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Welcome to the Merck Investor and Analyst Conference Call on Second Quarter 2020. [Operator Instructions] Please note that at our customers' request, this conference will be recorded. [Operator Instructions]Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Second Quarter 2020. [Operator Instructions]. 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 very much, Anna. Dear ladies and gentlemen, a very warm welcome from my side. My name is Constantin Fest, I'm Head of Investor Relations here at Merck. And I'm delighted to have today with me Stefan Oschmann, our group CEO; as well as Marcus Kuhnert, our Group CFO. In the next few minutes, we'd like to guide you through the slides in this presentation. And after that, we'll be happy to take all of your questions. Having said that, I'd like to directly hand over to Stefan to kick off this presentation. Stefan?
Thank you, Constantin, and a warm welcome, everyone, to our Q2 earnings call. I would like to start on Slide #5 of the presentation with the highlights. Overall, Q2 was unsurprisingly mixed albeit slightly ahead of our own expectations. Organically, group sales declined 2.5%, while EBITDA pre was down 11.5% against tough comps. On a reported basis, i.e., including modest currency headwinds and meaningful first-time consolidation benefits from Versum, sales increased 3.7% and EBITDA pre declined 5.7%. The adverse impact of COVID-19 was significant with about minus 10% on sales and about minus 20% on EBITDA pre. In fact, this was slightly less than we had anticipated, but more importantly, I'm proud to say that we, as an organization, continue to cope well with the challenges during this time of crisis. Infection rates among our staff are low. Supply chains are intact. Our output is robust and costs are well under control. In addition, we continue to make significant contributions to the fight against COVID-19 on multiple fronts. So far, our assessment of the impact of COVID-19 has proven to be pretty accurate and we are encouraged by the visible signs of recovery across important franchises since early June. Hence, based on a resilient performance in the first half, we are slightly raising our EBITDA pre guidance for the full year. In particular, we now expect net sales in the range of EUR 16.9 billion to EUR 17.7 billion, EBITDA pre in the range of EUR 4.45 billion to EUR 4.85 billion and EPS pre in a range of EUR 5.6 to EUR 6.25. And more details on our assumptions later. And let's go straight to Slide 6 for an overview of Q2 by business sector. As you can see, Life Science had a solid performance again, with organic sales growth even slightly ahead of Q1, although this was more than offset by organic declines in Healthcare and Performance Materials. FX was a slight headwind overall, while a significant boost from portfolio effects helped drive group sales to EUR 4.12 billion, up 3.7%. Further to Healthcare, please note that the organic sales decline was almost entirely driven by lower demand in fertility amid COVID-19-related clinic closures. Whereas the anticipated decline of Rebif was roughly offset by muted growth in the remainder of the portfolio, in turn, also largely due to COVID-19-related effects. In Life Science, very strong organic growth of plus 20% in Process Solutions was mitigated by adverse effects on demand in Applied and Research solutions. The latter primarily stemmed from lockdown conditions in Europe and North America, which had a pronounced impact on the academic customer segment in particular. In Performance Materials, strong organic growth of Semiconductor Solutions accelerated further, entering low teens territory, although this was more than offset by organic declines in Display and Surface Solutions with COVID-19 leaving its traces. Regarding earnings, group EBITDA pre came in at EUR 1.07 billion which corresponds to a margin of 26.1%, down 260 basis points. However, this is primarily due to significant higher nonrecurring income in Healthcare last year. In fact, adjusted for these differences, the margin would have been up by over 100 basis points on an organic basis, with fixed cost under absorption amid lower sales from the COVID-19 effect more than offset by an ongoing focus on cost and lower travel expenses. On to Slide 7 with a few comments on the regional sales development in Q2. Organic sales declined in the low to mid-single digits in all of our 3 main regions: APAC, Europe and North America. In each of these regions, organic growth in Life Science was more than offset by organic declines in Healthcare and Performance Materials. Among the highlights are double-digit organic growth of Process Solutions in all major regions and double-digit organic growth of Semiconductor Solutions in APAC. Adverse impacts related to COVID-19 were felt across all regions, although to differing degrees, in principle, depending on the mix of businesses and their sensitivity to lockdowns.With that, let me hand over to Marcus, who will provide you with additional color on financial performance and key developments in Q2. Marcus, please.
Thanks, Stefan, and a warm welcome to everyone also from my side. I'm now on Slide 9 with an overview of our key figures for Q2. Stefan has already guided you through the most important drivers for sales and EBITDA pre, so let me add a bit more color on the topic of nonrecurring income in Healthcare. As you know, Q2 last year included around EUR 190 million in total, comprising around EUR 75 million from the Peg-Pal milestone, around EUR 50 million for deferred income from Pfizer, around EUR 35 million for U.S. FDA approval of Bavencio and RCC and around EUR 30 million of deferred income from GSK. Q2 this year included around EUR 25 million in total, comprising around EUR 20 million of deferred income from GSK and around EUR 5 million from active portfolio management. That said, we confirm our full year guidance for up to a mid- double-digit million euro amount from active portfolio management. We booked around EUR 5 million in H1 and expect for that, of course, without GSK and expect most of the remaining amount in the third quarter. Regarding the deferred income from GSK, we update our full year guidance to around EUR 100 million. Here, we booked around EUR 50 million in H1 and expect the remaining amount to be equally split between Q3 and Q4. As per the usual disclaimer, please note that this amount can vary depending on cost evolution of the program and reaching development milestones. Let me also briefly comment on EPS pre, which declined faster than EBITDA pre, mainly due to a higher negative financial result. Finally, the lower operating cash flow is largely the result of the EUR 300 million upfront payment from GSK last year and higher working capital this year. So let's take now a look at our reported figures on Slide 10. While EBITDA pre declined EUR 65 million in the quarter, reported EBIT was down by EUR 127 million. In fact, we had a net positive effect of around EUR 50 million from lower amortization of intangibles and lower adjustments on the one hand and higher regular DNA on the other. This was more than offset, however, by impairments of around about EUR 100 million in Performance Material -- sorry, EUR 110 million in Performance Materials, mainly related to intellectual property acquired through AZ Electronics in 2014. The financial result was lower, largely due to higher LTIP provisions and higher interest expenses from the Versum financing. Please also note that we have slightly lowered our full year interest result guidance to range between EUR 280 million and EUR 310 million minus, mainly reflecting interest expense related to tax provisions. This is also the main reason why our EPS pre guidance remains unchanged despite an upgrade to our EBITDA pre guidance. The effective tax rate was within the guided range of 24% to 26% and consequently, reported EPS came in at EUR 0.67 compared to EUR 1.08 in Q2 last year. With that, let's move on to the review of our 3 business sectors, starting with Healthcare on Slide #11. Unsurprisingly, Healthcare had a soft quarter overall with sales down 7.4% organically as meaningful yet slower growth in new products of 34.1% was more than offset by a 9.6% decline in the core business. The adverse impact from COVID-19 was significant at close to EUR 300 million or to put it differently, we would have seen yet another very strong growth quarter with close to 10% organic growth otherwise. As expected, the largest absolute impact was on Fertility, followed by our N&I franchise and Mavenclad in particular. We also saw a significant impact on General Medicine & Endocrinology and limited effects in oncology. The good news is that there are visible and broad-based signs of recovery since early June, which speak for the fundamental relevance of our portfolio. For example, Mavenclad sales in June were almost back to pre-crisis levels and are rising further. The Fertility is gradually coming back as clinics reopen. And General Medicine & Endocrinology is normalizing after some destocking effects from Q1 pull-ins. On earnings, Healthcare EBITDA pre declined 25.9% organically in the second quarter, although this was primarily due to significant differences in nonrecurring income versus last year, as explained to you before. In fact, fixed costs under absorption amid lower sales from the COVID-19 effect was more than offset by a significant reduction of in-person face-to-face activities and ongoing rigorous cost discipline. Based on our resilient H1 performance, we are slightly raising our organic EBITDA pre guidance for Healthcare, now calling for about stable development in 2020. Please note that this is despite the recently announced third round of volume-based procurement in China, which includes Metformin as expected and will likely be implemented sometime in the fourth quarter. Pipeline wise, the clear highlight of the quarter was the U.S. FDA approval of Bavencio and first-line bladder. And I can tell you that initial feedback from the launch and this potentially significant indication is very encouraging. And with that, let's go to Slide #12 for a review of Life Science. Life Science had another solid quarter with organic sales growth of 6.3%, which is even slightly ahead of growth in Q1 despite ongoing challenges amid COVID-19. In fact, the net negative impact from COVID-19 was in the mid double-digit million euros, and hence, a bit higher compared to Q1. From a regional perspective and consistent with the phasing of the lockdowns, Asia Pacific accelerated into double-digit organic growth territory, while Europe grew in the high single digits and North America slowed down to low single-digit growth. In terms of customer segments and in line with the impact of lockdowns on lab activity, we saw demand shifting further away from academia towards pharma and biotech as well as diagnostics. In fact, academia was the only customer segment in decline, although we have seen encouraging signs of recovery in June here as well. From a product portfolio view, Process Solutions remains a star performer with organic growth accelerating to a very strong 19.8%, mainly driven by downstream and single use. COVID-19-related demand from therapy and vaccine developers had a net positive effect on sales and even more so on the order book. Applied Solutions was flat again, and COVID-19 effects were net negative across all business lines. However, growth in Lab Water turned positive in Q2 and Applied as a whole saw a strong recovery in June. Research Solutions was a laggard in Q2 with sales down 7.1% organically. The net effects of COVID-19 were negative with all businesses declining, which isn't surprising given Research Solutions had the highest exposure to academia. However, similar to Applied, we saw much better development in June. On earnings, EBITDA pre came in strong at EUR 569 million, reflecting an organic growth of 9.7% and an increased margin to a level of 31.5%, mainly due to operating leverage. Finally, we are confirming our full year guidance for strong organic EBITDA pre growth in Life Science, and feel increasingly confident about it. Let's now move to Slide 13 for a review of Performance Materials, which had a mixed quarter overall. Reported sales growth was strong at 38.1%, reflecting slight FX tailwinds and the major portfolio effect from Versum. However, organically, sales declined 13.7%, mainly due to a significant impact from COVID-19. We estimate the effect in the mid- to high double-digit million euros versus only a minor adverse effect in Q1. Similar to Life Science, a picture in terms of business unit is quite different. Semiconductor Solutions, which contributes almost 60% to sales in Performance Materials, meanwhile, delivered yet another strong quarter with above-market organic growth of 12.1%. Despite a small adverse effect from COVID-19, this is ahead of Q1 and confirms our view that the cyclical trust is behind us. Also note that growth of legacy Versum was consistent with this, while the integration remains well on track and synergies are coming through slightly faster than planned. I.e., we know -- we now expect at least EUR 25 million in cost synergies this year compared to around expected EUR 20 million previously. Sales in Display Solutions declined minus 20.8% organically against still elevated comps in liquid crystals and a meaningful impact from COVID-19. As already flagged to you in May, COVID-19 slightly weighing on the negative underlying trajectory in liquid crystals, while adverse effects in OLED appeared temporary. In Surface Solutions, organic sales declined 29.6%, reflecting the biggest hit from COVID-19 within Performance Materials, given its exposure to automotive and cosmetics end markets. Overall, while Performance Materials will likely continue to be adversely impacted by COVID-19 in Q3 and 4, we see signs for moderation compared to Q2. On earnings, reported EBITDA pre grew 25.2% as the organic decline was more than offset by the Versum portfolio effect and moderate currency tailwinds. Please also note that costs remain well under control and with strong execution on our Bright Future transformation program and COVID-19-related countermeasures. In fact, marketing and selling and R&D declined on a like-for-like basis in the second quarter. Finally, we are slightly raising our full year EBITDA pre guidance for Performance Materials, and Stefan will provide more color on this later. Moving on to Slide 14 with some remarks on our balance sheet. In fact, very little change compared to year-end 2019, as you can see on the chart. Cash and cash equivalents remain some EUR 750 million higher, in line with the end of March and reflecting our prudent approach to secure liquidity during this time of crisis. As a reminder, when taking into account the EUR 2 billion syndicated bank loan, we have a comfortable liquidity buffer in excess of EUR 3 billion. Finally, our equity ratio remains above 40% and net debt-to-EBITDA pre improved slightly from 2.8 at the end of December to 2.7 at the end of June. And now let's take a closer look at cash flow in the second quarter on Slide 15. So as you can see, operating cash flow came in at EUR 502 million compared to EUR 743 million in Q2 last year. The main effects relate to the difference in changes in other assets and liabilities, mainly reflecting the GSK upfront payment of EUR 300 million last year and higher working capital outflows this year largely due to the Versum consolidation and COVID-19 effects. While accounts receivable only rose slightly, we saw the bigger effect in inventories as upholding supply security was big priority for us in the second quarter. CapEx was up as planned, while last year's investing cash flow was mainly driven by temporary investments of proceeds from the Consumer Health's divestment. Similarly, financing cash flow has also returned to a more normal level as last year included significant effects from the issuance of bonds in connection with the financing of the Versum acquisition. And with that, let me hand back to Stefan for the outlook.
Thanks, Marcus. I'm now on Slide 17. In summary, we had a solid Q2 amid significant adverse effects from COVID-19. The effects were consistent with the assumptions laid out to you in May. And as you can see from this slide, our updated assumptions regarding the development of COVID-19 as a pandemic haven't changed much. We still expect an impact across all regions and assume that the recovery will progress in the second half. We also still assume that some countries will struggle to contain the virus, meaning that healthcare systems will remain under stress. Finally, while we have previously assumed no major resurgences, we are fine-tuning this statement and now assume additional flares, but that these will not trigger new widespread lockdowns. We don't assume that this is the only possible scenario or the absolute truth, but we want to make transparent what the base for our planning is. On to Slide 18 with some additional color on how the COVID-19 pandemic is impacting our business. While we usually do not report monthly sales trends, we believe that exceptional times warrant exceptional disclosure. So this illustration should provide you with a better understanding of the dynamics amid the current crisis and our expectation for a recovery in the second half of the year, subject, of course, to the assumptions discussed a minute ago. As you can see, organic sales growth of the group has correlated strongly with the pattern of lockdowns and mandatory workplace closures, in particular. In fact, April and May were the only months year-to-date with negative organic sales growth while June has seen a remarkable swing of plus 18 percentage points to plus 7% organic. Clearly, some adverse effects will likely last longer than others. But the vast majority of our business is highly resilient and largely immune to what you may want to call the new normal amid this lasting pandemic. In addition, we make important contributions to the fight against COVID-19 through our Healthcare and Life Science business sectors, and we play a critical role in meeting the rapidly growing needs of digitization through Performance Materials. Paired with agile and active management, this means we are poised to fare much better than many others, and we remain confident that we will emerge from this crisis even stronger. Before turning to the financial guidance, let me elaborate on this idea a bit further based on the example of Life Science. So let's go to Slide 19. Here on the left-hand side, you will find the so-called COVID-19 heat map, a 3X4 matrix with 2 dimensions, namely our Life Science business units and the customer segments in which we operate. Each of the 12 fields contains an indication of business sensitivity to COVID-19, with pluses representing growth upsides and minuses representing growth downsides in 2020. On the right-hand side of the slide, we show the monthly sales development of the Life Science business sector by customer segment in the first half of 2020 compared to the first half of 2019. So what are the key takeaways from this slide? Like many others, we see a mix of different factors. On the one hand, lockdown conditions have resulted in temporarily lower demand across various parts of our portfolio, mainly affecting Research and Applied solutions and mainly among customers working in academia. However, fundamentally, demand is unchanged, and we have been seeing clear signs of recovery since June. On the other hand, there is significant surge demand in high-value parts of our portfolio stemming from customers active in the area of COVID-19 diagnostics, vaccines and therapies. For example, our Process Solutions order book is up by over 40% year-to-date, and we are making good progress with necessary capacity expansions to meet this demand. So in summary, Life Science is super resilient during this crisis with up and downsides expected to roughly offset each other in the current year. At the same time, and I think that's an important point, downsides have started fading in June, and we are strongly positioned to capitalize on some of the lasting upsides in the medium term. And with that, I move on to guidance. On Slide 20, you will find an overview of our updated assumptions regarding the financial impact of COVID-19. Overall, our fundamental assessment of the situation hasn't changed much. But given improved visibility paired with strong execution, we have turned slightly more positive. In particular, we now expect COVID-19 to have an adverse impact on full year group sales of up to mid-single-digit percentages compared to mid-single digits before, while still expecting a drop-through of 50% to 60% on EBITDA pre amid established contingency measures. In terms of phasing, we expect the recovery that started in June to continue in Q3 and Q4. Regarding our 3 business sectors, we still believe that Healthcare will see the biggest absolute impact; Life Science, the lowest; Performance Materials to be somewhere in between. Further to Healthcare, Fertility will be impacted considerably although the worst seems behind us amid the ongoing reopening of clinics, while we expect only limited effects on the other franchises in the second half, and Mavenclad to regain momentum as suggested by encouraging trends in June. In Life Science, as explained before, we expect net positive effect in Process Solutions to be compensated by net negative effects in Research and Applied, although the latter 2 are expected to continue their recovery in line with what we saw in June. Last but not least, in Performance Materials, for Display and Surface Solution, we see signs of a slight easing of pressure from COVID-19 in Q3 and Q4 compared to Q2. And despite mixed signals in terms of market forecast, we remain confident of a continuation of the strong growth in Semiconductor Solutions based on diligent channel checks and regular conversations with our customers. On Slide 21, you will find a brief reminder of the key earnings drivers for 2020. No change compared to the version we shared with you in May other than fine-tuning the statement on expected growth in Semiconductor Solutions, in line with the bullish statements I made a minute ago, and a potential effect of VBP in China towards year-end, which is fully factored into our guidance. So let's go straight to the group guidance on Slide 22. In summary, we have narrowed our guidance corridor for group net sales by EUR 200 million, raised the lower end of the EBITDA pre range by EUR 100 million and narrowed the EPS pre corridor by EUR 0.20. In other words, we now expect group net sales in 2020 in a range of EUR 16.9 billion to EUR 17.7 billion. EBITDA pre in a range of EUR 4.45 billion to EUR 4.85 billion and EPS pre in a range of EUR 5.6 to EUR 6.25. Organically, we now expect slight to moderate growth for both sales and EBITDA pre. While previously, we only gave this guidance for sales, whereas EBITDA pre was expected about stable. The anticipated portfolio effects from Versum are confirmed at a mid- single-digit percentage tailwind for both net sales and EBITDA pre, although we have become more confident, as I will explain in a minute. And on exchange, we now assume slightly greater headwinds for both sales and EBITDA pre. Specifically, we expect an adverse effect of 0 to minus 2% on sales and minus 2% to minus 4% on EBITDA pre compared to plus 1% to minus 2% and 0 to minus 3% before, respectively. Finally, a few comments on our business sector guidance on Slide 23. While this remains qualitative amid prevailing uncertainty from COVID-19, you will find that we have become more positive on organic sales and EBITDA pre development in Healthcare as well as on organic EBITDA pre development in Performance Materials and the portfolio effects from Versum. However, let me also tell you that our organic sales guidance for Performance Materials should be considered increasingly conservative and that our confidence in strong organic sales and EBITDA pre growth for Life Science has risen. And with that, now on to your questions.
[Operator Instructions] And we take our first question from Matthew Weston of Crédit Suisse.
Two questions, please. The first regarding Life Science and the commentary about the 40% increase in order book demand. It's got a lot of attention this morning. And I'd just like you to put that in context, please. I presume that within your revenue, there are a whole series of repeat customers who you know are there with a very stable outlook while they continue to make drug for many years. And then there is growth drivers as new customers come on. So if you can put that 40% in context as to how much growth it would support within the existing total business portfolio, I think that would be extremely useful. And then secondly, on Glucophage and VBP, thank you for all the information. Can I just try and understand, in your annual report, you report the amount of earnings you pay away to your partner, Bristol-Myers, for Glucophage in China. Can you help us understand what proportion of the profitability of the joint venture that represents? Is it essentially a 50-50 profit split? Or do you pay them a royalty? And if you could frame at least somehow the earnings -- the maximum earnings downside from Glucophage and VBP, I think people would find that extremely helpful.
This is Stefan. Could you please sort of clarify the VBP question because we don't understand what joint venture you're referring to?
So in -- for Glucophage in China, as I understand it, you pay Bristol-Myers a 16% royalty. I think that's what it equates to for Glucophage. And so -- and that's disclosed in the annual report to the best of my knowledge, maybe that has now come to an end, but historically, you did until the end of last year. And therefore, how -- it would help us to understand how profitable Glucophage is if you were paying the partner layaways, and we all assume that China is traditionally a lower margin market.
So let's start with the Life Science question. Yes, we've heard that a couple of times, and this number was compared to numbers that competitors have published and was seen as highly favorable. It is not sort of say impossible to make a scientific forecast about what proportion of that is exactly surge demand, what is repeat demand, but let me try to shed some light. Overall, we assume that the growth upsides of the surge demand in Process Solutions as well as in the diagnostics field are in the low- to mid-3 digit level. So this is the growth impact. We also have some negatives, as you have talked about. And that's about the effect on 2020. We should note that the surge demand we're seeing will only translate into sales, some part of this will only translate into sales beyond the current year. So this very strong order intake in Process Solutions over, let's say, up to 40% year-to-date, one could assume that roughly 50% of that comes from COVID-19-related sort of surge demand. We also -- Matthew, I was talking about a capacity expansion. We are -- as we had mentioned in our Q1 earnings call, we are capacity constrained in certain areas of our portfolio where demand has surged mostly due to COVID-19, and this is really much about our -- some of our downstream and single-use offering in Process Solutions. And we're very -- we're working very hard together with our customers to mitigate these constraints. So we have established clear allocation principles, and we are also working closely with our customers to identify what they need and when exactly they need it.Our capacity is already increasing. We're optimizing output from the existing infrastructure through creative shift and staffing models, and we have accelerated our hiring plans and are adding physical capacity at 2 of our plants, which should be available early next year. And we are carefully monitoring the situation, and we are prepared to adapt our initiatives, and have -- we are very confident that we will have sufficient capacity in the medium term. Marcus will address the VBP, BMS Glucophage-related question.
Yes. So Matthew, I would like to take the opportunity first to make a couple of general statements related to the potential impact of VBP on our numbers in 2020, but also eventually beyond. So first of all, as you will probably know, the bidding is going to take place on August 20. So I think that a couple of days later, we will know the outcome. And the experience tells us, or at least when we look what happened in the second round of VBP that it then takes, I would say, from the point when the first list was published some 3 months until the implementation starts in a way that it starts triggering effects on the companies and in their P&Ls. So that means we expect a point, let's say, at the beginning of the first quarter where we might see first potential impacts on our P&L. At the moment, we have chosen actually for the more prudent approach that means our guidance contains the full quarterly impact of the VBP outcome at the moment in our P&L. However, to be very honest with you, I mean, we have internally also some scenarios because, obviously, it is yet unclear how the concrete outcome will be. So we know a couple of guardrails. So for example, we know there will be up to 8 winners. We know that the -- that those 8 winners will cover or will get exclusive access to some 80% of the hospital market, and we know that the hospital market is some 70% overall. When we look now on the looming P&L effect, keep in mind that the Chinese Metformin market is supposed to grow by more than 10% per annum over the next couple of years. That there is still a meaningful non-hospital market segment, which will not be subject to a gradient price cut. And that eventually also, we wouldn't see 8 winners but less with the respective consequences on the numbers. Translating this also into some questions that we received this morning, which I would want to also mention here. We believe, of course, that this will have an impact on China also beyond 2020. However, when we look at the period until 2022, we believe that while we stick to our belief and to our guidance that the base business will continue growing. And also China will continue to deliver positive sales growth until 2022. For 2021, we would, let's say, say today that we will be at least stable. And when we look on profitability, actually, we do not disclose profitability or margins on a country level. It is, in fact, correct that we have license payments in China for BMS. And so consequently, that means that the profitability in China is somewhat lower than other countries of the world. However, Glucophage in total has a very good profitability. So we do not expect yet a major impact from that.
The next question comes from Peter Verdult of Citi.
Peter Verdult of Citi. Marcus, before his recent departure, Udit was messaging that 2020 might be the last year of margin expansion at Life Sciences, especially given the investments you're making in Asia, viral vectors and gene medicine. Now given the performance that you put in for Q2 despite considerable headwinds, the comments you're making about the outlook for Process Solutions, the order book and the expected recovery of Applied and Research, is it fair to conclude that this margin outlook might be too conservative given what you're seeing? Question #1. #2, for either Stefan or Marcus, I realize you're not going to comment on interferon beta per se, but a simple yes or no answer would suffice here. Has the internal look yet taken place that we know is coming this year? Just I guess on there, has that internal look taken place? And if I can, Stefan, just squeeze 1 in, your IL-17 nanobody, A/F nanobody in psoriasis, a competitor generated a lot of excitement earlier this year with their Phase III data, you've got a sizable Phase IIb study coming up. You never mentioned it. Is that just a simple fact because you out-licensed it to Avillion? Or does that reflect your level of enthusiasm for the asset?
Yes, Peter, maybe I answered the question on margin expansion in Life Science. If I remember correctly, it was actually me who had made that statement. And I made that statement in the last quarterly earnings call, where I said that as an investor, I would want the business to balance margin delivery, with investment in the future and that nobody should expect that margin expansion will continue forever. That was a statement that some people picked up. I thought that was rather sort of benign that statement. We see -- as you see, we see in Q2, we see further margin expansion, and we currently see that especially the high-value segments of Life Science are growing. At the same time, there are exciting novel areas. The overall, the R&D expense in Life Science tool companies is fairly low and innovation happens through bolt-on acquisitions, innovation happens also through licensing and there are -- there is plenty of opportunity in the novel modalities in gene therapy and cell therapy in mRNA, et cetera. So you should expect us to balance this appropriately, but we have a history of margin expansion. We're very proud of that. We are also the profitability leader in the industry. We grow above the market, and we do not expect to change that. When it comes to bintrafusp, my answer -- and my answer is crystal clear to protect the integrity of our clinical trials. We are not able to comment on specific interim analysis. While we cannot comment on the number and the frequency of these analyses associated with the lung cancer program, we can say that they are multiple and that they are event-driven. At the time of Q2 earnings, the 037 study is active and enrolling patients, and we will continue to work with the IDMC to monitor trial progress. And then you asked about the IL-17 nanobody, we announced in -- I think we announced in 2017, if I remember correctly, that Merck had an agreement -- had come to an agreement with a subsidiary of Avillion to develop the IL-17 nanobody and the code is M1095. And as part of the corporation, Avillion will be responsible for developing this asset from Phase II through Phase III. We have, however, not commented on any Phase III timing plans as of now.
The next question comes from Sachin Jain from Bank of America.
Sachin Jain of Bank of America. Just 2 questions. One is a follow-on on Life Science growth. Given the 40% order book, and you've referenced that 50% of that is COVID surge demand, how do we think about market growth and your growth outlook relative to that for '21 versus the prior commentary of market growth of 5% to 6%? I was wondering if you're willing to quantify that to a greater extent. And then the second question, in your R&D deck, you list a TGF-ß study starting in combination with TIGIT. I've not heard you talk about TIGIT before. So wonder if you could just provide some perspective on that asset, when we would get Phase I monotherapy data? And what excites you about the combination with TGF?
Yes, Sachin, so on Life Science market growth, you correctly stated our assumptions. We're watching that very closely. And our plan is that at our Capital Markets Day that we will go into detail discussing our assumptions for future market growth. Currently, things are so fluid, so volatile. We think it's a bit early to sort of finally update our assumptions, but we think that by the time we have our Capital Markets Day, we can provide you with more granularity. When it comes to the TIGIT trial, it's a first-in-human study with 35 patients. We had communicated since the start of the alliance that we plan on initiating combo studies of bintrafusp alfa and other assets in our and GSK's portfolio. And M6223, if I remember correctly, is a Merck compound that was discovered in our own labs. And this is the first time we will be publishing data on M6223. And I think the primary completion date is in the second half of '22 -- September '22 or so.
The next question comes from James Quigley of Morgan Stanley.
It's James Quigley of Morgan Stanley. Just first question on Mavenclad. Can you give us an idea on how the reengagement with physicians and doctors is going since the lockdowns are lifted? The data in June looks pretty encouraging. But given spikes and cases in various places in the U.S., is there any risk that businesses may hold off on Mavenclad given the previous perception you highlighted in the Q1 call around the high efficacy products and infections? That's question #1. Then question #2, on Bavencio and bladder. So how are you thinking about the market dynamics here in the first-line maintenance setting? What will be your marketing message to trying to convince the physicians to use the maintenance versus the PD-1 chemo combination? And have you sort of noticed any biomarkers or any characteristics between the patients who may respond longer or deeper with the maintenance versus other patients?
Yes. Thank you. And indeed, we are more upbeat on Mavenclad development compared to when we communicated last with you in May. We're seeing prescription trends gaining traction. If you look at Page 20 -- sorry, 33, you see some relevant data on market share, et cetera. We see that the macro environment is favorable for Mavenclad recovery based on 3 variables. Healthcare practitioners are concerned about infection risks and vaccine readiness. Some of our competitors have published real-life data. We have also published real-life data. We think that our information is quite relevant in this respect. So vaccination readiness is an important factor, especially versus continuous immunosuppressants. Secondly, we're seeing a positive shift in guidelines for Mavenclad in the U.K., in Italy, in Germany, et cetera. While thirdly, the dynamic market took a major hit from COVID for obvious reasons, Mavenclad sustained a stable market share or if you look at the chart on Page 33, we see a positive development. We had -- at the peak of the pandemic, we didn't have any sales rep in the field, and they're now coming back early since June. We had a lot of -- we had put a lot of emphasis since years on digital outreach to customers, not only in Healthcare, also in our other businesses. And we're seeing, for instance, also for Fertility, where we're really getting it, we're seeing that we're really doing much -- we believe that we're doing much better than competition is doing and that in these fields, given that we are -- that we were more crisis-ready than many others that we will come out of this stronger. Overall, access to physician office depend on state, on the digital engagements. But we are very happy with the digital access we have, and these are digital sales calls, but plenty of digital roundtables, digital congresses, peer-to-peer exercises and so. And we're tracking that very, very carefully, and I'm very encouraged by what I hear from the different country organizations and franchises. You asked a question about Bavencio and launch feedback. So far, you may recall that Bavencio was approved in the U.S. on June 30. So it's very early. It's only 1 month into the launch. And obviously, our position has strengthened given failures of multiple combo studies and most recently, KEYNOTE-361. So we are -- we think that this is a very, very encouraging aspect. We are obviously -- again, we're launching in the middle of pandemic but we have -- as I have just said, we have started a long time ago adapting our marketing approach. And we're taking a digital -- a hybrid approach, digital and face-to-face wherever it's possible depending on the situation. Recently, we have been included in the NCCN and in the ESMO guidelines as part of a preferred regimen. And we think this is a clear signal of the transformative nature of the UC data. And we perceive strong early -- strongly positive early signals from the feed on reception of data and willingness to adopt in practice. It's -- when we talk about things like market share, so that would obviously be too early. But I would expect you will ask us this question at the capital -- or at the -- sorry, at the R&D update call. And we'll be doing the Capital Markets Day, and we're doing a separate R&D update call this year on September -- towards the end of September. And we also -- you should also bear in mind that we expect regulatory feedback in both Europe and Japan in the first half of 2021, and this would trigger milestones.
The next question comes from Richard Vosser of JPMorgan.
Maybe 1 question on the -- going back to the order book of Life Sciences. Maybe you could give us an idea of the split between sort of consumables and maybe more substantial equipment. And how you see that flowing through to sales in terms of timing of realization? I think consumables might be much quicker and equipment longer. So just some thoughts there. Second, on Mavenclad, thanks for the update, but could you give us an idea of the split in Q2 as well, please? And then thirdly, back to Life Sciences, just on the academic lab opening, perhaps you could give us a bit more color in terms of how you see the pace of those labs opening throughout the remainder of the year and what you've seen so far?
So on the order book, actually, what -- okay, Richard, there is a --there is not a sort of a direct border between equipment and consumables. This is -- this surge demand is mostly used by single-use and by filters. This is equipment, but it's consumable equipment in a way as it is single-use and as filters have a limited lifespan. So it's -- if your question is about whether that will trigger renewed orders, we assume so. I hope this answers your question?
Yes.
On the other Life Science-oriented question, if we go to -- if you go briefly back to Slide 19, which shows you the sales development -- monthly sales development per customer cluster. And if you look at the lower left-hand part, academia, it basically shows you that we took a hit, somewhat of a hit in March, a significant hit in April and May, and that then June is back to previous trends. And I think it's safe to assume that this pattern will prevail. We cannot predict this with 100% certainty of course, but that's our assumption. So what was lost in April and May is lost, but we are back on the previous track. That is something that creates an impact on second quarter. It creates an impact on the full year, but it doesn't change the long-term trajectory of the business. Marcus, you wanted to add something?
Yes. I would briefly touch your second question, Richard. So you asked for the regional breakdown of Mavenclad in the second quarter, and here, basically, you may remember what I said in the last quarterly call. So we have seen not a big change here, simply because the regions outside of the U.S. had a deeper drop in the second quarter. So especially from March to April, but then also a much steeper recovery in June. While U.S. obviously came in from a lower base, but also obviously not showing such a deep drop in the second quarter.
And on the Mavenclad question that you've asked. We had -- in the recent call, we had said that the split U.S. versus Europe is about 40-60. And this has been rising slight -- the U.S. percentage has been rising slightly. That's about the...
Both -- yes, both business are still the same.
Yes. Kind of the same. That would be the detail we would be prepared to disclose.
The next question comes from Michael Leuchten of UBS.
It's Michael Leuchten from UBS. 2 questions for Marcus, please. One, could you just clarify your commentary around the deferred income, please? I believe you said it's now up to triple digits when I think previously, you said triple digits. So just what's driving the change in that? And then secondly, on your guidance, what's the -- what's included in terms of milestones for this year in the Healthcare guidance? Previously, I think your guidance was excluding milestones. So as we look for the rest of the year, does that now still not include any milestones received up to today? Or does it include some milestones?
Yes. So I'll start with your second question first. So indeed, we have not included any milestones in our guidance, yet we did some let's say, nonrecurring income. So we said out of my mind, the double-digit -- mid double-digit million euro amount. So roughly half of it has been included until end of June, predominantly coming from the GSK deferred income. We expect the -- we expect, let's say, another eventually up to double-digit million or up to mid double-digit million euro in the second half of the year and eventually in the third quarter. On the deferred income recognition on bintrafusp alfa, a reduction to EUR 100 million. So regarding our R&D efforts, you have probably seen that in recent weeks, we have posted several new bintrafusp studies on ct.gov, including triple-negative breast cancer and also bladder to name just a few. So keep in mind that this is an extensive program that we continue to drive forward and evolve. We try to be as transparent as we can. And in light of this transparency effort also have tried to guide you as much as possible. But the realization is not linear. We have always stressed that this amount can rise depending on the cost evolution of the program and reaching development milestones. And that is exactly what you are seeing now, the quarter showing some variation.
The next question comes from KC Arikatla from Goldman Sachs.
I had 2, please. On Process Solutions, if I could ask about the opportunity from vaccine development. Clearly, there are several approaches under way to develop a vaccine. Would you say that you benefit more if a particular technology-based vaccine works compared to the other? Would be great if you could frame that opportunity for us, please. And on the second 1 on Glucophage, thanks for the detailed info, very helpful. Can you give us a rough idea about your current volume share of Glucophage in the Metformin market in China, in the hospital channel? And how does that compare with your volume share of Concor in the bisoprolol market?
Yes. On your Process Solutions-related question, this is not easy to answer because like, as we had said before, we are supporting 45 vaccine projects. Let's see, if you look at these vaccine projects are very different. They're sort of traditional vaccines, they are viral vector-based vaccines, DNA-based vaccines, they are mRNA vaccines. If I look at vaccine approach overall, we should note that the vaccines business is generally somewhat less -- slightly less attractive then monoclonal antibodies are, that should be noted. mRNA is a business that we that we support, we -- our single-use products are being used in mRNA. The mRNA process is very, very different, where things are being synthesized from oligos or amidites or plasmids, plus you have the precursor -- we've been involved in the precursor substances to create the lipospheres. So mRNA is less attractive than the other vaccine technologies, but we are very much involved. So let's say, life attenuated or in activated virus vaccines are a bit more attractive than mRNA vaccines. Viral vector or recombinant DNA vaccines are the most attractive ones from a value perspective for us. We are -- we do not disclose specific customer-related data as I think you can appreciate. But we're tracking that very clearly. If your question also relates to the other business units, in diagnostics, we see upside, for instance, ProK, guanidine, RNA extraction kits, lateral flow membranes. And we are participating, as I said, on the vaccine side, 45 vaccine projects and 35 testing solutions. What is also important is that there are several promising projects on therapeutic antibodies. There's really a surge in antibody work sort of for passive immunization, which would be an additional technology that would be quite useful sort of a bridging technology. So I mean, this is super complex matrix with, I don't know, dozens of variables. And I'm sorry, I can't give you a super simple answer.
Same when we look on your question on Glucophage volume share for Metformin, we do not disclose shares on product level, per product level in country, and we also do not make usually split-in in pricing and volume effects. I mean, I can give you 1 aid, which is saying that Gluco in China has sales between EUR 400 million and EUR 500 million. So to give you an idea on the exposure we are talking about. But as I said, we cannot share any kind of market shares or volumes.
What we can share, however, KC, is data on the percentage share of the hospital market of Concor and Glucophage, which in both assets is about 70%. That includes urban hospitals, health centers and rural hospitals. And there's an opportunity to rectify the understanding of our price in round 2, which is a high single-digit percentage for Concor.
The next question comes from Simon Baker from Redburn.
If I may kick off firstly with another 1 on Glucophage in China. Marcus, just to clarify your comment now on the sales exposure. At EUR 400 million to EUR 500 million, that was just for Glucophage alone, I think, that didn't include Concor. And that compares with the figure you gave in the 2018 annual report of EUR 329 million. So either the market growth has slowed dramatically or the figure now is towards the lower end of the EUR 400 million to EUR 500 million range, I would guess. Is that a reasonable assumption to make? And then secondly, the Slide 19 on the monthly evolution of sales for Life Sciences was both fascinating and very, very useful. If you were to do a similar slide for Performance Materials, what would it look like?
Yes. So Simon, I'll start briefly answering your first question. So I'm not sure where your EUR 300-something-million number's from. The 2019 sales for Gluco were around about EUR 400 million and in 2020, we will further grow. So that brings you to the number I've just mentioned, and it's without Concor, it's only -- it's Glucophage.
Yes. So and then, Simon, on Performance Materials, let's -- I would just like to make 1 statement. Currently, semicon is about 60% of our Performance Materials business. So we have -- as you know, we have transformed this business. And we told you that the semicon trends are either unaffected or boosted by the COVID crisis. If we look at Surface Solutions, overall, Surface Solutions is 2% of Merck's revenue. And in terms of -- if you factor in respective margins, it's less than that on profitability. So I think we shouldn't spend too much time touch time on that, but we're familiar with the trends in the automotive industry, and in the cosmetics industry. So we would not see such an uptick as we've seen in the other businesses for Surface Solutions. Also, coming back to the semiconductor market, we currently see massive scale up when it comes to making PCs and making service. On the other hand, mobile devices, there's a certain slowdown because this is much more consumer driven. So it's -- again, you need to factor in all these things. When it comes to Display Solutions, there are trends that you're familiar with that we have communicated about. And again, we must memorize there were times 10 years ago, where, I guess, 50% of Merck's cash flow depended on liquid crystal. Today, liquid crystal sales is 6% of Merck's total revenue. So please do not overestimate the impact of this. So we see the sort of secular trends, the shift of manufacturing from Korea toward China where pricing is lower, where we have lower market shares, and that is what has been anticipated by us. And on top of that, we see certain consumer-driven effects, i.e. for instance, TV sales, large TV sales depend very much on large sports events, like Olympics, like World Cup finals, like whatever. And much of this has been canceled right now. So we see a softness in demand for large TVs. But let me highlight, again, what matters most is the strength in semicon. And there, we see both on a -- when we analyze what our customers tell us when we look at how our peers are performing, how the wafer fab equipment makers and the sort of the -- and the forecast of the industry bellwethers, what they indicate, they all point upwards.
Okay. And just very quickly, just to follow-up, Marcus, that figure of EUR 329 million is from Page 214 of the 2018 annual report. So...
Okay. 2018, yes, but that's 2 years ago. But meanwhile we've been heavily growing.
The next question comes from Daniel Wendorff from Commerzbank.
One follow-up question I have on Life Science. Thanks again for Slide #18 and 19. Can you potentially exceptionally also mention what the organic growth was in Life Science in June? I would reckon well above 10%. A comment there would be helpful. And my second question would be on your stricter cost management, which you mentioned in your presentation. Can you potentially quantify what the savings you achieved due to COVID-19? And maybe how sustainable do you see these, if I think of travel expenses and maybe digital, new digital applications?
Yes. Your question is sort of on monthly growth. We wanted to share sort of the information with you. We don't want to change our policy of not reporting or forecasting monthly growth numbers. And I hope you do understand that. And we don't want to go beyond what we have disclosed in these 2 slides. We thought it was really important for you to be able to understand our -- the optimism that we're displaying, but I don't want to go into more detail about this. Marcus, on cost?
Yes. So when you look at the cost development in the context of COVID-19, there are actually a couple of different factors at work. So on the 1 hand, we, of course, incur lower costs for travel, entertainment, conferences, events, et cetera, which during the lockdown has basically completely come to a halt almost. While on the other hand, we see higher costs for freight and logistics. In addition to that, we incur also some extra costs for mask disinfection and testing. So for making active contributions to fight against COVID-19. The estimated net benefit for the full year 2020 is moderate. My best guess would be somewhere in the mid double-digit million euros. How much of this can be sustained? It's difficult to say, and it will depend a lot on, let's say, the -- let's say, the new behavior after the crisis has mitigated when it comes to having events, when it comes to traveling, et cetera. But you can rest assured that our focus on cost remains very high throughout the entire company and it's even more increased during the current crisis.
The next question comes from Wimal Kapadia from Bernstein.
Wimal Kapadia from Bernstein. Just following up on your comments just now on the semiconductor market. Clearly, particularly strong 2Q. I guess, I just wanted to get a bit more color on how sustainable this level of growth actually is. Should we expect a slowdown in growth in 2H? Or is there potential for further acceleration given we saw a pretty strong acceleration in year-on-year growth between 2Q and 1Q growth. And then just secondly, tied to that, where in the supply chain are you seeing the greatest demand in semiconductors? My second question is just on Mavenclad. Could you just give us a little more context on where your current patient revenues in the month of June came from? Was it new Mavenclad patients versus returning customers for year 2 of drug? If you can give that rough split, that will be extremely helpful. And then just a final quick 1 on -- within display and OLED. Was it a growth franchise in 2Q, just OLED in particular? And if not, have you actually seen a return to growth in June? And then just on the margins for that business, is it fair to assume it's now significantly accretive to the subdivision and PM more broadly?
So let me start with your semicon question. Overall, let's say, if you look at industry forecasts, they have been -- for the full year, they have been lifted recently to account for the semicon industries, let's say, COVID-19 resilience and -- which showed in the first half and a potential decoupling from GDP in 2020 overall. Let me again reiterate. I mean, most of us spent our working days sitting in front of laptops on Zoom or Microsoft Teams or BlueJeans or whatever. Taiwan is producing laptops and PCs like crazy these days. Servers, there are huge orders for servers. So there's a very strong trend in this respect. On the other hand, there is a weakness in handheld -- we see a weakness in handheld devices. And that explains also the OLED numbers. We have not yet seen the big turnaround in OLED, but we see no reason why this shouldn't come back to the levels we were used to. Then let's say, I cannot -- unfortunately, I cannot give you on Mavenclad patient split. So I cannot give you exact numbers, but let me try to give you sort of a flavor. On new patient uptake, we've seen a strong rebound as of May across all major markets, including the U.S., driven primarily by the reactivation of our pre-COVID prescriber base. There are twice as many new patients in June compared to May. And since we are on this topic already, let me highlight a similar picture for the second year returners. The uptake started even earlier than new patient uptake due to local treatment guidelines and the importance of retreating patients in due course within the second year. Marcus?
Yes. So your 2 questions on OLED. So your first question was growth in June, positive, no, not yet. But as we said already during the presentation, there is our clear expectation that the current slowdown in OLED is temporary. When we look on margin, I do confirm that, indeed, OLED is under normal circumstances accretive to Performance Materials, not necessarily yet for Display because liquid crystal still is a very profitable business.
The next question comes from Falko Friedrichs from Deutsche Bank.
I have 2 questions left, please. Firstly, how is the integration of Versum progressing? And what are the drivers for the higher synergies compared to what you initially expected? And then secondly, you mentioned necessary capacity expansion in Process Solutions. Are those meaningful investments that could potentially change your CapEx outlook, either this year or next year? Or is that not a concern?
Okay. Falko, I'll start with your first question. So integration of Versum, indeed, is very well on track. I mean, you can read it from the excellent business results where we have seen already a strong first quarter with double-digit growth pro forma. I mean, pro forma means you know that we report this under the portfolio effect. But if we take it out, it was double digit. And also, the second quarter was double-digit again. So when it comes to cultural integration, when it comes to commercial integration and doing a lot of work without actually disturbing the growth momentum and our relations to customers, I think we are doing an excellent job, and so we do in realizing the cost synergies. So just to clarify, the upgrade of EUR 5 million is not meant to increase the synergy target as a whole. So we stick to the EUR 75 million cost synergies in total. However, we are slightly ahead of plan when it comes to execution and more to come at the Capital Markets Day.
Yes. When it comes to capacity expansion in Life Science, we should know this is -- as I've said earlier on, this is mostly about single-use and about filters. The real challenging capacity expansion is not the availability of CapEx. This is not extremely CapEx intensive. This -- it's -- this is more about getting this done as soon as possible. We have identified buildings already. And as I told you, we think that we can -- we expect this to be operational early in '21. And we think that this will be -- return value within a very short period of time. It will not affect our 2020 CapEx guidance that we gave of EUR 1.1 billion to EUR 1.2 billion.
The last question comes from David Evans from Kepler Cheuvreux.
So just a couple on Process Solutions and the surge in demand that you're seeing. Can I say -- are you having to turn away any customers? Or are you keeping market share still in all of these highly in demand segment? And do you think that may change in the future, maybe prior to these new capacity investments coming on stream? Or are you somewhat actually more optimistic now that you can capitalize on at least most of this extra demand? And then secondly, in terms of where this COVID-related demand comes from, could you -- is there any way you can split roughly order? How much is from vaccines-related projects? How much from therapeutics or diagnostics? And thinking into the future, could any of those be maybe meaningfully bigger than any of the other segments?
So on capacity, as I said earlier on, we're working very hard at this, and we think that we have sufficient available capacity in the midterm. In this crisis situation right now, I think each and every Life Science tool company will have to prioritize orders. There are certain small subsegment products where we could sell 10x more, if we could only make it. And I think that all of our competitors are in the same situation. We do not, however, think that this is a significant limitation to our growth going forward. When it comes to more granularity on different segments, I think you understand that we have -- what can I say, we would like to give you forecasts that are reliable, and there is so much volatility between these different segments right now that I don't think it makes any sense to provide that type of detail.
I think this was then the last question. And with this, I'd like to hand over back to you, Stefan, for the closing remarks.
Yes. Thanks, Constantin. And thanks for -- to all of you for dialing in and for your continued interest in our company in Merck. I wanted to use this opportunity to thank our teams around the world for their -- they're doing fantastic work. They have shown outstanding commitment and purpose orientation. I've been in the industry for quite a while. I've never seen such in a period such incredible dedication and togetherness. And in this, our priorities remain clear. It's the health and safety of our employees and their family, business continuity and ongoing recovery as well as our commitment to public health and to wider society. And we are very proud of what we have achieved, and we are determined to move on, and we look forward to updating you again soon. And in that context, let me remind you that we will be hosting our first Virtual Capital Markets Day on September 16, and we hope to -- how can we say, e-meet as many of you then. Thanks again, and goodbye.
Ladies and gentlemen, thank you for your attendance. This has concluded our call. You may now disconnect.