Merck KGaA

XETRA:MRK

Earnings Call Transcript 2021-Q2

[Operator]

Dear, ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on Second Quarter for 2021. [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.

[Constantin Fest, Head of Investor Relations]

Yes, ladies and gentlemen, a very, very warm welcome from my side. My name is Constantin Fest. I'm Head of Investor Relations, and a warm welcome to this Q2 2021 Earnings Release Call. For the presentation as well as for the Q&A part of this call. We have here today with us, Belen Garijo, CEO of the group; as well as Marcus Kuhnert, CFO of the group. For the Q&A part, we also have with us here today Peter Guenter, CEO of Healthcare; as well as Matthias Heinzel, CEO of Life Science; and Kai Beckmann, CEO of Electronics. One housekeeping item for the Q&A, if I may. Please be aware that we have room for 2 questions and also kindly refrain from multipart questions. This helps maximizing the amount of different perspectives that we have on the Q&A. And with this, and without any further delay, I'd like to hand over to Belen to kick off this presentation.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thanks Constantin. A warm welcome, everyone, to our Q2 earnings call. I am now on Slide 5 of the presentation, starting with the highlights. Needless to say, Q2 was very strong and even ahead of our own expectations. Starting by the group, our group sales increased by 23% and EBITDA pre rose by 52%, taking into account the significant currency headwinds, reported sales and EBITDA pre came in at EUR 4.9 billion and EUR 1.6 billion, respectively. Of course, the comparison wasn't that difficult because we had a soft quarter last year. Q2 last year, you will remember, was the quarter where we felt the biggest impact from the lockdowns, as you may remember. However, let me emphasize that underlying performance in the quarter has been extremely robust, and that we continue to successfully capitalize on business opportunities around the fight against COVID-19, especially in our Life Science business sector. Against this background and an improved outlook for the remainder of the year, we are raising our 2021 guidance once again. In particular, we now expect net sales in a range of EUR 18.8 billion to EUR 19.7 billion and an EBITDA pre in a range of EUR 5.6 billion to EUR 6 billion and EPS pre in a range of EUR 7.80 to EUR 8.50, which represents 70% increase in EPS versus the same quarter of last year. More details on our assumptions will come later. So let's go straight to Slide #6 for some additional color on our strong Q2 performance. In absolute terms, group sales increased by almost EUR 1 billion year-on-year organically, clearly an outstanding achievement in which I would like to reflect a little bit further. Slightly more than half of the growth due to mergers from the Big 3, namely Process Solutions; the Healthcare Pipeline; and Semiconductor Solutions. As you know, these businesses are a key strategic focus for us, and we believe Q2 is just another case in point for the tremendous potential. Process Solutions alone delivered about EUR 300 million incremental sales driven by robust performance of the core business as well as significant contributions for COVID -- from COVID-related sales. Bioprocessing continues to be the main growth engine in Process Solutions. However, let me also highlight that our differentiated product offering for novel modalities, including mRNA is gaining traction and importance as an emerging growth driver for our Life Science sector. Turning to the Healthcare pipeline, sales have more than doubled year-on-year, adding about EUR 100 million in total. Behind this, the strong growth of Mavenclad with promising initial signs of a dynamic MS market recovery and significant uptake of Bavencio on the back of the successful ongoing launches in urothelial cancer first line across the U.S., Europe and Japan. Semiconductor Solutions also had a very robust performance with organic growth accelerating to 12% in relation to pricing demand of our advanced materials business and a more normal pacing in our project business in DS&S.Besides the major contribution of the Big 3, we have seen an overall recovery of most other businesses, those which were heavily impacted by the first wave of lockdowns last year, in particular, fertility, research solutions and applied solution with activity across all of them at or very close to pre-pandemic levels. Moving on to Slide #7. Here you have an overview by business sector. All 3 business sectors delivered double-digit organic sales growth, which clearly illustrates the strength of our globally diversified portfolio. Life Science was the star performer with organic growth of sales of 28%, closely followed by Healthcare with deliverable strong 23% and electronics with a robust 10%. Currency headwinds were slightly less pronounced when compared with Q1, yet significant at around minus 5% on both group revenues and EBITDA pre.Looking at the business sectors in more detail and starting with Life Science, please note that record organic growth was broad-based with a strong performance in the core business and significant contributions from COVID. So growth came from both parts of the business, almost equally. In fact, we saw double-digit organic growth across all business units, customer segments and major regions. Looking at the portfolio of Life Science, Process Solutions continues to stand out with organic sales growth of 34%. However, Research and Applied also came in strongly. Moving into Healthcare. We have seen a major recovery of the base business, and that despite the well-anticipated [ VBP ] impacts in China and considerable year-on-year growth in new products, our new launches, Mavenclad, Bavencio and Tepotinib. Highlights included tripling of the Bavencio sales, a doubling of the Mavenclad sales and almost a doubling of the fertility business, cumulating -- explaining about 90% of the growth of the Healthcare sector in Q2. In Electronics, Sales growth was primarily driven by strong performance in Semiconductor Solutions, which is up 12% organically, while this play was broadly stable and surface rebounded significantly in relation to the improvement of our end markets, mainly automotive. Regarding earnings, as mentioned before, group EBITDA pre came in at EUR 1.6 billion, up 52% organically. And therefore, [indiscernible] growing at more than twice the rate of sales. In other words, the margin expanded by over 6 percentage points to 32.4%, mainly in relation of 2 strong operating leverage, favorable productive mix, especially in Life Science and Healthcare and an ongoing and continued focus on cost across the company. I am now on Slide #8 for a few comments on our Q2 performance by regions. All major regions, so double-digit growth, as you see on the slide, organically, supported by all 3 business sectors in line with the phasing of the lockdowns last year, growth in Q2 has been led by North America, followed by Europe and Asia Pacific for Q2 last year was already showing signs of recovery, mainly in China. Overall, our footprint remains nicely balanced with Asia Pacific, bringing 35% of our group sales. Europe around 29% and North America 28%. And with this, let me hand it over the floor to Marcus to deep dive on our financial performance of Q2.

[Marcus Kuhnert, CFO & Member of Executive Board]

Thanks, Belen, and a warm welcome also from my side. I'm now on Slide 10 of the presentation for an overview of our key figures for the second quarter. Overall, we are very pleased with our performance in Q2, building significant momentum against, however, [ soft costs ]. On a reported basis, that means including FX headwinds, group net sales increased by 18.2% to EUR 4.87 billion, EBITDA pre rose 46.7% to EUR 1.58 billion, and given a better financial result and lower tax rate, EPS pre soared by 72.3% to EUR 2.24. Operating cash flow was also very strong, up 76.9% to EUR 888 million, reflecting a sharp increase in earnings paired with sound working capital management. Hence, despite higher CapEx and the dividend payout, net debt remained broadly stable compared with the end of Q1, while net debt-to-EBITDA pre improved further from 1.8x to 1.7x. Let's have a closer look now at our reported earnings figures on Slide #11. While EBITDA pre rose by EUR 502 million year-on-year, the increase in EBIT was even more pronounced at EUR 558 million. Key drivers behind this difference include higher impairments last year, mainly related to intellectual property acquired through the AZ acquisition, partly offset by higher adjustments this year, including a mid-double-digit million Euro litigation provision. The financial result improved moderately, as higher hedging costs were more than offset by positive effects from de-leveraging, resulting in significantly lower interest expense. The effective tax rate came in at 21.8%, which is at the lower end of the new guidance range we introduced in May to reflect an improved country mix. Consequently, reported net income totaled EUR 745 million in Q2 and reported earnings per share increased by 155% to EUR 1.71. And with this, let's move on to a more detailed review by business sectors, starting with Healthcare on Slide #12. Overall, Healthcare had an excellent Q2 with 15% organic sales growth in the base business and sales of new products more than doubling year-on-year, resulting in a plus of EUR 150 million versus Q2 2020. By franchise, Fertility clearly stood out with sales up 88% organically, driven by continued strong demand and recovery across all regions. In this context, please keep in mind that the comparison base was significantly impacted by the temporary closure of Fertility clinics amidst the first wave of lockdowns last year. Oncology also showed remarkable growth with sales up 49% organically. This was driven by continued strong launch momentum of Bavencio in first-line urothelial cancer with sales tripling year-on-year and very strong growth of 36% of Erbitux. As flagged to you on our last earnings call, Erbitux sales were boosted by the temporary supply agreement with Eli Lilly. In fact, we booked EUR 49 million in Q2 and expect the remaining around about EUR 10 million in the third quarter. Our M&A franchise returned to growth in Q2 with sales up 15% organically as 9% decline of Rebif was more than offset by a doubling of Mavenclad against easy comparables. Last but not least, [indiscernible] showed a very solid performance with sales up 1% organically despite the volume-based procurement impacts on Glucophage and Concor.Before moving on to earnings, a couple of words on pipeline highlights. Starting with oncology. The collaboration with Debiopharm is fully on track, and we are excited about the initiation of the Phase III study of xevinapant ineligible head and neck cancer towards the end of this year. As for the MS franchise, our approved Phase III evobrutinib studies continue to recruit very nicely without any COVID related delays. Regarding earnings, EBITDA pre surged [ 17% ] organically, with the margin up 750 basis points at 32.5%, mainly due to operating leverage. On other words, fixed costs under absorption last year. In addition, we saw efficiency gains and about EUR 20 million more in nonrecurring income compared with Q2 last year. This EUR 20 million more of nonrecurring income basically consists of an acceleration of the deferred income from GSK of around about EUR 10 million. And the other EUR 10 million contributed from out-licensing. So we outlicensed [ sonilokimab ] and a very small milestone payment in the mid-single digit [ million Euro ] amount. Please also note that our full year guidance for nonrecurring income remained broadly unchanged overall. As a reminder in H1, we recorded around EUR 120 million comprising around EUR 50 million in Bavencio milestones, around EUR 50 million deferred income from GSK and some EUR 20 million from active portfolio management. For H2, we see consequently limited scope for incremental income from active portfolio management and expect another roughly EUR 50 million deferred income from GSK. The letter should be about equally distributed over Q3 and Q4. And as always, can vary depending on [ trial dynamics ].With that, let's now take a closer look at Life Science on Slide 13. You heard it before, Life Science delivered another record quarter with very strong organic sales growth of 28.2%. In this context, the core business continued its robust performance with growth of about 15% and COVID-related sales contributed the remaining 13% to growth. From a portfolio perspective, Process Solutions remains the main growth engine, with sales up 34% organically. As such, growth moderated slightly compared with Q1. However, that was no surprise. And rising comps, while continued sequential uptake in sales clearly speaks to ongoing productivity gains and the successful ramp up of digital capacities. Furthermore, order intake remained very robust with growth of over 60% again. Research and Applied Solutions both accelerated further with strong organic sales increases of 31% and 13%, respectively. Please note that in contrast to Process Solutions, the comparison base in both businesses, especially in research, was still easy as the initial wave of lockdowns last year resulted in significantly reduced lab activity. Since then, however, lab activity has continuously recovered and is now broadly back at or close to precrisis levels. That said, COVID-related tailwinds have increased further in Process and started moderating in Research as expected, while Applied remains largely unaffected. In terms of customer segments, we saw double-digit organic growth across the board with a strong rebound in academia, whereas pharma and biotech remained by far the largest contributors to growth. Geographically, we also saw a double-digit organic growth in all major regions. This was led by North America and closely followed by Europe and Asia Pacific, so pretty consistent with what was to be expected from a comps perspective or the phasing of lockdowns last year. In regards to earnings, EBITDA pre surged 50% organically, so very similar to Q1, with the margin still at an elevated level of 37.3%, up 580 basis points year-on-year. And as in previous quarters, this was driven by a combination of strong operating leverage, favorable product mix and positive pricing. Moving on to Electronics on Slide 14. Here, sales increased 10.3% organically, indicating significant acceleration compared with the situation in Q1. In fact, momentum improved across all 3 business units, with semiconductor solutions picking up nicely, Surface Solutions seeing a strong recovery and display solutions reporting broadly stable sales organically. Taking a closer look at Semiconductor Solutions, our main growth engine of electronics, you will recall a rather slow start to the year, which was mainly due to the project phasing in its DS&S business. This has reversed in Q2, and we expect additional project contributions in the second half of the year. Meanwhile, strong growth in the Materials business continued, thanks to higher volumes and new business wins. As such, overall organic sales growth for Semiconductor Solutions came in at a strong 12%, well above our midterm guidance of mid- to high single digits. Sales in Display Solutions were down 1% organically, albeit against the comparison base that was significantly impacted by the pandemic. So for this quarter, ongoing declines in liquid crystals were almost fully compensated by growth in the remainder of the portfolio, in particular, the strong performance of OLED materials. Last but not least, in Surface Solution, we surged 41% organically. Here, comps were also soft and the recovery is now materializing in all end markets. In terms of earnings, EBITDA pre increased 14% organically to EUR 258 million, which corresponds to a margin of 30.1%. The plus 80 basis points increase in the margin was supported by sales growth, ongoing realization of [indiscernible] synergies and further diligent cost management backed by the Bright Future program. I move on to Slide 15 for a few remarks on our balance sheet as per end of June. As you can see, a modest expansion compared with the end, which is mainly due to FX effects and strong growth of the business. Cash and cash equivalents are up significantly supported by the strong operating cash flow. Net working capital is also higher, but has increased at a lower rate than sales. And financial debt is lower due to net repayments. As a result, our equity ratio increased from 41% to 45% in the first 6 months of the year, while net debt-to-EBITDA pre improved from 2.3x now to 1.7x. Over to Slide 16 for some additional color on cash flows. As we already mentioned, operating cash flow was very strong with growth of 77% year-on-year to EUR 888 million. Key drivers behind this positive development were the significant increase in earnings, supported by all 3 business sectors, paired with sound working capital management. Cash out for investing activities increased on higher CapEx, in line with ongoing capacity expansions to support the strong growth of key businesses. And finally, the difference in financing cash flow compared with Q2 last year can be explained by significant net repayment of bonds, bank liabilities and commercial paper. And with that, let me hand back to Belen for the outlook.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Thank you, Marcus. I am now on Slide #18. In nutshell, our Q2 results have been very strong. And yes, in some instances, growth rates were, obviously, helped by a soft comparison base. However, the underlying performance of all businesses was very robust across the board and even exceeded our own expectations. We appreciate that uncertainty remains higher in the context of the pandemic. Yes, we look ahead with increasing confidence and raise our 2021 guidance accordingly. In particular, we now expect the group net sales in a range of EUR 18.8 billion to EUR 19.7 billion and EBITDA pre in a range of EUR 5.6 billion to EUR 6 billion with an EPS pre in a range of EUR 7.80 to EUR 8.50. At the midpoint, this corresponds to an increase of 1% to 2% on sales, and importantly, 3% to 4% on earnings. Please note that this uplift is purely organic. That means our assumption for currency headwinds of 2% to 4% on both revenues and EBITDA pre remains absolutely unchanged. In other words, we are now expecting our group organic sales growth of 12% to 14%, and organic EBITDA pre growth adjusted for the Biogen provision reversal of 21% to 25%. On Slide #19, you have our updated assumptions by business sector. Overall, we have become slightly more optimistic on earnings in health care and electronics, while the main source of our guidance upgrade is life science. Please also note that the life science upgrade is about equally driven by an improved outlook of the base business as well as the COVID-related tailwinds. As you know, we are and will continue to be contributing very significantly to the fight against COVID-19 with our life science business. In particular, we are providing critical products and services urgently needed for the development and manufacturing of COVID-19 vaccines, therapies and diagnostics. On the other side, the pandemic has ramifications for our business that go above and beyond Life Science. And while the overall situation remains very dynamic and forecasting is a challenge, we thought it would be helpful to share some early thoughts around important developments beyond the current year. And this is what I will show on the next chart, Slide #20. Starting with Healthcare, you will have seen from our release this morning that we have updated our '22 pipeline sales ambition from around $2 billion to around $1.6 billion to $1.8 billion. The main driver behind is a phasing effect, namely the delayed ramp-up of Mavenclad due to the significant pandemic related impact on the dynamic MS market and the heavy disruption that we have seen from lockdowns in Q2 last year. Accordingly, and this is very, very important, our view on Mavenclad peak sales of EUR 1 billion to EUR 1.4 billion hasn't changed. We have now observed positive early signals of a dynamic market recovery, the high efficacy dynamic market recovery in the past couple of weeks, and we are expecting this to continue. Additionally, we remain focused on driving patient uptake through our different programs and execution excellence including capitalizing on Mavenclad differentiated COVID vaccine data that we have discussed with you before. In addition to Mavenclad, the launches of Bavencio and TEPMETKO are well on track, and we have robust plans in place to drive share and penetration further. To sum it up, we are very confident in achieving the floor of the neo pipeline sales range for 2022 with room for an upside if the market conditions, particularly the high efficacy dynamic market continued to improve. Turning to Electronics. The story is very simple. Our confidence in the outlook has further increased. We have slightly upgraded the 2021 guidance, as mentioned earlier and encouraging market signals for semiconductor solutions, such as increasing capacity investment of our customers support our thesis that the COVID-19 pandemic has accelerated the digital transformation with positive implications for our business in 2022 ambition. Finally, coming back to Life Science, we have turned more optimistic on COVID-related sales, not only for 2021, but also for next year. In particular, we now expect at least EUR 1 billion of COVID-related sales in 2021. Within this, at least EUR 900 million will come from Process Solutions and balance is research solutions. For research, where our exposure is mainly the raw materials for diagnostic testing, we confirm our expectation for weaker demand in H2 compared with H1 and into next year. So very consistent with what you have already heard elsewhere. For Process Solutions, with market products and services, as you know, primarily for the development and manufacturing of vaccines and therapies, we expect COVID-related sales in the second half of 2021, slightly above H1, while we have increased the floor for next year from at least EUR 500 million to at least EUR 700 million. And with this, I want to thank you for your attention, and we are all standing ready to take your questions.

[Constantin Fest, Head of Investor Relations]

Ryan, if we could have the first question, please. And as a reminder, as I mentioned earlier, please we have be aware that we have room for 2 questions and also kindly refrain from multipart questions. Again, this helps us maximizing the amount of different perspectives we can get on this Q&A. Thank you. And with this, Ryan, first question, please.

[Operator]

[Operator Instructions] Our first question comes from Matthew Weston from Credit Suisse.

[Matthew Weston, Managing Director and Co]

Two questions, please. The first, I think, for Matthias about underlying growth in Life Science. So Belen, you very kindly set out the COVID implications and your expectations for the COVID floor in '22. I will be very interested to understand how your underlying capacity has increased over the course of this year. We know that you've been investing a lot, I'm just trying to understand how much extra capacity you'll have next year versus this year, so we can understand how much the underlying business could also grow in the future. And then the second question, I know you've got a lot more interesting and dynamic products, but I'm very interested in the VBP impact that you've had or the lack of it. I just want to really make sure that there isn't a mix of COVID recovery for Glucophage and Concor, which means we're going to see the [ VBP IV ] decline next year? Or are you confident that the stable base that we've seen is really a sustainable level for that legacy franchise?

[Matthias J. Heinzel]

Yes. Matthew, Matthias here. In order to answer your question, let me start by '21, about 50% of our growth comes from the base business. And that reflects [ albeit ] kind of an increase in capacity ramp-up, which we have planned, as you know, our main bottleneck sites are in Danvers and [ Jeffries ], especially in the single-use and the filter. We have announced capacity increases, and we are fully on track to do so. In addition, we also have increased our efforts to get more out of the existing assets. So to some extent, our guidance upgrade, which Belen referred to, is already reflecting for this year, an increase of capacity, and we continue to ramp that up for next year. So with that in mind, I mean, we will stick to our midterm guidance for especially Process Solutions, where we said it's about low teens, and we are very comfortable with the capacity ramp-up we have in place to really hit that number and certainly working on further upsides.

[Peter Guenter]

Yes. Matthew, to your -- it's Peter speaking. To your question around the, let's say, the base business. The answer to your question is, yes, we are comfortable by continuing to guide you to a globally stable base business throughout 2021 and 2022. This is not related to any kind of COVID-19 catch up. This is just the way this business is moving. If I can give you a little bit more color perhaps on Glucophage, you should bear in mind that Glucophage is about 15% of the global base business. And within China, it's roughly half of that. So it also puts a little bit the VBP weight of Glucophage into perspective. And then the last comment I would make, again, related to Glucophage is that, yes, Glucophage decreased 4% in Q2. And of course, underlying, you've had different movements there. But I can tell you, for example, that in other emerging markets like LatAm, Middle East, Africa, there was a very, very strong double-digit growth on Glucophage. And that brings you all together to a globally stable base business.

[Operator]

Our next question comes from Laerke Engkilde from JPMorgan.

[Laerke L. Engkilde, Analyst]

Laerke Engkilde from JPMorgan. Maybe just a quick follow-up on Life Science. Do you expect pharma companies to continue to hold high levels of stock? Or is there a risk of destocking in 2023? And then secondly, within Electronics, should we now anticipate to continue to see double-digit growth in semis demand for 2021 and 2022.

[Unknown Executive]

[Audio Gap] customers, we do not see elevated stock levels at least for the products we serve actually, there's a very strong demand. And we really do everything we can, and refer also to the prior question to satisfy that demand. So from that angle, we are not expecting any risk of de-stocking longer term. Actually, the customers, obviously, are placing orders a little bit more now in advance. So the lead times are a little bit longer. But from my perspective and the conversations I had with many pharma CEOs, there is not a risk, at least to our portfolio of de-stocking.

[Unknown Executive]

Let me take the electronic question. So for the remainder of 2021, I think you can easily calculate our growth expectations based on our guidance that gives you a fair presentation of the remaining growth in 2021. And for 2022 and beyond, I'd like to refer you to our Capital Markets Day, when we'll give you a more quantitative view on what's going to happen from 2020 onwards. I think you can expect that our markets do have a positive momentum, and this will be reflected in our outlook from 2022 onwards.

[Operator]

Our next question comes from Peter Verdult from Citi.

[Peter Verdult, Managing Director]

Peter Verdult from Citi. Two questions, please. Matthias on Life Science. Perhaps a bit of a deep dive on Research Solutions. I mean traditionally, we will think low single-digit growth outlook. I appreciate the [ comes so easy and as ] a COVID effect but there does seem to be a stronger underlying growth story building here. So is that something you can confirm? And maybe give us a flavor of in terms of which areas of the portfolio are particularly dynamic and what the new growth outlook could be? And then secondly, Kai, sorry to, sort of, put you on the [indiscernible] again. Just a follow-up from the question before. It does seem that the semis midterm target's seems very much achievable, not just this year, the next. What needs to go wrong for that not to be the case? And perhaps just a quick comment on that OLED versus LCD dynamic, when could we see display returning to sustainable growth?

[Matthias J. Heinzel]

Peter, yes, it's Matthias here. Let me handle the first question. First, obviously, Retail Solutions, we have seen a very strong growth, 31%. About 24% came from the base and 7% from COVID. Now we need to take into account, and I think we had a backup chart in the deck. We had last year a weak quarter, actually a decline of 7%. Obviously, that strong base compares to a better weak last year. Having said that, what we see is that we are pretty much back to normal levels in the labs actually across the world, especially also in North America. So that explains certainly strong, kind of, base growth. Sequentially, we are slightly down Q1 to Q2, and we continue to expect further, if you will, decrease of the growth rates for Research Solution and coming much more back to a normalized level. I would see that already happening in the second half of the year. So as of now, I would say, we are sticking really and we're expecting getting back to our midterm guidance for research solutions over the next couple of quarters, which was more in a low single digit. Obviously, the end markets are very healthy. You're asking about specifics. So certainly, our Life Science biology segment within Research Solution continues to be very strong. But on a high level, I would say, over time, we'll get back to the midterm guidance.

[Kai Beckmann]

Just grabbing the microphone for now. Thanks for your question. Let me start with the OLED question. And maybe Important to see is that OLED or the display business benefited a bit from low comps last year. So the almost flattish development for this quarter is exceptionally positive. So we would stick to the low single-digit decline as the midterm guidance as for now. And that's as far as I can give you right now, guidance on this one. Now more importantly, on the semi situation. You asked what needs to go wrong to have no growth going forward. I mean there is not much that can go wrong to have no growth going forward. We are positive, as you have seen from our guidance, guidance upgrade and all our customers have communicated very bold plans for their future. And this will kick on in over the next 18 to 24 months. It will be not a one-shot situation. It will kick in over a couple of quarters. We are positive about the future. And again, quantitatively, I would like to refer you to the Capital Markets Day.

[Operator]

Our next question comes from Sachin Jain from Bank of America.

[Sachin Jain, Managing Director]

Two, please. Firstly, on Process Solutions growth, which is obviously very strong in the 30s, but it's a little bit below peers, which you sort of reported in the 50s. So I wonder if you could just comment how much of that is capacity market share shifts versus just different business mix that we should be aware of? And then secondly, a big picture question, I guess, Belen, just a update on your M&A commentary. What's the bandwidth for small deals and divisional focus?

[Matthias J. Heinzel]

Yes. Jain, it's Matthias here. For me, the key indicator is obviously, also, the order book and the order intake, and we continue to see a very strong increase of those key KPIs. And indeed, as I was referring before, we are still capacity limited, right? We do whatever we can to accelerate and to de-bottleneck, and that's my really #1 priority. So in that comparison, I think we need to keep that in mind. I think the company you're referring to, they're probably a little bit more short-term headwind in terms of short-term capacity availability versus us. But if I look at the order book and the order intake and have to compare that, we are very well positioned. And as the capacity comes in, I mean, this will keep improving our sales.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Sachin, let me address your second question because over the years, we have built a very, very strong portfolio that is now flourishing and delivering to the level you have seen in Q2, very significant organic growth. So we see our strategy is going to be to balance -- to keep a balance between driving organic growth and actually integrate through a technology-oriented approach, integrate smaller acquisitions that can help strengthen our portfolio, offer longer term and to continuously boost our competitiveness. So when it comes to capital allocation, I can tell you, that our top priority is investing CapEx on building capacity for Life Science and electronics to actually drive growth and get the benefit of the organic potential that we see in our portfolio. We will do that. Then, of course, we will complement this with, what we call, high-frequency M&A, kind of a string of pearls approach. Focus completely on our Big 3. And as I mentioned before, with a lens on advanced technologies that will help strengthen the competitiveness of our offer. We don't need a scale. We are -- after 2022, we don't exclude anything. But I believe we are moving and shifting our strategy from Spain, all filling gaps to actually enriching the offer. And that's basically giving you some perspectives on what is the direction of travel, of course, during the Capital Markets Day. We will share a bit more with all of you.

[Operator]

Our next question comes from Wimal Kapadia from Bernstein.

[Wimal Kapadia, Research Analyst]

Wimal Kapadia from Bernstein. So can I just first ask on Life Science margins, please. You're on track for mid-30s EBITDA margin, supported by operating leverage and product mix. My question is, given you expect at least EUR 700 million in common revenues next year, should we assume margins will remain at a similar level in 2022. And it only beyond '22 that we could expect to move lower? Or is it mid-30s, the new base to work with, even with a COVID benefit reset. And my second question is sticking with Life Sciences. Is there a possibility that Life Science in 2022 could actually see a higher benefit from COVID revenues in 2021, given your confidence of already flagging a floor of $700 million halfway to the year. How should we think about the probability for more contracts to be in place over the coming months for next year?

[Matthias J. Heinzel]

Yes, Wimal, it's Matthias here on your first question. Obviously, in the first 2 quarters, we have seen above usual levels of margin in a 37% range. We will expect that to come to see that coming down slightly, especially as we're ramping up capacity. We also significantly need to increase our hiring, especially in the plants to satisfy the growing demands, I would assume for the next couple of quarters, the margins coming down slightly. And longer term, I would expect them to be between the high points, which we currently see in the pre-COVID situation. So to give you kind of an indication.In terms of the COVID situation, as we said here, expecting now a flow of about EUR 700 million coming from COVID. We are very confident about that. And that's, obviously, based on the assumptions as we have them today, we are monitoring the COVID situation, closely -- working closely with the customers. And as you know, we are involved in more than 50 vaccine programs, including mRNA, et cetera. So that depends also on the booster shots and how that will play out. I think it's too early to say. So for now, we are very confident on the EUR 700 million. And should the situation evolve, we are certainly positioned to take further potential.

[Operator]

Our next question comes from David Evans from Kepler Cheuvreux.

[David Paul Evans, Senior Equity Research Analyst]

So a couple of questions on Life Science, again, I'm afraid. Just on pricing in Life Science. You did reference positive pricing. I mean can I ask, is that positive pricing effect higher currently than in prior years? And is there any way you can -- if it is, is there any way you can quantify the scale of the, kind of, greater pricing benefit currently? And equally, is there any risk that you can see of that price effect coming down, say, in 2022 or '23. And then second question, a broader question really around after U.S. approval of Biogen's Alzheimer's therapy. Just any perspective really on what's, basically, approved Biogen, and possibly future products within Alzheimer's could do to the future balance of supply and demand within the process solutions outlook?

[Matthias J. Heinzel]

Thanks, David. Let me answer your 3 questions. So on the pricing, we have about 1% to 2% on average price increase year-over-year. I would say this year, it's extraordinarily high. It's probably a little bit on the higher end, but we will -- we are very confident that, that's the range we are going to expect going forward, right? So it's not a risk from my perspective, given our value propositions and the new product launches that this will come down. To your question about the Alzheimer drug, obviously that was an important event for the industry, great news for the patients, there are about 50 million people worldwide suffering from that disease. So that was a big milestone. I think Biogen assumes a potential target population of 1.5 million. The price tag of the treatment is very high. So in general, this is a needle mover for the entire industry. It's a big new mover for the biotech industry. Obviously, this is the monoclonal antibody. I can't comment on the specific customer. Obviously, we can't comment about customer situations. In general, I can tell you, we have followed that [ demand ] very closely. And given our product portfolio, we're well positioned to serve this kind of situation.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Perhaps let me add -- let me build on what Matthias said, one single comment. The portfolio, the growth portfolio that we have in Life Science is actually giving us a very granular breakdown of sales in which any product may not go beyond 2% of the sales. And in that context, you can imagine that a new product will not -- we are not expecting any new product to make a major impact to our long-term perspective.

[David Paul Evans, Senior Equity Research Analyst]

Okay. Great. Actually, could we just go back and just check on what you said on the price increases saying current increases are at the higher end, is that at the higher end of 1.2% -- sorry, 1% to 2% increase? Or is it above 2%?

[Matthias J. Heinzel]

No. It's in that range on the upper end of this 1% to 2% range.

[Operator]

And our next question comes from Falko Friedrichs from Deutsche Bank.

[Falko Friedrichs, Research Analyst]

So firstly, on Life Science. Can you disclose the COVID-related sales that you had in H1 of this year? And on this EUR 700 million figure for next year, can you confirm that this is only process solutions? Or does that also include anything that might come from research solutions next year? And then secondly, on Mavenclad, since you presented this COVID vaccine related data to us, did you actually notice any additional demand for the drug on the back of this data?

[Matthias J. Heinzel]

Yes, it's Matthias here to answer your question on COVID. So for the year of '21, we are expecting about $0.5 billion impact from COVID. It's about half-half with a slightly higher number in the second half. So a slight sequential uptick. And you're correct for '22, the number we provided, the floor of EUR 700 million is exactly in Process Solutions given our strong positioning in filters and single-use. As I indicated in one of the prior question on Research Solutions had, in the first 2 quarters, a pretty sizable impact, especially on diagnostics. But given the trends on diagnostic tests, we see that coming down over the next couple of quarters.

[Peter Guenter]

Yes, Falko, it's Peter speaking. Related to your question on Mavenclad and vaccination data. Actually, we started spreading and working around those data by the end of May, early June. So it's a little bit early to see effects in the second quarter. But we do anticipate this to become a relevant element in the physician's choice. This being said, you have seen in Q2 versus Q1 a sequential growth. We have seen the high efficacy marketing rebounding, in general. And I also would like to point to the fact that besides the U.S., we have a pretty significant business in Europe. So this is not only a U.S. story this time. And actually, we are seeing in some European countries, some significant market share upticks in the month of June. So let's see how this goes further. And then perhaps my last comment, if you look at the Q data of Mavenclad for this year, don't forget that, of course, we have a relatively low number of [ year 2 ] returners. Remember, the low patient starts in Q2 last year, during the first lockdown. And actually, I can tell you that our new patient starts in the Q1 are also higher than our new patient starts -- in Q2, sorry, are higher than in Q1. So I think all these elements together make us optimistic that we will see continued growth moving forward in the second half of this year.

[Operator]

And our next question comes from Luisa Hector from Berenberg.

[Luisa Caroline Hector, Co]

So on cost lines, in general market, you previously mentioned around EUR 75 million of COVID cost savings last year, which should repeat this year. And I think that was mainly in health care. I just wanted to check whether that figure is still valid? And perhaps explains, for example, the significant decline in the health care marketing costs in the first half. So then I'm just trying to put that into the context of the full year, specifically in health care because the guidance does seem to imply some increase in costs. So just trying to figure out the phasing of those marketing, the R&D in health care in the second half, please? And then maybe just a quick follow-up on Mavenclad. Peter, hearing your comments there, it sounds very encouraging for the second half. I just wanted to understand your level of confidence that some of those year 2 patients will return. Can you -- do you have good visibility on them? Can you activate them to return to Mavenclad rather than go elsewhere?

[Marcus Kuhnert, CFO & Member of Executive Board]

Luisa, I start -- it's Marcus speaking. I'll start with your first question. So first of all, so we do not actually fully track COVID-related savings per business sector. But I can give you a little bit flavor on our seller expectations for the group. And I have to admit that also changed a little bit over the quarters. So when we look back to last year 2020, we recorded, I would say, around about EUR 150 million COVID-related savings across the entire group. We were staring into this year with the assumption that around about 50% of those savings should be kept or maintained. Unfortunately, as all of us know, we were entering into the year in a pretty hard lockdown and pretty, I would say, restricted set up so that we have actually upgraded this assumtion our expectation in our -- I think it was in our Q1 call in May, saying we expect around about 75% of this EUR 150 million to reoccur in 2021. And meanwhile, so now it's August, we are comfortable to say that we expect COVID-19 related savings in 2021 on the same absolute level as in 2020, so around about EUR 150 million. This is on the COVID thing. The second question, health care guidance, cost and margins. So first of all, it is true, so marketing and selling costs are below last year, and that is basically due to a strict prioritization and also in part due to the fact that we are still, actually, live with the implications of COVID-19. That means not much traveling, not much -- still not much face-to-face activity with customers and so on. You're right, the guidance implies a decline in margin in a way. And that is simply due to the factor, in the second half of the year, we will have most likely a little bit lower non-recurring income than in the first half. We will not have the Eli Lilly effect where the major part of this was actually occurring in H1. We expect travel costs, at least partly coming back in a very moderate way. Remember what I just said on our expectation regarding cost savings, but we will see most likely a little bit more T&E expenses and would also see let's say, further, let's say -- or continuously R&D costs above prior year. However, in percent of sales ratio should continue to go down. But those effects actually are responsible for a more conservative margin which is implicit in our guidance in H2.

[Peter Guenter]

Luisa, Peter speaking. Related to your question on the [ year 2 ] return is what typically saw in the pre-COVID times was 90% returners of year 2 patients. We see that going down a little bit around COVID, to roughly 80%. Now bear in mind, of course, that we are still confronted in some countries with lockdown situations, number one; number two, the year 2 returns is not an exact math. As per the label, patients can come back between 12 and 18 months, not -- so they don't have to come back after 12 months. So I think you have to take it with a bit of, lets say, flexibility in the analysis. So we have, of course, our patient support program in the U.S. called MS Life line, where we have recall systems for the patients. And for example, we have data now going out of Germany that, of the patients that are coming back that actually [ quasi ], no patient has switched to another treatment. So the product is really doing what it is supposed to do. The patients remain under control. And I'm confident that the year 2 return rate will hardly be impacted at the end of the day by the COVID-19 situation.

[Operator]

Our next question comes from Florent Cespedes from Societe Generale.

[Florent Cespedes, Senior Equity Analyst]

Two quick ones. First on Fertility. Could you give us a little bit more color on how do you see the kind of back-to-normal situation? If you could have a little bit more color maybe by geographical areas to, let's say, help us to model the dynamic of this business? And second question, maybe on Bavencio, which delivered a little better than expected quarter. Is there anything new or anything you could highlight to better understand the dynamics here?

[Matthias J. Heinzel]

Florent, for your 2 questions. First on Fertility. We see actually a relatively homogeneous picture around the world. So Fertility clinics are back to [ quasi ] full capacity. And we have seen very nice performance, not only versus Q2 last year, but also sequentially, we are actually today above historical pre-COVID level. So we are extremely encouraged by the performance of the Fertility business. In terms of -- it's not easy to forecast between what is compensation of sector demand and then underlining growth rates. Of course, this business will continue to benefit sorry, from beneficial tailwinds. Parents becoming older when they decide to try to have children, decreasing birth rates. So all this is, of course, very beneficial for the fundamental tailwind for our Fertility business. And we continue to monitor also patient desires to become a parent and actually those levels of desires to become a parent actually are very high coming out of the COVID-19 crisis. So all in all, we're very positive. But please bear in mind that part of the sales that you see now is, of course pent up demand. And then in the midterm, we continue to guide you towards a mid-single-digit growth of this market. On Bavencio, what is, of course, new is the increased rollout in Europe. So as you know, we've rolled out, [ we do see an ] indication in the U.S. mid last year. We have the first European countries coming up to speed, such as France and Germany. And also in Japan, we got the approval. And that is actually the fundamental reason behind the acceleration plus the constant progress that we continue to make on the 3 levers of implementing the new standard of care with Bavencio [ and you see ] that is to say, to increase the platinum-based treatment of bladder cancer; second, within the maintenance treatment; and then third as a choice of [indiscernible] choose Bavencio. And actually, we see quarter-after-quarter those numbers coming up. In the U.S., for example, in Q1, the platinum-based treatment was 70%, Q2 at 75%, the maintenance treatment went 35% to 45%, and the [indiscernible] of Bavencio then went from 80% to 90%. So actually, we continue to have steady progress quarter-over-quarter with these products. We're very encouraged.

[Operator]

Our next question comes from Simon Baker from Redburn.

[Simon P. Baker, Head of Pharmaceutical Research]

Two, if I may, please. Firstly, on Research Solutions. We've not talked about market growth and your market share within that area for a while. So just wondering if you could give us some color on how the market is growing in the key geographies and how your share is evolving. And changing the subject somewhat on bintrafusp. I saw the Phase II indications on the slide in the pack, but I also noticed that are involved in the study for bintrafusp in advanced sarcoma, which was announced in May to beginning December. I wonder if you could give us a little color on that trial and the potential opportunity there.

[Matthias J. Heinzel]

Simon, it's Matthias. On Research -- so overall, we are expecting the market to grow in the 2% to 3% range in the midterm. And we expect to grow slightly above that market midterm.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Simon, on the -- on your bintrafusp question. Peter and I were looking at each other trying to figure out, what is the study coming from? I think my guess, our best guess is that this is an IST, so it's not driven by the company. And of course, we -- it's an independent study that we haven't really either promoted or seen. So we can't -- unfortunately, we can't share anything today with you, but we will definitely try to further screen the topic and get it back to you.

[Constantin Fest, Head of Investor Relations]

We have time for one last question, please.

[Operator]

Our last question comes from Rosie Turner from Barclays.

[Rosie Turner, Research Analyst]

Yes. I guess just to follow on from that question on Fertility. So does that mean for the remainder of the year, we still will expect some kind of catch-up effect? And then on your string of pearls, just wondering if there's any bias in terms of the 3 divisions and where you will be looking to kind of deploy capital?

[Matthias J. Heinzel]

Rosie, on Fertility, again, we anticipate to continue significant growth in 2021. And I think I've explained the fundamental reasons behind. It's really not easy to make the difference and to quantify the compensation of the lost cycle, so to speak, and COVID-19 and the underlying demand. But I think that the key guidance I can give you is mid-single digit when things really normalize.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Rosie, on your second question, as I mentioned before, we are going to give you additional perspective during our Capital Markets Day. What I can tell you today is that the focus of our string of pearls approach is going to continue to be on the so-called Big 3. So Process Solutions, Novel Technologies, CDMO acceleration, Healthcare, licensing of [indiscernible] licensing opportunities like the ones you have seen recently with Debiopharm and Electronics, of course, entering the next wave of advanced technologies that would allow us to stay a privileged partner to our customers also in the longer term.

[Constantin Fest, Head of Investor Relations]

All right. Thank you. With this, over to you, Belen, for any closing remarks.

[Belen Garijo Lopez, Chair of Executive Board & CEO]

Okay. Thanks, Constantin, and thanks, everyone, for your continued interest in Merck. Obviously, the numbers speak by themselves. Q2 was very strong. And I believe, to a certain extent, a case in point for how uniquely positioned our company has become to capture the opportunities that are now arising around COVID, and of course, post COVID. So think of the pandemic not only as a source of near-term upside for certain parts of our business, which it is as we have discussed today, but also as an accelerator of major important trends that we serve. And as an inflection point of critical technologies that we shape including digitalization, bioelectronics or mRNA, to name a few. Rest assure that despite the good success, we don't get complacent. We want to stand still. And instead, we will remain laser focused on reaching new heights as we continue to mobilize the company for future growth. As several times discussed with all of you, we will be sharing more about our plans and priorities. Also with the participation of our management teams at our upcoming Virtual Capital Markets Day on September 9. And I look forward to meeting you there. For those of you who are now taking summer holidays, all the best that you have a very enjoyable summer break, and we see you in early September. Thank you very much.

[Operator]

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