Bayer AG

XETRA:BAYN

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor and Analyst Conference Call on the Second Quarter 2021 Results. [Operator Instructions]I would now like to turn the conference over to Mr. Oliver Maier, Head of Investor Relations of Bayer AG. Please go ahead, sir.

[Oliver Maier, Head of Investor Relations]

Thank you, Emma. Good afternoon, everybody, and thanks for joining us today. I would like to welcome all of you to our second quarter 2021 conference call.With me on the call today are Werner Baumann, our CEO; and Wolfgang Nickl, our CFO. The businesses are represented by the responsible management Board members. That being said, Werner will begin today's call, as usual, with an overview of the key developments in the second quarter, and Wolfgang will then cover the performance of our businesses as well as the outlook for 2021 before we open the Q&A session.As always, I would like to start the call today by drawing your attention to the cautionary language that is included in our safe harbor statement as well as in all the materials that we have distributed today.With that, I hand it over to you, Werner.

[Werner Baumann]

All right. Thanks, Oliver, and good afternoon, ladies and gentlemen. It's my pleasure to welcome you to our conference call today.In the beginning of the year, we promised to set the stage for growth. We are very pleased that actually all our businesses showed currency and portfolio adjusted double-digit growth in the second quarter. The strong growth trajectory is also reflected in the company's first half 2021 numbers.Given the market fluctuations due to the pandemic and the seasonality of our business, our year-to-date is a better representation of our underlying performance and strong growth momentum.In Crop Science, the positive market environment had sustained strong commodity prices for corn and soybeans, have led to a strong top line development. In Pharma, our blockbusters Xarelto and EYLEA continued their growth momentum. We also saw an overall significant recovery of elective treatments. And our Consumer Health business continued its path of leading growth and margin improvement.We expect continued positive dynamics across all businesses for the remainder of the year and, hence, raised our guidance. Needless to say that the pandemic and the related effects might provide for further volatility, which needs close monitoring.Let me now come to our objective to progress our late-stage pipeline this year. With our recent approvals, we are looking at a significantly derisked new pipeline. The rollout of the Nubeqa is ongoing and continues to exceed our expectations. We also advanced the launch of Verquvo, our new symptomatic chronic heart failure treatment. Following the FDA approval in January, we received market authorization in the European Union and Japan.Now Kerendia, our treatment for patients with chronic kidney disease and type 2 diabetes, is the last addition to our launch products. The recent FDA approval offers a new path to protect patients from further kidney damage to addressing MR overactivation, a key driver of chronic kidney disease progression which is unaddressed by currently available therapies.From a strategic perspective, it is also important to note that we are now reentering the U.S. market commercially with our own marketing and sales organization in this indication.I'm sure you've also seen yesterday's good news on our eliapixant, our PX2 -- P2X3 receptor antagonist. The Phase IIb study in chronic cough has been positive and shown efficacy and an excellent safety profile which makes us very optimistic for this new treatment option and also the running Phase II trials in other indications that are underway.Let me now touch on some further highlights in our early programs and platforms. We're making great progress on our early-stage pipeline with our cell and gene therapy platform. For BlueRock and AskBio, we are working on a two-pronged approach to treat Parkinson's disease. And for the first time ever, it might be possible to stop and reverse this degenerative disease and truly help patients with their high unmet medical needs.We're very proud to share that BlueRock successfully administered the first dose of its pluripotent stem cell-derived dopaminergic neurons to Parkinson's disease patient in their Phase I clinical study. In parallel, AskBio is driving forward the gene therapy program based on adeno-associated virus, or AAV, that is currently recruiting and evaluating patients in an ongoing Phase Ib clinical study. The start of clinical trials bring us one step further to the potential of a truly breakthrough treatment option to dramatically improve the lives of patients suffering from Parkinson's disease.Last, but not least, we are also strengthening our drug discovery capabilities with the acquisition of Vividion Therapeutics. Vividion is a U.S.-headquartered biopharmaceutical company utilizing novel discovery technologies to unlock high-value, traditionally undruggable targets with precision therapeutics. Vividion's technology is the most advanced in the industry, and it has already proven its applicability preclinically in oncology and immune-related diseases, with potential to expand into other and additional therapeutic areas. We have already diversified our [indiscernible] portfolio with our cell and gene therapy platform and continue to fuel our pipeline with breakthrough innovation by acquiring Vividion. Stefan can provide more background on the acquisition of Vividion Therapeutics later in the Q&A.And with that, let me hand it now over to Wolfgang.

[Wolfgang U. Nickl, CFO & Member of Management Board]

So thank you, Werner, and ladies and gentlemen, also a warm welcome from my end.I will walk you now through our business performance for the second quarter and the first half of the year, followed by our financial outlook for fiscal '21. Please note, when I mention sales development, I'm referring to portfolio and currency adjusted numbers, unless otherwise stated.Our sales grew by 13% to EUR 10.9 billion in the second quarter, with all of our businesses contributing double-digit sales growth. Currency headwinds did, however, impact sales by EUR 524 million. Our EBITDA before special items declined by 11% year-on-year, coming in at EUR 2.6 billion, with an adjusted EBITDA margin of 23.7%. Foreign exchange effects of EUR 153 million weighed substantially on our EBITDA before special items.The year-over-year swing in provisioning for variable compensation had a negative effect of EUR 467 million. I will elaborate more on this shortly. We also had higher cost of goods sold, specifically in Pharma and Crop Science, and invested in product launches, especially in Pharma and Consumer Health.Our core earnings per share in the second quarter came in at EUR 1.61. This is a 1% increase versus the prior year quarter despite a negative foreign exchange effect of EUR 0.10. The improvement in our core financial result from minus EUR 343 million to minus EUR 115 million was a key contributor to our core EPS performance. This was largely the result of valuation benefit for one of our Leaps investments, which went through a very successful IPO during the quarter. Our core tax rate came in at 24.4% for the quarter, up from 23.3% in the prior year quarter. We continue to expect it to be around 23% for the full year, as guided.Earnings per share decreased to minus EUR 1.48, mainly impacted by special items of EUR 3.53 that primarily relate to the adjusted growth glyphosate provision of USD 4.5 billion or EUR 3.8 billion that we discussed last week. In addition, noncash impairment charges in our Crop Science division of net EUR 437 million and the usual adjustment for acquisition-related amortization contributed EUR 1.04 to the decline. The tax effect was a positive EUR 0.56. You can find the bridge from core EPS to reported earnings per share in the appendix of our presentation.Our free cash flow came in at EUR 1.2 billion in the second quarter of 2021. This compares to EUR 1.4 billion in the previous year. A strong underlying cash flow profile was masked by litigation-related settlement payout of about EUR 900 million.In line with our typical quarterly profile, our net financial debt increased by EUR 428 million to EUR 34.4 billion in the second quarter. Strong operational cash generation and currency effects kept the increase to a very modest level and could largely compensate payout of dividends and litigation settlements.Let's look at the first half of the year next, which we believe better reflects our performance after considering seasonality and pandemic-related dynamics. Group sales grew by an impressive 7% to EUR 23 billion. On the earnings side, however, our EBITDA margin -- our EBITDA before special items rather, declined by 8%. The decrease is mainly driven by massive currency headwinds of EUR 490 million and higher provisions for variable compensation of EUR 534 million. This year-over-year swing effect negatively impacted the bottom lines of the businesses and the reconciliation.Given that our performance is linked to growth, margins, core earnings per share and free cash flow, you will recall that we significantly reduced our provision for variable compensation last year as a result of the pandemic-related shortfalls. We already mentioned in February that we would essentially restore our cost profile this year. Now with the good performance in the first half of the year and our improved outlook, we increased the provision. Note that the second quarter is the most effect mainly due to the seasonality of the business.Core earnings per share came in at EUR 4.20 and decreased slightly by 1% due to the effects on EBITDA before special items described above, which were not offset by an improvement of our core financial results by EUR 336 million. The core tax rate for half year 1 came in at 24.3% compared to 24% in the previous year.Our free cash flow in the first half of 2021 fell to minus EUR 2.1 billion and was heavily impacted by net settlement payout of approximately EUR 3.1 billion.I would now like to give you some more color on the performance of our 3 businesses in Q2. Our Crop Science division delivered double-digit sales growth of 11%, driven by all regions. In particular, Latin America and Asia Pacific were up significantly, growing 18% and 12%, respectively, while North America contributed the most on an absolute basis with a 10% growth.Regarding our strategic business entities, herbicides and fungicides were the main growth drivers in the quarter. Sales of our fungicide platform increased by 23%, relating primarily to volume gains of Fox Xpro in Latin America as well as new product launches in North America.Our herbicides segment also continued its growth trajectory and grew by 16%. The segment benefited from higher sales of our XtendiMax herbicide and price increases of Roundup in North America.For insecticides, growth in Latin America and Asia Pacific was insufficient to completely offset the impact of the loss of thiacloprid registration in EMEA.We held our #1 position in weed control in soybeans in North America with our Xtend system and delivered 9% sales growth in our Soybean Seed & Traits segment.Growth in North America was volume-driven, resulting from both higher acres landed and the benefit of excess seed sales. Corn Seed & Traits also displayed sales growth of 9%, with expansions in all regions, most notably in the Americas.On the earnings side, EBITDA before special items declined considerably by 25% to EUR 1 billion despite price increases and volume expansions. Significant negative currency effects of EUR 111 million, a negative sales mix and higher costs most notably in our COGS with increased raw material and freight costs negatively impacted the bottom line.For our Pharma division, sales expanded significantly by 16% to EUR 4.5 billion. Our 2 blockbuster drugs, EYLEA and Xarelto, continued their strong performance. EYLEA sales grew by 27% due to strong demand in Europe after the prior year quarter was heavily burdened by the impact of the COVID-19 pandemic. Xarelto displayed 13% growth, driven mainly by high demand in China and Russia.In the area of elective treatments, we benefited considerably from the recovery from pandemic-related restrictions as COVID-19 heavily impacted our prior year quarter. As a consequence, the IUD franchise grew by 68% and our radiology business by 37%.Due to the annualization of the volume-based procurement impact on Glucobay and Avelox as well as strong growth of Xarelto, sales in China rose by 22%. The successful launch of Nubeqa supported our business performance in the second quarter, as Werner already mentioned earlier.Regarding our bottom line, launch investments, higher COGS, higher incentive rules and the negative currency effect of EUR 26 million were more than offset by strong sales growth, resulting in a 3% increase of our EBITDA before special items.I will close out the divisional update with Consumer Health. Our sales were up significantly by 13%, driven by growth across all regions and categories. In the context of an ongoing volatile market environment, we continue our path of profitable growth by executing our strategy. The Nutritionals category continued its strong growth momentum and grew by 16% due to sustained high demand. Allergy & Cold returned to growth after being impacted heavily by a weak flu season and ongoing COVID-19-related lockdown measures in prior quarters that particularly hurt our cough and cold products.This quarter, however, a strong allergy spring season in North America led to 16% growth for this category. Growth in North America was also supported by the launch of AleveX, where we entered the topical pain treatment segment. Dermatology benefited, amongst others, from line extensions of Bepanthen in the dry skin segment, growing by 6% in the second quarter. All these positive developments underline our well-balanced category and geographical portfolio.In addition, we increased our clean EBITDA margin by 50 basis points to 21.6%, driven by strong sales growth and disciplined cost management, clearly offsetting the impact from launch investments and negative currency effects of EUR 20 million.Let's move on now and look at our guidance for the full year. As we have outlined before, we have seen a strong growth trajectory throughout the first half of the year, with contributions from all 3 of our businesses. We are optimistic that the positive market environment in Crop Science and the good growth momentum for Pharma and Consumer Health are sustained for the remainder of the year. We, therefore, raised our guidance, notwithstanding that the pandemic continues to increase volatility in the markets.Please note that our guidance is based on constant currencies or, in other words, average actual 2020 exchange rate. The outlook at constant currency is shown in the light blue box in the presentation, and the very left column, you can see the full year outlook we gave back in February. Right next to it, you see our updated guidance as of today.We increased our guidance for group sales from previously EUR 42 billion to EUR 43 billion to now approximately EUR 44 billion, with increased growth rates for all businesses. Our EBITDA margin before special items is anticipated to come in slightly lower than guided in February at 26% at constant currencies. For core EPS, we increased our outlook and now expect core EPS in the range of EUR 6.40 to EUR 6.60 at constant currencies. Previously, we had guided to EUR 6.10 and EUR 6 -- or between EUR 6.10 and EUR 6.30. We expect to reach the upper end of the guidance in case the very favorable core financial result is sustained throughout the remainder of the year.We forecast to keep our core tax rate at approximately 23% for the full year. Our free cash flow guidance is raised by EUR 1 billion to between minus EUR 2 billion and minus EUR 3 billion, including anticipated payouts for litigation settlements of approximately EUR 7 billion, which is EUR 1 billion lower than what we had anticipated in February. Consequently, we improved our guidance for net financial debt to approximately EUR 36 billion versus the EUR 36 billion to EUR 37 billion in our February guidance. Let me add that the acquisition of Vividion Therapeutics is not yet considered here.In the gray box on the right, we provide the currency impact for the fiscal year 2021, reflecting currencies at 2021 month-end June spot rates. The last column on the right depicts our guidance at month-end June rates. We now expect a negative currency effect of approximately only EUR 1 billion on our full year net sales, which by and large materialized in the first half of the year. The impact on core EPS is roughly a negative EUR 0.40, which would bring our outlook to between EUR 6 and EUR 6.20 using June month-end spot rates. We have listed the updated guidance for our businesses and other major KPIs in the appendix of our investor deck.And with that, I'll hand the call back to you, Oliver, to start us on the Q&A, please.

[Oliver Maier, Head of Investor Relations]

Thank you, Wolfgang, thank you, Werner, for your comments. Emma, I think we are ready to open the line for the questions now.

[Operator]

[Operator Instructions] The first question comes from Mr. Leuchten.

[Michael Leuchten, Co]

It's Michael Leuchten from UBS. If I could start with the Crop Science division and the lack of margin gearing, please, especially as Q2 was heavily impacted by the STIs, as you outlined.So first question is, can you quantify the inflation pressure on input costs for us? And how will this develop into the second half? And more importantly, how much of this can you recapture if 2022 happens to be a normal year? And related to that, given that 7% top line growth in constant exchange rate does not give you more than 24% EBITDA margin this year, how confident are you that with consensus sitting at 26% margins for 2022 for the division?Then a question about equity ratio. The equity ratio was below 27% in H1. Where does that go from here? And what are the buffers? Is there a level where that ratio becomes a problem for you?And then the third question on Kerendia positioning now that you have approval. I was wondering if you could talk about your launch plans and market segmentation, if you could?

[Werner Baumann]

Right. Michael, thanks. So Liam is going to take question one, followed by Wolfgang on the equity ratio. And then Stefan is going to talk about our launch plans for Kerendia.

[Liam Condon]

Yes. Thanks a lot, Michael. So maybe let me start with your last question towards me on our confidence in the midterm targets, which we had given out as the 27% to 29% EBITDA range in 2024.So I'm very confident about our ability to reach these targets. And I'll try and explain that now by giving you a bit of color on what's happened in Q2 on the margin side and why we're very confident we can achieve our guidance for 2021, but also explain a little bit some of the transitory impacts that are in there that will help give you a better sense for what could be happening then in the future.Now if we break down Q2, the margin impact on Crop Science, that there's, in essence, 3 things happening here. One is FX. So if we just leave out the FX, which has been noted is EUR 111 million, there are 2 big elements to the margin decline. One of them is phasing effects, which I will touch on, and one of them is related to higher costs and product mix.Now about half of it is phasing effects, and about half of it is related to higher costs and product mix. These phasing effects become positive effects in the second half of the year. So I think this first point is very important to understand.Now what these phasing effects are is, in essence, you recall last year, when we had the very special COVID situation, we had very significant seed returns and licensing true-ups in Q3 of 2020. This year, in a much more market -- in a much more vibrant market situation, we've had these true-ups already in Q2. So this, in essence, hits our Q2 result. It helps our Q3 result because we won't be having those true-ups then.Second part is there's a license -- a shift in licensing income which last year, we got in Q2. This year, we will get it in Q3. So the sum of that is, in essence, half of what the margin decline is, this comes back in Q3. So just to flag that to you very, very transparently.The other element -- the other half is a mixed bag of higher costs and product mix. Product mix, we flagged a little bit in the past. We had lost an older corn license expiry, which is a higher margin for us. We lost thiacloprid and neonic in Europe registration, which is a high-margin product. And this simply has a ways to a degree on our margin, but it's a transitory effect, of course, because you take that hit onetime and not on an ongoing base.Then we have the higher costs, which are, in essence, 2 elements. One of them is our short-term incentive, which Wolfgang alluded to, where the swing versus last year and because of last year, a very poor performance; this year, with a much stronger overall performance projected for year-end.And the second one is related to a degree, a reversal of contingency spending. So last year, in the COVID situation, we, of course, clamped on the brakes as many companies did from a spending point of view. We don't go back to what the original spending was. But for sure, we do have some additional investments, both in R&D and on the commercial side, if you think of the fact that we're also launching consistently new products. So there's a bit of a onetime effect there. But again, this is a transitory impact. And the bigger part of those costs have already been incurred in the first half of the year versus the second half of the year.And the third element is COGS, and this is largely material costs and freight. And here as well, I think it's important to understand a lot of our growth in the first half of the year was driven by heavy volumes of particularly herbicides and fungicides. On the seed production side, our production costs are hedged. Our COGS on the crop protection side are simply more impactful. And as we go into the second half of the year, our growth is going to be driven much more by pricing upside, and you will see this across the board.So in essence, what you're going to see is, in the second half of the year, a significantly higher margin than what we had in the second half of last year, and that gives us confidence or a lot of confidence that we can achieve our 24% EBITDA guidance for this year on constant currency base. And because a lot of those effects are transitory, you would expect them going forward to see margin lift. And that's why we're confident that we can achieve our 27% to 29% guidance range.

[Wolfgang U. Nickl, CFO & Member of Management Board]

Okay. I'll continue on the equity ratio, Michael, and thanks for the question. Absolutely right, equity ratio reduced versus Q1 from 29% to 27%. At the year-end, it was, by the way, 26%. In absolute terms, that means from about EUR 4 billion, from EUR 35 million to EUR 31 billion. You can attribute about half of that to the dividend that we paid out. That's obviously coming out of equity. And the other half on the reported loss that's driven by the provision, the incremental provision that we talked about last week.Balance is EUR 31 billion on the balance sheet. I'm not concerned. Even more important than whether I'm concerned or not concerned as well as the rating agencies are concerned. And you can assume that under NDA, of course, we have talked with them about the legal complex and also the exciting acquisition that we announced today. And you have seen Moody's coming out, confirming already. I think they do understand that we are laser-focused on this. We think we are in good shape there. We continue to be absolutely committed to the net financial debt in '24 of EUR 28 billion to EUR 30 billion, and with that, a significant a reduction in leverage. And from that perspective, I'm not concerned, Michael.I think the next one was for Stefan.

[Werner Baumann]

Yes. Stefan, yes.

[Stefan Oelrich]

Yes. Michael, thanks for the question. So first of all, we're super excited about the broad FDA label for Kerendia that was granted following the FDA review, or may I be more precise, priority review of the FDA. The label really recognizes the renal and cardiovascular outcomes in the pivotal FIDELIO-DKD trial. But you were asking specifically to what our entry strategy is here. And let me maybe preface by saying, we're looking at worldwide more than 160 million patients that live with chronic kidney disease and type 2 diabetes. So this is a significant opportunity with an even more significant unmet need. And our mechanism of action is well known to kidney specialists. But so far, they didn't have a medicine that they could prescribe without -- with this indication and because of side effects.So we really think that we have the kidney medicine. The kidney medicine means we have the product that is designed to treat kidney with 5 different indications. Let me just remind you how broad our label is and the indications that come with it. We're indicated to reduce the risk of sustained EGFR decline. We're indicated in end-stage kidney disease -- in -- to prevent cardiovascular death, nonfatal myocardial infarction and hospitalization for heart failure in adult patients with CKD and type 2 diabetes. So an incredibly strong label.If you think about this, we're going to go in initially targeting specifically nephrologists, endocrinologists and a select group of primary care physicians. And to add to that, we have also the FIDELIO data that you've seen top line information on, which is going to be presented at the ESC meeting next month. And the FIDELIO data, really, I think, pooled with the FIGARO data makes our case even stronger.So we really feel very good about this. The launch is ongoing now in the U.S. We should have commercial presence in doctors' offices towards the end of this month, and that's the start that we're looking at.

[Operator]

The next question comes from the line of Mr. Andrews.

[Vincent Stephen Andrews, Managing Director]

Vincent Andrews from Morgan Stanley. Liam, I wonder if you could give us some more detail on the Intacta 2 Xtend launch in South America this fall, and in particular, the price premium, maybe that you've been able to establish over the Intacta 1, and if there's any improvement in your contractual ability to take price in the coming years as needed against foreign exchange or costs or anything else. And then also, how big of a launch do you anticipate? And what -- sort of over what period of time do you think Intacta 2 will be able to replace Intacta 1?

[Werner Baumann]

Liam?

[Liam Condon]

Yes. Thanks a lot, Vincent. So we have all the approvals in place and are in the process now of ramping up for launch. We expect to be on 600,000 acres within Intacta 2 Xtend this season that this is the initial goal in the early phase of launch. But of course, what we're working on is, and the plan is, to shift our Intacta franchise to Intacta 2 Xtend over time. And as you know, on the Intacta franchise, we're on over 85 million acres in Latin America. So there's a tremendous potential in here.We have been able to improve the contractual situation around pricing, which, as you know from the past, was linked only to inflation. So beyond inflation, there was no ability to increase prices. This is being adjusted. And the initial price increase for the launch phase over Intacta is about 5% -- it's a mid- to high single-digit increase, so somewhere between 5% and 8% increase is what's in the initial launch phase now.

[Vincent Stephen Andrews, Managing Director]

Okay. And then if I could just ask you on the U.S. season and how that played out. It would appear from the corn and soy sales numbers that you had strong price realization in corn, which I suspect was more a reduction in promotional spending than changes in list price. But how do we think about that going into next year, where I would assume you're going to have an increase in seed production costs that could be quite sizable? And what is your confidence that you're going to be able to price well in excess of that increase in production costs?

[Liam Condon]

Yes. So on corn, as you know, for last season, everybody had priced ahead of the run-up in commodity prices. And we have the opportunity now in the new season to price again. So we will be issuing our price cards in the next couple of weeks, actually latest by end of August. But within August, we'll be issuing them. You can expect a significant price increase. This is corn U.S. I'm talking about.And on the corn production side, we're actually hedged to a large degree. And our goal is always anyway from a pricing point of view, whatever increases that are going to be in cost of goods that we pass this on to the market. This is just a basic philosophy that we have and that we're pretty rigorous on implementing. But you can expect to see a significant price increase going forward.

[Operator]

The next question comes from Mr. Jackson.

[Joel Jackson, Director of Fertilizer Research & Analyst]

Joel Jackson, BMO. I want to talk a little bit about crop protection pricing and as it relates to some of the -- trying to pass through the higher costs you're seeing, so higher inflation. Is it easier -- has it been easier to pass through the cost on the lower-margin, lower-priced products like glyphosate? Are you finding on the higher-priced technologies in your crop protection portfolio that it is a more competitive dynamic, and it's harder to pass the cost inflation of -- with higher pricing?

[Liam Condon]

Yes. Let me try and give a bit of color on this on the CP pricing, and it's, of course, as you know, very different by region. Actually, across the board, we would be expecting to be passing on, again, increases in COGS. We need to pass it on to the market. The issue is, of course, you have a time lag between when we purchase materials, go through the whole production process and product inventory. And then by the time it's sold, there is this inherent time lag that we simply need to deal with versus something like freight as well, which is immediately visible for us.But overall, we've actually seen very strong prices -- price increases for glyphosate because you mentioned that specifically. Our pricing for glyphosate is intricately linked to the price of acid in China as kind of the basic raw materials for glyphosate. And because of shortage of supply in China, this price has gone up significantly. And with that, our market price has also gone up significantly for glyphosate. And we're very flexible in pricing here. If the market price moves, our price moves. And we adjust pretty, pretty regularly. We've actually had multiple price increases already this season, and we expect more to come even in the second half of the year.In Latin America, as you know, it's a little bit of a different situation because we have to price in local currency. But we try and tie this as tightly as possible to U.S. dollar currency movements. And also here, we usually have multiple price increases throughout the season. And as an example, now starting into the Lat Am season, you could expect to be seeing local price increases high single digit is what I would be expecting on the CP portfolio.So overall, again, we should be compensating for any COGS increases as we go through the year. There might be a bit of a time lag given the nature of crop protection. But we've -- so far, we've been able to pass on -- I think we're -- you'll see more of the pricing effect kicking in, in the second half of the year, simply again due to that time lag.

[Joel Jackson, Director of Fertilizer Research & Analyst]

Okay. And finally, are you expecting any more headwinds in the second half of the year from loss registrations?

[Liam Condon]

No, no. The big one this year was thiacloprid, which we flagged last year as well because we knew that was coming. Beyond that, there's nothing that I would flag for the second half of this year that's really relevant. And most of the sales of thiacloprid are in the first half of the year, not the second half.

[Operator]

The next question is from the line of Ms. Walton.

[Jo Walton, Managing Director]

Jo Walton from Crédit Suisse. To start on the crop side, can I just clarify, you've gone from an underlying expectation of 2% sales growth to now 7% sales growth. Is the vast majority of that increase to do with price? Is there anything to do with increased volume or background improvement?And if we think about that big price improvement, is that just because everyone is able to get a price uplift? Or is this somewhere where you are getting it from a competitive point of view?And on the Pharma side, again, looking at the uplift in sales guidance from 4% to 6% in local currency, what proportion of that is COVID-related disruption coming back perhaps faster than you'd anticipated with very strong performance in the hospital imaging side of things? I don't know how sustainable, whether that's just a massive catch-up that won't keep going in the future?And if you could also give us an update on the rollout of Nubeqa beyond Germany, how that's doing? And you've said in the past that you would expect Nubeqa to meet -- breach your top 15 drugs by the end of this year. Is that the same for finerenone?

[Liam Condon]

Okay. Thanks a lot, Jo. Let me start with the first question. So as you know, the first half of our year is where we do the main -- the bulk of sales and actually pull in the bulk of EBITDA in the Crop Science business. And the first half of the year was roughly 6% volume increase and 2% price increase.This changes as we go through the second half of the year, where you'll see significantly more price increase versus volume. How that then nets out at the end of the year, we'll see. But what you can see is that over time, the pricing impact is kicking in more and more at the back end.Those price increases are clearly coming from the fact that we have a buoyant market situation with high corn and soybean commodity prices. And we always have to price competitively. But reality is in almost every market with our portfolio, we tend to be the price leader. So we always price -- we always try and aim for a premium price. And if we lift up the prices, it often happens that others will follow as well. So this is something where I think we've had a good -- overall, we've had a good experience in the market that price increases do not necessarily lead to market share loss on our side, and market share is really dependent on -- in market performance of the products.And here, I think across the board on corn, I think we've gained a bit of -- we'll only know at the end of the season, but it looks like we've gained a bit of market share. Soybeans, we're doing better than we had originally expected given the highly competitive situation in North America. And clearly, in crop protection, we believe we're gaining market share. So despite the fact that we have high-end pricing and our increasing prices, I believe we still have room for share increases as well.

[Stefan Oelrich]

Yes. Jo, so your question on performance versus -- catch-up versus real performance. So there's obviously a mix of both. And there's -- I would say, also in the second half, we're going to see a little bit of that catch-up still. But when I look at the underlying performance, some of the things that I had been talking about also to all of you over the last year that we were well in the pandemic lacking elective treatments, we were increasing the market share, especially on EYLEA, but also on some of our women's health care business in the U.S. This is now coming to full fruition, as demand is strong again and the market share is coming through, and we're seeing this translate into growth. So some of this is performance.Let me also remind you that when we guided for the year -- when we've guided for the 4%, all the catch-up was already included in the guidance. So that was included before.What also plays a significant difference is that we saw VBP for Xarelto China come in maybe a little later than we would have expected, and that gives us also a little bit of a lift for the remainder of the year.Now as to the rollout of Nubeqa, we had said last time when we spoke that this will make it to the top 15 by the end of the year. We stand by that. So just for -- to repeat, top 15 is somewhere in the range of EUR 200 million to EUR 250 million probably. But just to give you an indication, we're seeing really strong demand for Nubeqa in the second quarter despite the pandemic. Across the board, we saw really strong reimbursement now in Germany, better than expected. So this is going well.And to finerenone, I wish I could tell you, but this is a little early to place us in the top 15 this year because we're only coming out of the gate basically in September. But -- well, I'm sure you will ask me a lot of questions on finerenone because you will have good visibility on demand with prescription data in the U.S.

[Operator]

The next question comes from Mr. Quigley.

[James Patrick Quigley, Equity Analyst]

It's James Quigley from Morgan Stanley. I've got 2, please -- or 2.5. So on the Vividion acquisition, can you give us a bit more details on this? So how it fits into the Bayer discovery platform? What will be the impact on R&D costs on an annualized basis and the margin drag from that? And what is about the platform that gives you confidence that it will be -- or it will significantly improve your drug discovery capabilities?Then for eliapixant in the chronic cough indication, where do you think this will be differentiated versus Merck & Co.'s gefapixant? How are you planning on designing the Phase III trials? And are you sort of considering any patient selection within those trials? And in terms of the read across from the Phase II that you reported yesterday or gave a top line yesterday to the other indications, is there any? Or is it just more of a safety read across rather than anything else?And then third one on Kerendia. What is the contracting situation like here and then the reimbursement profile? Or what are you expecting from a reimbursement profile in the U.S. or sort of the trend of reimbursement? I think it was $19 a day price, which is obviously significantly more than the SGLT2s. How would that impact sales uptake?

[Stefan Oelrich]

Okay. Thanks, James. So maybe first about Vividion, I think with this acquisition, we're really consistently executing against our innovation vision and creating true value through breakthrough. To us, Vividion is really unique and, at the same time, a world-leading platform to address biological targets that no one else has been able to address. So it's 90% of all known disease-causing and modifying proteins that we can now address that before couldn't be addressed. Or I could also say it differently, we're getting from the druggable now into the undruggable space, which is, I think, an incredible leap.For us, it's the perfect combination. Our expertise in chemistry but also drug development, combined with Vividion, should be able to really capture the full potential of this groundbreaking technology. You've seen their licensing deals that were, I think, very noteworthy given the milestones that were attached to that they've done before, how well this technology is seen also by some of our competitors. So it's -- I think it's a great leap forward.In terms of costs, we intend to absorb that cost within our overall R&D expense. So don't count for that as an additional burden to our profile.So coming to eliapixant, I can't tell you how pleased I am with the results of this. But at the same time, I can't tell you what it is exactly because we're waiting for the publication of the full data at an upcoming meeting. But I can guarantee you'll be as pleased as I will be, as I am now when you see it.So in terms of differentiation to Merck, you've seen good efficacy with Merck. You've seen somewhat mixed side effect profile that they have. So stay tuned, but I think it's going to be a good surprise.And on the entry for finerenone, in terms of pricing and reimbursement, of course, we're right now working with the different commercial payers as a priority in the U.S. to gain lives here. I think we have a very favorable price profile because I think you're looking at this potentially the wrong way. You shouldn't necessarily compare us to SGLT2 as a price anchor because this is not a diabetes drug.So we feel strong that we're actually priced right. And we will have hopefully then also, too early to say, reasonable commercial conditions that allow for not just a good uptick in prescriptions but also to capture the value that we think lies in our medicine.

[Operator]

The next question comes from the line of Mr. Jones.

[Tony Jones, Partner of Chemicals Research]

Tony Jones from Redburn in London. I've got 3 quick ones. On Slide 21, the pipeline, it shows that you've got SmartStax PRO moving into launch mode for next year. Could you tell us a little bit about what the price premium might be and maybe early stage estimates on acreage? On litigation, when are you expecting the decision on the Supreme Court accepting the preemption case? Or maybe a little bit of a range, that would be really helpful.And then circling back to seeds. You say that you're hedged. That seems quite Bayer-specific. So could you explain what the mechanics are there, please, and how that works?

[Liam Condon]

Yes. Thanks, Tony. Let me start. SmartStax PRO, we're launching next year. So we'd actually be guiding for that at the beginning of the year, how we see that from a pricing point of view. What you can, of course, expect is that it will be a pricing premium over SmartStax. And what we're seeing and what we're hearing a lot as well this year in the U.S. in comparison to the last few years is that there is more corn rootworm pressure. So we hope that this is coming into a positive market environment where we can get significant penetration. But I would suggest that we update you then at the beginning when we give our guidance for '22 about the outlook specifically for that product litigation.

[Werner Baumann]

Maybe you could do also the seeds hedging.

[Liam Condon]

Yes. So I don't know, Wolfgang, if you want to take how -- the mechanics of how we do our hedging. But our basic philosophy is from a production point of view, this is not something that we want to be burning money off. We just want to make sure that we don't make any losses. So we basically, in essence, hedge our soybean and our corn production to ensure that there is no -- not overly any kind of volatility in there.

[Wolfgang U. Nickl, CFO & Member of Management Board]

Nothing much to add. Exactly the reason why we do that.

[Werner Baumann]

Okay. So -- and we use then a derivative to do that. So Tony, on your last question, we are going to file our writ for the petition to the Supreme Court on August 23, yes? So you're just about a fortnight from now. And the Supreme Court could then virtually any day accept it, yes? But normally, it takes quite a number of [ months ]. So we would think that around the turn of the year, yes, end of 2021, early 2022, by then for sure, the Supreme Court will have taken a decision on whether to take the case or not, but it could also be earlier.

[Operator]

The next question comes from the line of Mr. Faitz.

[Christian Faitz, Equity Analyst]

Thank you for taking my 2 questions, please. First of all, a question for Liam, again, coming back to the production costs. Sorry for that. I appreciate your seed production costs are hedged for this year on the seed side. How would that look next year? And how much more expensive would that hedge be, given the rise in crop commodity prices?And then the second question is on the current heat drought wave in the Western U.S. Is that a concern for you? Are demand patterns affected in any way, let's say, sprays in the Northwestern U.S. or veggies season in California?

[Liam Condon]

Yes. Thanks, Christian. So next year for the production costs, I mean, if commodity prices, and as you know, it's all a factor of where commodity prices are, we could expect some higher hedging costs. But again, this will completely depend on where the overall commodity price is. Given the peaks that they're at right now, it's kind of hard to imagine that this would go significantly higher. So I think we should be okay on that front. Just acoustically, I didn't really get the second. You meant the drought in California, whether that's impacting the veggies business?

[Christian Faitz, Equity Analyst]

Yes, I mean, the veggies but also spraying in the Northwestern U.S. I mean, the Northwestern U.S. is quite heavily affected. Is there any stockpiling effect in sprays, which hadn't been applied, things like that?

[Liam Condon]

Yes. So I mean, for affected farmers, this, of course, is a disastrous situation. We've also had pretty freaky weather incidents in other parts of the world as well.On our business, right now, we're not seeing any material impact. Our vegetables, and particularly our fruit and vegetables business, is pretty specialized. And there's also a lot of indoor business for us. So we're not seeing anything that would be overly concerned of right now. But it does -- of course, for affected farmers, it's a big issue.On stocks in the channel in North America, and a specific example, we're not noticing any elevated levels of stocks because of, for example, [ mist sprays ]. I think the only issue really is rather much further north, in Canada and the ongoing drought there that, that probably, from a fungicide point of view, is leading to some increased inventories in the channel. But by and large, it's not something that right now I would be somehow materially worried about it.

[Oliver Maier, Head of Investor Relations]

Emma, I think we have time for 1 or 2 more questions. I'm time conscious.

[Operator]

You have the last question from the line of Mr. Parekh.

[Keyur Parekh, Equity Analyst]

I have 3, please. The first one for Liam. Liam, you very eloquently explained kind of the margin on the crop side and the variances kind of between quarters. But my question is slightly different. You've gone from 2% top line growth on crop at the start of this year to 7% top line growth. And there are very few businesses where your growth more than doubled, and margin expectations remained flat. I understand there are some things about this particular year that may be a question, but how does -- how do you not drive greater margins when crop is growing 7%? And longer term, does this mean that 24%, 25% is now peak margins for this business, and we need to start thinking about volatility more on the revenue line? So that's question number one.Question number two is, if I read the disclosures currently, your total employee compensation for the half is up 21% year-over-year. Your stock price is down 30% compared to the peer group over the last 12 months. So one, just keen on your thoughts of how do you think about kind of the various stakeholders in your business and whether margins should flow through to your shareholders or to your employees?And then lastly, the call last week, Werner, you spoke about kind of trying to rebuild trust in the intrinsic kind of fundamental value of Bayer. At least 6 out of the last 12 quarters, there have been some form of a disappointment relative to Street expectations. What are we getting wrong on a quarterly basis? What can Bayer do to help us avoid those mistakes going forward?

[Liam Condon]

Yes. Thanks a lot, Keyur. Let me start with the first one, and then I'll try not to repeat the -- some of the explanations I gave earlier. But on your, I think, high-level question is like 24% or 24%, 25%, is that peak margin? Clearly, I do not think that is the case. We had said going into this year, we viewed it as a transitional year. And we gave out a certain guidance on the bottom line. We knew there would be some transitional impacts, some transitory impacts that particularly hit us in the first half of the year that ease up in the second half of the year, and that, by and large, are not present in next year.And if you think of the situation then going into next year, where we should be benefiting from some of the price increases that are coming through in the second half of this year and the efficiency measures, if we don't have the transitory increase in costs to the degree we had this year, you should be expecting margin accretion. And that's what I would be expecting, and that's why we're completely sticking to our midterm guidance of 27% to 29%.

[Werner Baumann]

Yes. Let me take the other 2 questions, Keyur. So first of all, on your first question, our employee compensation, as you rightfully point out, is up 21%, yes? That's in a way a little bit a technicality and an [ odd effect ] in the quarter because we do have quite a bit of volatility based on our quarter 2 last year, with a significant baseline effect, we are rather then kind of putting up provisions for a normal year bonus program in light of the massive COVID impact was already visible that both with COVID and FX, we would be by and large out of the money, yes, at least in 2 of our businesses.And that led to actually a reverse or a reverse of accruals into earnings versus this year, where we see based on where we started the year, actually, quite frankly, improving momentum. And we see that across the board. Top line, we see it bottom line. We will, for sure, see some further momentum -- positive momentum going into 2022. And based on that, you see that year-over-year swing factor kind of overexpressed, which doesn't have any bearing on a full year employee or, let's say, a payroll structure that you would see by the end of the year.Secondly, in terms of rebuilding trust, this is not about the receiver. This is about the sender. Obviously, we don't get it right. Last week, we wanted to make sure that you get full transparency on where we are going to take the litigation, what the option space is that we provide for the, let's say, less favorable outcome in our balance sheet so that you have full transparency. And we kind of try to do the same today with our quarter and frame the quarter with some of the effects that have been weighing on the quarter, while at the same time, providing you, I think, with little more relevant, a full perspective and full confirmation of where the year is going. But obviously, we have to do better, yes? So I fully take that point.

[Oliver Maier, Head of Investor Relations]

Okay. Emma?

[Operator]

Mr. Maier, there are no further questions at this time.

[Oliver Maier, Head of Investor Relations]

Okay. Great. Thank you very much, Emma. Thanks to all of you for your time and your attention today. It's greatly appreciated. And this closes our call. Talk to you soon. Thank you.

[Operator]

Ladies and gentlemen, this concludes the Second Quarter 2021 Investor and Analyst Conference Call of Bayer AG. Thank you for participating. You may now disconnect.