, I just think consensus is sort of in the 33%, 34% range. So should we think about R&D spend being downside to consensus Healthcare EBITDA margins with the sort of refocus on pipeline investments. Second, you reiterated the midterm guide which is very helpful. That obviously implies an acceleration from what you're guiding for '26. So would we see the underlying midterm guide appear in '27? Or is it getting that a bit further out? And then the final 1 is just for Danny, if you could just update us where you are on Pergoveris submission and time lines, you obviously reiterate 2026. But I think on the earlier call, you gave a very detailed assessment of submitting Part 2 and then a 60-day review. Maybe you can just update us where we are on that.

So let me start on the margin. Just to be very clear on this one. So we're talking about it's moving towards that 25% range for R&D. And in order to secure the 30% -- above 30% EBITDA pre-margin and being accretive to group margin. And of course, it always depends on what we have in our hands. There's no automatism. It depends on what the pipeline candidate that we have in our hands and how much do we need to invest in order to drive these opportunities. it's very important to keep that in mind. So '26 will be drinking at where we are. So there is nothing specific here, in addition to mention on '26. Now let's talk about the second part of your question concerning the guidance and how we go towards '27. So I think it's very important to understand we have confirmed our midterm guidance today that was part of my speech. For 2027, Life Science Electronics are well on track. I think there's nothing to add for life science and electronics for health care. It's important to consider that depending on where in that will be for the next quarters. The more successful we are, the tougher '27 will be. That's pretty straightforward. And of course, the open price remains on what exactly happens to Pergoveris and will depend on, of course, the timing of a possible launch. Now I'll hand it to Danny.

Sachin. So regarding Pergoveris, on the backdrop of continuous very strong growth of 20% organically and also expecting double-digit growth for the full year. When it comes to the U.S. to be very honest with you, not so much change. And that's actually good news. We continue to have a very constructive exchange with the FDA and plan to submit the Part the file under the voucher procedure in the coming months, and that's fully consistent with our unchanged goal to launch in the second half of 2026 and we will only be able to talk more about the U.S. opportunity once we have clarity on the label, as I said several times ago, and we are doing whatever we can in order to bring the product to patients as soon as possible in maximizing the potential. But regarding the label language, it will be tough to discuss now.

Next question today comes from Peter Verdult from BNP Paribas.

Peter Verdult, BNP. Can I just push you on the pace of business development. Should we anticipate that to pick up in 2026. And perhaps thanks for your strategic update. But can I just push you for some concrete examples of immediate changes you've made to how Merck operates on a day-to-day basis. since you stepped up to group CEO, will be interested to know what sort of immediate changes you've made? And then secondly, Danny, just on ASCO for the rest of the year, any updates or data updates or canal trial starts that you want to flag to the market to keep an eye on.

Peter, I'm not sure whether I got the question perfectly right because audio was not perfect. But the -- on the BD side of your question. So of course, as you know, we are continuously assessing opportunities and market becomes more attractive going forward. We are handling that as we go forward. So nothing to share at this point in time, just tuned on that. Now on the strategy itself, we are actually in week 2. It was very important to get started with our implementation work. It's very important that we get started as fast as possible with the implementation work. And this is why we share the direction today. Of course, we cannot share now details on implementation steps as it is only week too. Stay tuned on our progress here. We'll keep you informed. And of course, most importantly, towards the end of next year and then we will share a much more detailed picture on how we progress. And of course, I would expect some more serious updates on details. But for now, that is the frame and bear with us now working on the details.

Peter, it's Danny. Regarding clinical trial starts. So you heard Helene about enpatoran two twin studies, global studies, Phase II in lupus rash, the potentially first-in-class drug for this huge unmet need. We dosed the first patient. This adds to the already ongoing Phase III cladribine tablet study -- sorry, cladribine capsules study in general is myasthenia gravis, which is also recruiting very well. The next one to start, and I guess that we will announce it in the next couple of weeks, not more than that, is our anti-CEACAM5 ADC, Precem-TcT, M9140 in third-line metastatic colorectal cancer, global Phase III study, very exciting. We have additional ongoing data that will come out very exciting also from pimicotinib extension study, and we have recently started a bridging study to maximize the opportunity also in Japan. So there is a lot of good traction from David's team.

Next question today is from Matthew Weston from UBS.

Two questions, please. The first for Danny, on SpringWorks. Now that we should be washing through, I guess, all of the integration dynamics, can you walk us through what you think investors should expect kind of quarter-by-quarter for SpringWorks growth going into potentially competitor launches and Merck really delivering the full potential of the acquisition. And then the second question is one for Kai. I know you've been pushed in a number of different directions. But we've had the kind of strategic update headlines. I realize it's very early and you've reiterated midterm guidance, which I assume is a statement where you want to reassure investors that there isn't a meaningful incremental cost of what you have planned. But I would love to know how you envisage the new strategic thinking manifesting for investors, what time frame and how we will see it. So will we see a faster growing Merck will we see a more profitable Merck, how will we actually judge the success?

Matthew, it's Danny regarding the SpringWorks question. So I'll try to address your question from several angles. First of all, in the quarter, Q1 2026, rare disease in general and rare disease include the SpringWorks legacy products, Gomekli as well as Ogsiveo in China, the rare disease, in general, came in at EUR 94 million, EUR 93 million were attributed to Ogsiveo and Gomekli as I flagged last time. Q1 sales were sequentially down versus Q4, minus EUR 9 million. It's mostly pronounced for Ogsiveo. Actually for Gomekli, it was rather flat. And this is -- the reason and the main reason for that is the stocking ahead of WACC increases which we have minimized as we promised. If you remember, the dynamics for SpringWorks last year. So we minimized it as we promised. Now if you drill down to 1 of the most important surrogates for launch dynamics here with a focus on which is new patient starts, we see a healthy increase in Q1 versus Q4. So the phasing that you see towards Q4 had nothing to do with the increase in new patient starts. The launches in Germany and in Austria are, I would say, quite encouraging. For Gomekli, we are actually working against a competitor. You know that's quite established one, and our launch is progressing very well. And if you take a look at the numbers for the competitor in the U.S. for their MEK inhibitor, you will clearly see that our EMV team there is doing a very good job in terms of share. Now you are right, the integration is behind us. There is a lot to be done as we are working on many fronts, reduction of surgical procedures according to the guidelines for both products. raising shares in systemic first-line therapy, taking care of discontinuations and drug holidays. And here, the real life in -- for these tumors is different from a clinical trial because patients tend to go on and off, not necessarily because of the therapy. So we get used to that as well. And mostly finding those patients who are under active surveillance we are making quite a lot of progress there using a lot of advanced analytics and AI and to find these patients, and I see the results. A little bit more color, number of prescribers for Ogsiveo was sort of, I would say, flattish, slightly increasing. But in the last 4 months, there was a 20% increase in the number of prescribers. So if you are referring to the around EUR 1 billion expectation for Ogsiveo and near blockbuster for Gomekli, we still believe that the potential is there. Now we increased the guidance slightly for the first half to at least EUR 200 million for both products. We do expect a ramp-up in the second half. We have a plan how to deliver it. I don't dismiss the challenge but I see initial signals that there is a strong likelihood we can make it. Now that we are fully integrated in Europe and countries beyond Europe are picking up. I overall feel comfortable with the current market expectation for the 2 products in 2026.

Matt, I appreciate your question on the strategy. So again, let me reiterate. The strategy is a mid- to long-term direction that I've shared today. And it's a pretty substantial development of how we operate in the group where the first part, the earlier part is to support our midterm guidance. And then on top of that, progressively, we will see impact as we move forward kind of beyond the midterm guidance. So I need your patience of staying tuned on the updates that we will share then in the course of next year, how we then build that progression over the coming years. Very important to understand mid- to long-term strategy important to capture cost opportunities on the mid- and long-term horizon, and we will share details as we go forward -- thank you.

Next question is from James Quigley from Goldman Sachs.

I've got 2, please. And unfortunately, they're both clarification questions. So First of all, on healthcare, R&D, you sort of mentioned it depends on what's in the pipeline now in order for the 20% or for the new guidance of 25%. We're around 20% to 21% now. Is it safe to assume that this is the level where we should stay at until we see further M&A or BD and then that will boost us towards a 25% level. Just also on the increase of the site increase, what was the key decisions or the key factors that led you to increase that R&D threshold? And would there be a skew towards discovery or development or for the R&D spend? And the second question on Process Solutions. So Jean-Charles, you mentioned that the underlying would be closer to the top end of the 8% to 12% range. on Slide 28, it says the underlying organic growth is slightly north of 10%. So how do you reconcile those comments or your comments was the slide? And then -- could you help us out a little bit more on the actual impact of those key growth drivers or the 3 impacts of Process Solutions. So particularly in terms of quantifying the growth impact of the stocking from APAC customers and on the warehouse. -- presumably the stocking from APAC customers could continue in the second quarter, as you said. But just to give us an idea of how the cadence of growth might develop in process solutions through the quarters, that would be great.

This is Amy. I'll take the first one. So regarding R&D needs. So right now, when you look at the pipeline, you see pretty much the first time that we have 3 uncorrelated Phase III programs ongoing or just underway. And this is quite an achievement. I don't remember that at Merck. So this is a great testament for what we can do. Now once we move things from Phase II to Phase III and also after we told you last time that we closed the efforts in the DDR space, so our mid- and early-stage pipeline is rather slim, I would say. And here, we need to build that in order to sustain or to ensure that we grow beyond the low to mid-single-digit midterm guidance that we gave you beyond 2030, beyond 2031. And this is something that we need to start building now. So if you're talking about what will we focus on in terms of BD, both on M&As and so, it will be mainly on the early to mid-stage, not excluding discovery platform deals that can actually continue relying on validated biology and using our own strengths in communications and so on and so forth. So this is regarding the -- what will we invest in. Now from -- in terms of the R&D ratios, so right now, we are at around 21%. As Kai said, we would gradually go towards the 25%. We will do that only with keeping the EBITDA margins, the EBITDA margins above 30%. So it's not going to be in 1 shot. It will need to be based by a good acquisition or a good in-licensing that is worth investing in. So take that into account, it will be gradual. It needs to feed the midterm pipeline in order to secure the long term of the health care business.

Jean-Charles speaking. So let me provide you some more color. So as I said, process solution Q1 performance was driven by 3 effects: Operational efficiency linked to our new go-to-market model. The second 1 was new customer projects as well as stronger buying pattern, as I said, mainly coming from our Asian customer. But all in all, I would like to repeat that while these exceptional effects impact Q1, some of them may persist in Q2. So when you are working on your modeling, you should think about it. And then when you think about H2, we assume that we'll return to a kind of more normalized underlying growth rate around 10%. But all in all, to answer the question, we are feeling -- and I'm feeling very confident with the overall underlying business for process solution in 2026.

Next question is from Charles Pitman King from Barclays.

Two, if I may. Firstly, for Jean-Charles, thanks very much for providing the extra detail on the extraordinary items for PS. But I'm just wondering if you could give a little bit more detail around the overall underlying for you remain confident in. So I'm just wondering if you're able to speak at all to any share gains that you saw within the quarter -- and then just thinking about the kind of underlying mix. Firstly, can you just confirm your exposure to the equipment mix. And given you talk about a rapid gain towards the end of the quarter, I'm wondering if the return of demand for equipment in this space is what has supported the performance in 1Q. Any details you could provide very helpful. And just a second question, in terms of your guidance, in your release note, you mentioned that you have -- you're assuming the Middle East conflict will de-escalate in 2Q and stabilize and normalize from there. Given relatively limited exposure in Middle East this year, I'm just wondering if you could give us an idea of any potential impact that we could see, especially for health care, should we not see a return normalization. Thank you.

So let me start with your third question about the gain in market share. First of all, we don't comment versus our competitor. But overall, I would say, within a quarter, it's very hard to comment on market share trends. Concerning the underlying mix Keep in mind that our portfolio is mainly composed by consumables. Call it, 90% of our portfolio is based on coal 10%, call it service and equipment. Related to your second question on Middle East and conflict, I will hand over to Kai.

Charles, I'll take the Middle East question. As you're aware, only 3% of our sales in total are Middle East and Africa. And in health care, I think we are pretty used to crisis-related phasing in the region over quite a longer period of time. And in life sciences, we have already indicated the temporary effect of the prices. And in electronics, we are probably there, more exposed to consumer sentiment as compared to other sectors, but this has been fully integrated in our guidance already.

And the next question comes from the line of Oliver Metzger from AHS.

Yes. The first one is on your strategy update. So on Slide 20, you show the value chain of Life Sciences. And this slides suggest that the expansion potential is the biggest for instruments and equipment, which is from an industry perspective under representative of you? So would you agree with that? And is it possible to expand more into this area organically? Or is there something where you really need more and organic growth. This brings me also to my second question because on Slide 21, you described the financial criteria for M&A, which is also wrote down the criteria for accretive deals. So how do you think about technology accretive deals, which are not necessarily earned accretive. And we think about life sciences, it's hard to find earnings accretive deals. And the last 1 is very quick on Electronics calculation. The DS&S business should have been down only in the low single digit territory, which will be a sequential improvement. Do you expect already this positive trend to continue in DS&S upturn positive already in Q2. Thank you .

Oliver, thanks for your question. So let me start with the different perspectives on the chart you have mentioned on, let's say, how to expand beyond materials and consumables. We already do that in certain areas where I've shared have shared examples, and we intend to do it where it really makes economic sense. There is no intent to do it kind of across the full portfolio to go into equipment and tools, but where it makes sense in order to drive growth in our core business, namely materials and consumables to create additional value for our customers. And then in these areas, we intend to selectively do that. That's the idea which we have already demonstrated, and you remember the examples in bioprocessing or for example, the more recent one with Unity-SC in heterogenous integration. I think very important that, that is -- you bear that in mind as one of the components. On the financial exterior bigger moves, they are clearly, as they have stated, on the chart for some smaller capability-related moves. These are more bolt-on moves. We would then, of course, apply a more kind of strategic lens to that. But the -- that is for only some smaller bolt-on related technology modes. But let's trust that with once we get there.

Yes. Thank you very much. Let me cover the DS&S question. It's Ben speaking. So semiconductor materials represents about 2/3 or 65% of electronic sales and in Q1, it's once again the main growth driver, benefiting from AI advanced nodes and continued demand across both specialty and mature nodes in Asia. Coming to DS&S, it represents roughly 15% of sales and after bottoming out in Q4 2025 has now shown quarter-over-quarter stabilization in Q1. We expect DS&S to be stable in 2026 and therefore, no longer to be a growth headwind going forward.

A quick follow-up of a last 1 because DS&S comps in H2 are very low. Let me it means sequentially that DS&S in H2 will be worse than it was in H1. And would you confirm that? Or do you see it much more is from the base comparison perspective?

So first of all, I agree 1 especially towards H2. And over the full year, we expect DS&S to be by and large flat compared to the previous year.

Next question today is from Falko Friedrichs at Deutsche Bank.

My first question is on the Discovery Solutions business within Life Sciences. How is the market environment in China evolving? And how would you characterize the U.S. market environment at the moment? And then secondly, a quick one on Advanced Solutions, which showed a nice pickup in organic growth in Q1. And I saw that you called out the services business in the appendix of your presentation as a key driver. Can you add a bit more color on what exactly was driving this and whether the type of growth could be sustainable over the next few quarters?

Jean-Charles speaking. So let me comment on both Advanced Solutions and Discovery Solutions business. In both cases, the 2 business units delivered solid quarterly performance within the 2026 guidance. So I call it all clean. We don't see any exceptional effects neither for advanced suction or discovery solution. The key driver for Advanced Solutions include, again, very strong and solid performance for our, call it, quality testing business, biomonitoring, but also solid performance from a low comp when I mentioned business services, think about CTS and think about CDMO. But overall, I will say we had a solid growth across the different franchises within Advanced Solution with, let's say, no exceptional effect. Concerning your question on Discovery Solutions, we observed slight organic growth versus our initial guidance, which feels good. And it was driven by, I will say, low funding in U.S. academic customers last year. If you remember correct. I mean if you remember last year, in March, we suffer a bit in U.S. from an academic segment perspective. So we have a lower comp. And we also enjoy an increase of our service level within the quarter for Discovery Solutions, which is again linked to our new go-to-market model. So for Discovery Solution, you have to drive lower comp in 2025 and you have a higher sales level from a supply chain point of view, would boost a bit of performance, and it's aligned with our new go-to-market model. Concerning your question on China for Advanced Solutions and Discovery Solution, we are still navigating through changing environments situation in China. I will say the market overall for these 2 business units remain soft.

Next question today is from Thibault Boutherin from Morgan Stanley.

Just two quick questions on Pharma. The first one on fertility. You had a guide, I think, for a low single-digit growth for the year. given the performance in Q1? Is this still on track? And for Gonal-f in particular, could we see -- or what should we expect once you lap the price cut that you took in Q2 last year. So should you expect stabilization can we see growth? That's the first one facility? And the second one, just on CME I think Q1 was expected to be the worst for the year. Actually, it's probably better than what we expected. So could the mid-single-digit guidance for the year actually land a bit better given what we saw in Q1.

I will start again. It's Danny. Regarding fertility, Gonal-f 16% organic decline is -- the key driver there is the remaining pricing headwinds in the U.S. We took a significant price cut in the second quarter of last year, which is carrying over here, annualizing. However, this effect annualizes, we expect Gonal-f momentum to improve significantly as of Q2. In fact, we expect Gonal-f sales to be broadly stable year-over-year from Q2 onwards, which will also improve the overall fertility trajectory more towards our midterm ambition of mid-single-digit growth. And of course, the -- our ability to predict pricing with the MFN deal will help us a lot as well from that perspective. Now the key growth engine of fertility business continues to be Pergoveris. As I said, another strong quarter, 20% up in sales. We are successfully leveraging Pergoveris differentiated profile as the only recombinant FSH and LH product. As a reminder, we launched Pergoveris recently in China, one of the largest fertility markets, and we start seeing a little bit of encouraging early signs from the launch. And then, of course, as we spoke about the U.S., the assumption is that we will launch in the second half of this year based on the priority review voucher. And if that happens, then, of course, it brings us even closer to the ambition of mid-single-digit growth. Now when it comes to CME, for the CME franchise, we reported, yes, organic sales growth of 1.8% increase. And this is quite remarkable against the very tough comp from prior year where the organic growth was more than 10% for this entire franchise. Now you also heard Helene talk about phasing effects and actually, there are 2 that we are calling out. 1 on the positive side related to China. The other 1 on the negative related to the geopolitical situation in the Middle East, both were pretty similar in terms of the magnitude of about EUR 30 million and actually neutralizing each other. Looking ahead, we are confirming our indication that in 2026 CME should grow in line with its midterm outlook of mid-single-digit organic growth. It assumes that the phasing effect should wash out over the rest of the year, as we said before, for Q2, I don't expect CME to be back to mid-single-digit growth yet, but rather a bit below, while the second half of 2026 should be well in line or even slightly above the mid-single-digit line. But please take that with a grain of solvency, the situation in the Middle East continues to be quite volatile and phasing could be different from what we currently assume, but rest assured that the underlying trends for CME are fully intact.

Next question today is from Rajesh Kumar from HSBC.

Can I ask a follow-up on Process Solutions. You gave some very precise quantification or not quantification in terms of color in terms of why you think your growth is so much higher than most of your other global peers, lower exposure to consumables, lower exposure to instruments, lower exposure to China, but also you quantified the APAC stronger buying patterns. In terms of your management systems, when you look at these quantification, how well -- can you -- what is the solidity of this estimate that 2% to 3% benefit came from stocking up from APAC customers, i.e., how much of that is an estimate based on the process that you improved during COVID? And how much of that is unknown back because you have visibility on your customers' inventory? The second follow-up question is, so we are starting the year in Process Solutions with a very high growth run rate, then we probably go back to the normal 10%. I'm assuming that this talking little destocking effect will not repeat in '27 and the world might be slightly clearer place. Should we then expect first quarter next year to face this difficult comp taking you to the lower end of the 8% to 12% corridor? Or could it go below that corridor, given the comp effects you've seen in the first quarter this year?

Thank you, Kumar, for the 2 questions. So let me try to answer the first one on the quantification. So yes, you're right. I mentioned the 3 effects, and you dropped a number 2% to 3%. I will not comment on it. But you should assume that learning from the past, learning from the new go-to-market, we have quite a deep understanding of our order book. I mentioned several times that we have a report, called a rainbow report where we could slice and dice our order intake, order book by customer, by region, by product type and we also could have our order hedging from 0 to 1 month, 1 to 3, 3 to 6, 6 to 9. Overall, we don't see any normal pattern except with a few customers in Asia. So the quality of our insight is extremely high. One point I would like to highlight on top of our quantify report. Now for several quarters, we have implemented qualitative survey with our global strategic accounts, and we are fostering the interaction with our global strategic accounts, and I'm personally involved in some of them. Again, nothing which is normal. So I want to repeat, I feel comfortable and confidence in the full year for Process Solutions. To your next question concerning the stocking effect for 2027. What I would like to mention is that we don't expect the normalization of inventory to happen in 2026, maybe in 2027 and it will depend of the geopolitical situation of the Middle East. And this is something we cannot predict.

Next question is from Simon Baker from Rothschild & Co Redburn.

Two, if I may, please, both on health care. Going back to, I think, your Sachin's question about the drift upwards in R&D as a percentage of sales over time. I just wonder if there are any countervailing cost reductions because in the quarter, on 1 side, you did have higher-than-expected R&D, but your SG&A cost control was very impressive. Is that a trend we should extrapolate over the coming years? And then going back to the strategy, looking at the framework that you've presented, Kai, I just wonder if it's led to any -- if there's been any change in the perception of the strengths and weaknesses of the Pharma business? Because if we dissect it into the commercial and the innovation, the commercial performance of health care over the last has been absolutely outstanding. The performance in R&D, less stellar. Within this framework, is there -- is there any change in where you view the strengths and the opportunities for investment within Pharma based on the framework and based on the performance of those 2 activities.

I will take. Simon, I will take the margins question and the R&D ratio. So you are right, the Q1 EBITDA pre margin was still at a very solid level of -- in fact, the year-over-year decline in the margin was mainly due to FX and to a minor extent from dilution from SpringWorks. On an organic basis, we were able to even slightly increase the margin which is quite an achievement, considering the significantly higher R&D and also lower Mavenclad sales. Now while there was also a bit of benefit from a couple of smaller one-timers together, adding some 100 basis points to the margin. in Q1. This clearly speaks to our disciplined cost management approach. Now as we said at the beginning of the call, we are streamlining the organization, the entire organization to mitigate pressures on some of our more mature brands like Mavenclad, not just Mavenclad. And this is what you actually see in the numbers. Looking at the remainder of the year, just to give a little bit more color on that, we do expect lower margins in the coming quarters, still above 30%, in line with our updated guidance. Key drivers to consider here in this context are also launch investments in rail diseases, particularly outside of the U.S., pimicotinib launch in China and in the U.S., hopefully, the at the end of this year. and also for Pergoveris when it comes. So you need to balance that, now the increase in the R&D right now, as we speak, is a reflection of the ramping up of Phase III programs, which are quite extensive. And that's good news. We like Phase II. And as I've said before, the continuous increase will be gradual based on the opportunities up to 25%, maintaining the EBITDA margin above 30.

Simon, let me take the strategic question. So I think it's important to zoom out first and look at the group picture. It's very important to look at the capability perspective I've shared with you across the and where all businesses contribute to these capabilities that we need in order to serve customers and patients better. It's important to start at that level every business has an important role to play. And now zooming into pharma, we have expertise in different parts, and we addressed already kind of the commercial expertise with our move in rare diseases and how we utilize that. And we will say very much focused in pharma on risk and profitability on the right balance of the 2. This is very important to always better in mind for pharma specifically. But again, let me remind you, there's many opportunities if you think broader, what we call the life sciences value chain, across the different businesses to -- in addition, with using AI to improve the way we do research, the way we do manufacturing in the company the way we drive new businesses, it's very important to see every part of our company has an important role to play across the different businesses.

And the last question today is from Peter Spengler from DZ Bank.

Two questions. First, given that specific guidance for Q2 was not provided, could you please provide a kind of qualitative trading update for the second quarter? And my second question the strategic update outlines the plan to develop the portfolio and increase company velocity by leveraging capabilities across the existing businesses. While this reinforces the 3-pillar structure of Life Science, Healthcare and Electronics were alternative structures such as more focused division approach or strategic swap of divisions considered as part of this review. What makes the current 3 sector model the optimal structure for future value creation of Merck.

So Peter, let me start with the second question, then the a chart in the deck that shows you the kind of the 2 ends of the spectrum that we have been addressing. So there is the what we would call the front end. This is the customer-facing side, the market-facing side of our business. I think it's essential and it is a competitive advantage that we feel we have how much aligned we are in different businesses with different customer groups, different markets. And then is the strength that we should build on and that's a competitive strength as we compare that across the industries. And it's always important in your structure, you have to have the end caster in mind to focus predominantly on that part. However, at the same time, it should not exclude options for kind of better collaboration across different businesses and that's what we call building platforms because it helps us to scale better. It helps us to increase speed in the implementation. So these are the 2 different angles that we have to balance. It's very important that you bear these 2 streams of the picture in mind as we look at into our strategic development going forward. Who takes the first question? Peter, there specifically on one business. The first question or...

Could you repeat the first question again, please, Peter?

Yes, it's basically, could you give us a qualitative guidance or a trading update for Q2 for the whole group?

No, but that is typically not something which we do on the running level. So there, I hope you understand that we'll keep you posted around August.

Thank you. And I will now hand the conference back to Florian Schraeder for closing remarks.

Thank you so much. I think we have reached the end of a long call. So with that, I would say we close the call for today. Thank you very much and then see some of you at the upcoming roadshows. Thank you, and have a great day. Bye-bye.

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