Merck : Q2 2020 Financial Summary for Investors and Analysts

Q2 2020 Financial Summary for Investors and Analysts

Top Line reflects COVID-19 impact, Bottom line well managed

• Healthcare: Oncology and General Medicine growing despite pandemic, Fertility demand lowered as anticipated, recovery
  of Mavenclad® ramp-up started in June, Bavencio® U.S. launch in UC 1L; M5049 COVID-19 study initiated
• Life Science: supporting fight against COVID-19, Process Solutions growing 20%, Research & Applied end markets continue to be negatively impacted but recovery started in June
• Performance Materials: Semiconductor Solutions growing 12% organically not yet offsetting Display and Surface Solutions decline; Versum performance & integration on track
• Q2 organic sales: decline of -2.5%;
• Q2 organic EBITDA pre: decline of -11.5% (against elevated comps)
• EBITDA pre guidance slightly upgraded: Net sales: €16.9 - 17.7 bn
  EBITDA pre: €4,450 - 4,850 m
  EPS pre: €5.60 - 6.25
• Net financial debt to EBITDA pre at 2.8 on June 30, 2020 - continued focus on deleveraging

Overview Financials

Q2 2020 Overview

• Versum portfolio effect and strong growth in Process Solutions drive sales above last year, despite materializing COVID-19 impact across most business units
• EBITDA pre and margin decline driven by lower non-recurring income components and under absorption of fixed costs due to lower sales from the COVID-19 impact
• EPS pre declining due to a lower financial result and lower EBITDA pre
• Lower operating cash flow driven primarily by GSK upfront payment in 2019 and higher working capital in 2020

Q2 2020 Cash Flow Statement

• Profit after tax driven by lower EBIT
• Higher depreciation & amortization from Versum PPA and impairments in Performance Materials
• Provisions reflect reduced litigation provisions and fluctuations in LTIP1
• Changes in other assets and liabilities primarily driven by GSK upfront payment in Q2 2019 that was deferred
• Increased working capital driven by Versum consolidation, higher inventories to secure supply in the face of COVID-19 and growing receivables
• Investing and financing cash flows returning to normal levels

1Long Term Incentive Plan

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Q2 2020 Balance Sheet

• Stable balance sheet since Dec. 31, 2019
• Continuously higher cash level in order to secure liquidity in the face of the COVID-19 pandemic
• Equity ratio of 41.1%
• Financial debt increase reflects bonds issued in January (€1.5 bn) and utilization of available credit lines to increase liquidity reserve; bond repayments in March (€2.0 bn)

Q2 2020 Business Overview

Healthcare

• Savings in M&S and R&D offset impact from lowered Fertility demand and Mavenclad® drag amid COVID-19
• Net sales deviation YoY: organic -7.4%, FX -2.3%, portfolio -0.9%
• EBITDA pre deviation YoY: organic -25.9%, FX -4.1%, portfolio +0.9%
• Mavenclad® 36% growth versus Q2 2019, especially in U.S.; however demand declines versus Q1 2020 due to COVID-19 as expected; Rebif® returning to the anticipated underlying trajectory
• Fertility heavily impacted across all regions due to temporary shutdown of a majority of clinics
• Erbitux® organically slightly growing; Bavencio® growing strongly versus last year, but sequentially impacted by COVID-19
• M&S decrease due to rigorous cost management, further supported by significant reduction of in person face-to-face activities during pandemic, last year elevated by now expired amortization of Rebif ®
• R&D reflecting ongoing stringent cost control
• EBITDA pre declining faster than sales, driven largely by tough comps from Peg-Pal and Bavencio® milestones in Q2 2019

Life Science

• Strong resilience continues in Q2; Process growing 20%, Applied & Research impacted by COVID-19 but recovery visible in June
• Net sales deviation YoY: organic +6.3%, FX -0.4%, portfolio 0.0%
• EBITDA pre deviation YoY: organic +9.7%, FX -2.4%, portfolio -0.6%
• 19.8% organic growth of Process Solutions mainly driven by downstream and single use, with COVID-19 demand contributing
• Applied Solutions about stable due to COVID-19-related effects across the full portfolio albeit clear signs of recovery in June
• Research Solutions impacted significantly mainly due to temporary slowdown in academia from COVID-19-related lab closures, also showing clear signs of recovery in June
• Lower M&S from overall cost-consciousness and lower travel expenses, partially offset by increased freight costs
• Admin increase largely driven by EBITDA pre adjustments (€12 m) and COVID-19-related cost for additional safety precautions
• Increased R&D driven by investments in strategic projects
• EBITDA pre growing faster than sales, reflecting operational leverage from strong top-line growth

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Performance Materials

• Versum portfolio effect and accelerating Semi growth more than offset declining Display and Surface amid COVID-19
• Net sales deviation YoY: organic -13.7%, FX +1.8%, portfolio +50.1%
• EBITDA pre deviation YoY: organic -29.7%, FX +3.1%, portfolio +51.8%
• Sales growth of 38% reflects portfolio effect from Versum and positive FX, overcompensating organic decline
• Semiconductor Solutions: further accelerating strong organic growth, cyclical recovery and outperformance continuing
• Display Solutions: COVID-19 weighs on LC's negative underlying trajectory against still elevated comps in Q2 2019; OLED also impacted
• Surface Solutions: declining significantly amid a heavy COVID-19 impact on automotive and cosmetic end markets
• M&S reflects consolidation of Versum acquisition and diligent underlying cost management as part of the Bright Future transformation and countermeasures to COVID-19
• R&D declining from an elevated Q2 2019 base including Bright Future provisions (EBITDA pre adjustments); Q2 2020 includes Versum consolidation and shows underlying Bright Future cost management
• Increase in EBITDA pre largely reflects portfolio effect from Versum

2020 guidance

Our assumptions on the development of the COVID-19 pandemic have remained largely the same since May

Previous Assumptions (communicated in May)

• Impact across all regions
• Cases expected to peak in Q2; Situation eases in H2; Pandemic crisis lasts for FY
• Stressed health systems; Some countries have less effective response than China
• However, no major resurgences

Current assumptions (communicated in August)

• Impact across all regions
• Recovery progressing during H2
• Some countries struggle to contain virus resulting in stressed health systems; Effective vaccines not broadly available
• Additional flares, but not triggering new widespread lockdowns

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COVID-19 guidance given in May overall accurate, improved visibility warrants slight upgrade

Group:

• Up to mid single-digit percentage sales impact full year
• Countermeasures in place: confirm 50 to 60% of net sales impact to hit EBITDA pre
• Recovery visible in June, expected to continue in Q3 and Q4 Healthcare
• Biggest impact in Fertility behind, as clinics are opening up again
• Mavenclad® recovery visible in June
• Other businesses normalizing

Life Science

• Net upside from COVID-19-related demand in Process Solutions
• Recovery as of June in Applied Solutions
• Research showed largest impact, recovering in June as well Performance Materials
• Strong growth in Semiconductor expected to continue despite COVID-19
• Some ease of impact from COVID-19 in Display versus Q2
• Slight ease on Surface's end markets expected versus Q2

Group:

• Net sales: Slight to moderate organic growth, Versum growth contribution in mid single-digit percentage range; FX between 0% to -2% YoY;
  ~€16.9 - 17.7 bn
• EBITDA pre: EBITDA pre:
  Slight to moderate organic growth, mid single-digit percentage range growth from Versum; FX headwinds of -2% to -4% YoY; ~€4,450 - 4,850 m1
  o EBITDA pre - supporting factors:
• • Increasing sales contribution from Mavenclad® and Bavencio®
  • Stringent M&S and R&D cost management in HC (decrease YoY absolute and as % of sales)
  • Ongoing strength in Life Science with above-market sales growth
  • Good momentum in Semiconductor Solutions and cost savings from Bright Future program related initiatives
  • High level of cost consciousness and prioritization
  • Four quarters of Versum

• 1. EBITDA pre - reducing factors:
  2. • No more support from Pfizer deferred income (€191 m in 2019)
     • Lower income from pipeline management
     • Continued decline of Liquid Crystals and Rebif®
     • COVID-19related sales and earnings effect
     • Potential additional effect from VBP2 in China during Q4 for Glucophage®
• EPS pre: ~€5.60 - 6.25

1CO guidance 2020: Slightly higher than last year

2Volume Based Procurement

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Qualitative outlook by business sector1:

Healthcare

• Net sales:

1. Slight organic growth

• 1. COVID-19significantly impacting fertility performance
  1. Sustained performance of new products
• EBITDA pre:
• 1. Organically about stable

1. Significant adverse FX impact

Life Science

• Net sales:

1. Strong organic growth

• 1. Process Solutions trend offsetting slowdown in Research and Applied Solutions
• EBITDA pre:
• 1. Strong organic growth

1. Moderate adverse FX impact

Performance Materials

• Net sales:

1. Moderate to strong organic decline

1. Semiconductor Solutions growing strongly,
   while COVID-19 weighing on Display and Surface

• 1. Mid-thirtiespercentage contribution from Versum
• EBITDA pre:
• 1. Organic decline in the low-teens %

1. Slight support from FX

1. Mid-thirtiespercentage contribution from Versum

1Business Sector guidances are only support to the Group guidance and do not have to add up

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Additional financial guidance for 2020
 Corporate & Other EBITDA pre	slightly lower than last year
	Interest result	~ -280 to -310 m
	Effective tax rate	~24 % to 26%
	Capex on PPE	~1.1 bn - 1.2 bn
 Hedging / USD assumption	FY 2020 hedge ratio ~ 65%
		at EUR/USD ~1.16
 2020 Ø EUR/USD assumption	~1.09 to 1.13

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Group Q2 2020

			Group			Healthcare		Life Science		Performance Materials	Corporate/Others
€ m	Q2 2019		Q2 2020	% YoY	Q2 2019	Q2 2020	% YoY	Q2 2019	Q2 2020	% YoY	Q2 2019	Q2 2020	% YoY	Q2 2019	Q2 2020	% YoY
Net sales	3 971		4 119	4%	1 677	1 499	-11%	1 705	1 806	6%	589	814	38%
% organic				-2%			-7%			6%			-14%
% FX				-1%			-2%			0%			2%
% portfolio				7%			-1%			0%			50%
EBIT	618		491	-21%	345	269	-22%	322	386	20%	100	-30	n.m.	-148	-133	-10%
Depreciation and amortization	455		556	22%	177	90	-49%	197	199	1%	62	249	>100%	20	19	-6%
EBITDA	1 074		1 048	-2%	523	359	-31%	518	584	13%	161	219	36%	-128	-115	-10%
Adjustments in EBITDA	65		27	-59%	5	15	>100%	15	-15	n.m.	29	19	-34%	16	8	-52%
EBITDA pre	1 139		1 074	-6%	528	374	-29%	533	569	7%	190	238	25%	-112	-107	-4%
Net financial debt	12 363	*	12 560	2%
* as per 31 December

Totals may not add up due to rounding

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Group

P&L Group	Q2 2019	Q2 2020	% YoY
Net sales	3 971	4 119	4%
Cost of sales	-1 454	-1 610	11%
thereof: intangibles amortization	-44	-57	31%
Gross profit	2 517	2 509	0%
Marketing and selling expenses	-1 157	-1 035	-11%
thereof: intangibles amortization	-225	-165	-27%
Administration	-269	-298	11%
Impairment losses / reversals (IFRS9)	2	-5	n.m.
Other operating income/expenses	79	-160	n.m.
Research and development	-553	-520	-6%
EBIT	618	491	-21%
Depreciation and amortization	455	556	22%
EBITDA	1 074	1 048	-2%
Adjustments in EBITDA	65	27	-59%
EBITDA pre	1 139	1 074	-6%
Financial result	-61	-102	67%
Profit before tax	557	389	-30%
Income tax	-136	-100	-27%
Income tax rate	24%	26%
Profit after tax from continuing operations		421	289	-31%
Profit after tax from discontinued operation		50	0	-100%
Profit after tax	471	289	-39%
Non-controlling interests	0	1	n.m.
Net income	471	290	-38%
Number of theoretical shares in million	434,8	434,8
EPS in €	1,08	0,67	-38%
EPS pre in €	1,54	1,30	-16%
Totals may not add up due to rounding

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Healthcare
	P&L Healthcare	Q2 2019	Q2 2020	% YoY
	Net sales	1 677	1 499	-11%
	Cost of sales	-421	-364	-13%
	thereof: intangibles amortization	-1	-1	-30%
	Gross profit	1 256	1 135	-10%
	Marketing and selling expenses	-599	-409	-32%
	thereof: intangibles amortization	-112	-14	-88%
	Administration	-84	-81	-4%
	Impairment losses / reversals (IFRS9)	2	-3	n.m.
	Other operating income/expenses	165	-7	n.m.
	Research and development	-395	-366	-7%
	EBIT	345	269	-22%
	Depreciation and amortization	177	90	-49%
	EBITDA	523	359	-31%
	Adjustments in EBITDA	5	15	>100%
	EBITDA pre	528	374	-29%
Totals may not add up due to rounding
Life Science
	P&L Life Science	Q2 2019	Q2 2020	% YoY
	Net sales	1 705	1 806	6%
	Cost of sales	-724	-774	7%
	thereof: intangibles amortization	-15	-15	6%
	Gross profit	982	1 033	5%
	Marketing and selling expenses	-490	-488	0%
	thereof: intangibles amortization	-109	-104	-5%
	Administration	-68	-100	47%
	Impairment losses / reversals (IFRS9)	0	-1	n.m.
	Other operating income/expenses	-32	18	n.m.
	Research and development	-69	-75	9%
	EBIT	322	386	20%
	Depreciation and amortization	197	199	1%
	EBITDA	518	584	13%
	Adjustments in EBITDA	15	-15	n.m.
	EBITDA pre	533	569	7%

Totals may not add up due to rounding

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Performance Materials

P&L Performance Materials	Q2 2019	Q2 2020	% YoY
Net sales	589	814	38%
Cost of sales	-307	-472	54%
thereof: intangibles amortization	-28	-41	46%
Gross profit	282	342	21%
Marketing and selling expenses	-66	-134	>100%
thereof: intangibles amortization	-4	-47	>100%
Administration	-25	-44	76%
Impairment losses / reversals (IFRS9)	0	-1	>100%
Other operating income/expenses	-17	-124	>100%
Research and development	-74	-68	-8%
EBIT	100	-30	n.m.
Depreciation and amortization	62	249	>100%
EBITDA	161	219	36%
Adjustments in EBITDA	29	19	-34%
EBITDA pre	190	238	25%

Totals may not add up due to rounding

Consensus deviation

		Actual	Consensus	Difference to	Consensus	Difference to
			(mean)	estimate	(median)	estimate
			27.07.2020		27.07.2020
	[€m]	Q2 2020A	Q2 2020 E	%	Q2 2020 E	%
	Group
	Sales	4 119,1	4 118,7	0,0%	4 119,1	0,0%
	EBITDA pre	1 074,2	1 078,7	-0,4%	1 070,9	0,3%
	EBITDA pre-margin (%)	26,1	26,2	-0.1 pp	25,9	0.1 pp
	EPS pre (€)	1,30	1,34	-3,2%	1,32	-1,8%
	Healthcare
	Sales	1 499,2	1 515,1	-1,1%	1 517,1	-1,2%
	Rebif	289,8	284,1	2,0%	282,9	2,4%
	Bavencio	30,1	33,0	-8,9%	32,9	-8,5%
	Mavenclad	82,3	102,3	-19,6%	102,1	-19,4%
	All other products	1 097,1	1 095,7	0,1%	1 099,3	-0,2%
	EBITDA pre	374,0	394,9	-5,3%	385,7	-3,0%
	EBITDA pre-margin (%)	24,9	26,1	-1.1 pp	25,6	-0.7 pp
	Life Science
	Sales	1 806,2	1 771,4	2,0%	1 771,2	2,0%
	EBITDA pre	569,0	549,3	3,6%	548,5	3,8%
	EBITDA pre-margin (%)	31,5	31,0	0.5 pp	31,0	0.5 pp
	Performance Materials
	Sales	813,6	832,1	-2,2%	836,4	-2,7%
	EBITDA pre	238,3	249,4	-4,5%	246,4	-3,3%
	EBITDA pre-margin (%)	29,3	30,0	-0.7 pp	29,7	-0.4 pp
	Corporate/Other
	Sales	0,0	0,1	n.m.	-5,6	n.m.
	EBITDA pre	-107,2	-115,0	-6,8%	-117,5	-8,8%

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