U.S. Markets closed

Edited Transcript of MRK.DE earnings conference call or presentation 14-Nov-19 1:00pm GMT

Q3 2019 Merck KGaA Earnings Call

Darmstadt Nov 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Merck KGaA earnings conference call or presentation Thursday, November 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Constantin Fest

MERCK Kommanditgesellschaft auf Aktien - Head of IR

* Marcus Kuhnert

MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board

* Udit Batra

MERCK Kommanditgesellschaft auf Aktien - CEO of Life Science & Member of Executive Board

================================================================================

Conference Call Participants

================================================================================

* Daniel Wendorff

Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals

* Falko Friedrichs

Deutsche Bank AG, Research Division - Research Analyst

* Florent Cespedes

Societe Generale Cross Asset Research - Senior Equity Analyst

* Jo Walton

Crédit Suisse AG, Research Division - MD

* Joseph W Lockey

Morgan Stanley, Research Division - Equity Analyst

* Keyur Parekh

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Richard Vosser

JP Morgan Chase & Co, Research Division - Senior Analyst

* Simon P. Baker

Redburn (Europe) Limited, Research Division - Head of Pharmaceutical Research

* Wimal Kapadia

Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Dear ladies and gentlemen, welcome to the Merck investor and analyst conference call on the third quarter 2019. (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, MERCK Kommanditgesellschaft auf Aktien - Head of IR [2]

--------------------------------------------------------------------------------

Thank you, Maria, and a very warm welcome from my side to this Merck Q3 '19 results call. My name is Constantin Fest. I'm Head of Investor Relations here at Merck. And I'm delighted to have here today with me also Marcus Kuhnert, our Group CFO; as well as Udit Batra, Life Science CEO of Merck. In the next few minutes, we'd like to walk you through key slides of this presentation, roughly half an hour, is my guess. And after that, we'd be happy to take all of your questions. Having said this, yes, I'd like to directly hand over to Marcus to kick off this presentation. Marcus?

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [3]

--------------------------------------------------------------------------------

Thank you, Constantin. Good afternoon. A warm welcome to our Q3 earnings call also from my side.

I am starting on Slide 5 of the presentation, looking on the highlights.

Overall, Q3 was a good quarter for us with organic sales growth of 5.7% at group level, reflecting another strong trend in both our Life Science and Healthcare business sectors, more than offsetting the expected decline in Performance Materials.

Group EBITDA pre grew by a healthy 10% organically, mainly due to the favorable sales development, continued cost discipline across the board and further deferred income from GSK and Healthcare. On Versum, most of you will have noted that we successfully closed this acquisition early October, and hence, well in line with our original plans. Integration has already started, and we are proud to welcome our new colleagues on board.

Finally, we are upgrading our full year 2019 guidance for sales and EBITDA while keeping it stable for earnings per share pre. Specifically, we now expect net sales in a range between EUR 15.7 billion and EUR 16.3 billion, EBITDA pre between EUR 4.23 billion and EUR 4.43 billion, and earnings per share pre between EUR 5.30 and EUR 5.65. Note that the uplift at the operating level stems from the expected first time consolidation benefits of Versum, or to put it differently, we fully confirm our organic growth ambitions of 3% to 5% for sales and 10% to 13% for EBITDA pre. And I will come back on the stable EPS pre corridor later.

So now let's take a closer look at sales and earnings contributions by business on Slide #6.

Life Science had a stellar performance with 10% organic sales growth, driven by all businesses and regions, and even slightly exceeding the already strong growth rates from Q1 and Q2. However, we would also caution you to extrapolate this into the fourth quarter. Udit will elaborate on this later in the call.

Healthcare also added very nicely with organic sales growth of 8%, the highest in almost a decade, reflecting moderate growth in the base business and rising contributions of our recently launched products, Mavenclad and Bavencio.

Performance Materials, on the other hand, weighed on our overall performance with an 11% organic sales decline, mainly due to the expected decline in liquid crystals, as the capacity effects from recent panel manufacturers' investments have finally faded out.

On earnings, the 10% organic growth in EBITDA pre was largely driven by Healthcare and Life Science, more than offsetting the declines in Performance Materials.

Finally, a brief comment on FX.

As you can see from the slide, currencies have been a tailwind for us in all business sectors and for the group as a whole, with a mitigating effect from hedging losses showing in the Corporate and Others line as usual.

On Slide #7, turning to the regional split.

I'll keep it brief by saying that we have continued to see organic growth across all regions. Growth rates do vary somewhat from one quarter to the next. And in Q3, we had LatAm standing out with 16% growth, while in absolute terms, Asia Pacific remains the largest contributor to growth.

Moving on to Slide #9 then, a couple of points I would like to make on the headline figures.

While we are reporting strong sales growth of 8%, even stronger EBITDA pre growth of 15% in Q3, you will have also noticed that EPS pre increased by only 2%, with the main driver being a higher negative financial result. Now I'll come back to this in a minute.

I would also like to point out that regarding nonrecurring income, we had a pretty clean quarter. Earnings were only supported by another EUR 30 million of the GSK upfront payment in Q3, and we expect a similar number in Q4. Also note that this number can vary depending on trial dynamics in our strategic alliance with GSK.

Further on the topic of nonrecurring income. In Healthcare, you will also remember that in our last earnings call, we guided you to EUR 100 million to EUR 150 million in H2, and we are confirming this today. Operating cash flow increased close to 30% in the third quarter, while net financial debt rose by 9% since the end of December, mainly due to IFRS 16 dividend payments and temporary investments of cash proceeds from the Consumer Health disposal. Compared to the status by the end of June, however, we were able to reduce financial debt by EUR 0.5 billion.

On to Slide #10, and a few comments on our reported figures and the financial result in particular.

You will see that the financial result of minus EUR 135 million is substantially lower compared to prior periods, which in part is due to higher interest expense related to a full quarter of Versum financing. That said, we confirm our 2019 interest result guidance of EUR 260 million to EUR 280 million, updated in August, but would point you to around the higher end of the range amid finalization of the Versum financing, which includes also onetime charge for early redemption of the high coupon-paying bond immediately after closing. The main driver behind the lower [financial] (corrected by company after the call) results though is a meaningful drag from higher LTIP provisions. The LTIP-related track was in the low- to mid-double-digit million euros, both year-over-year and quarter-over-quarter, and mainly reflect the outperformance of the Merck shares versus the tax. Please also note that, especially when we see a decoupling of the Merck share versus tax, we may have to respect its impact on the financial result. In the third quarter, this was one of the main drivers behind only moderate EPS growth, as explained before. Finally, reported EPS also reflects a higher tax rate due to reserves for future tax audits, but we are confident to land the year in the guided range of 24% to 26%.

With that, let's move on to the review of our business sectors, starting with Healthcare on Slide #11.

Healthcare had a strong quarter with sales up 8% organically, given solid growth on our base business, paired with further uptake of recently launched products, Mavenclad and Bavencio. Within our base business, we were pleased with the continued double-digit growth of our General Medicine portfolio as well as the healthy dynamics of Fertility and Erbitux. Also note that our N&I franchise, containing Rebif and Mavenclad, saw positive organic growth already in the third quarter, and we expect further rising contributions in Q4. Remember, that was one of the things we have basically put on the table in August that we expect the tides to turn in the second half of the year, and we have now already seen positive growth of 2.3% organically in the third quarter.

On our new products, given the year-to-date performance, we slightly increased our guidance for Bavencio, now expecting around EUR 100 million in sales in 2019 compared to high double-digits previously. And we become also more precise for Mavenclad, now aiming for around EUR 300 million compared to up to mid 3 digits before.

With regard to the strong margin expansion in Q3, please note that next to IFRS 16, this has been supported by EUR 30 million of deferred income from GSK, but also another sequential uptick in underlying profitability due to stringent cost management.

Finally, a quick update on nonrecurring income in 2019 as announced earlier.

Given the EUR 30 million from GSK recorded in Q3, our unchanged guidance for H2 leaves us with some EUR 70 million to EUR 120 million in the fourth quarter. This consists of another EUR 30 million from GSK; EUR 35 million for the recently accomplished RCC approval of Bavencio in Europe; another EUR 20 million for the anticipated RCC approval of Bavencio in Japan, which we expect to happen until the end; and potential support from additional pipeline and portfolio management measures. As such, we confirm our 2019 guidance for Healthcare.

And with this, let me hand over to Udit.

--------------------------------------------------------------------------------

Udit Batra, MERCK Kommanditgesellschaft auf Aktien - CEO of Life Science & Member of Executive Board [4]

--------------------------------------------------------------------------------

Thank you, Marcus, and a very warm welcome from my side as well.

I am now on Slide #12 with a review of our Q3 numbers.

Life Science had yet another very strong quarter, cracking the double-digit mark for organic sales growth for the first time. And this was driven by a broad-based performance across all of our businesses and our regions. Process Solutions was again the largest contributor with roughly 16% organic growth, matching the strong trend that you've seen in the prior quarters, and this is driven by sound biopharma end markets. Applied Solutions also had a very good quarter with sales up almost 7% organically, so slightly above the first half, and with key drivers, including our advanced analytical and lab water portfolios. Research Solutions delivered a solid 5% in terms of organic sales growth, so somewhat above the trend and really good demand from our workflow tools, workflow tools business and a strong contribution from e-commerce. Regionally, we saw double-digit organic sales growth in APAC, Asia Pacific, and LatAm and a high single-digit sales growth in North America and Europe.

EBITDA pre came in at EUR 531 million. This reflects an organic growth of roughly 14% and an increased margin of 31%. The gross margin was slightly down year-over-year in the third quarter, but it's still tracking nicely ahead of last year. For the 9-month period, we are pleased to see this operating leverage across all our OpEx lines.

Finally, backed by our strong 9-month performance, we're slightly upgrading our 2019 guidance for Life Science, but would caution you to extrapolate the very strong trend of prior quarters into Q4. This is given the lumpiness in the business across quarters, and this is really nothing that is uncommon.

With that, let me move to Slide 13 to start a slightly deeper dive into this business. So now I'm on Slide 13. I'd like to zoom out for a few minutes and then -- and reflect on the fundamentals of our business before zooming in again.

We are operating in a truly attractive environment, which is characterized by long-term secular growth trends, such as a growing and aging population, rising regulatory trends as well as a science- and technology-driven progress across multiple disciplines. Today, we are looking at a global life science tools market worth EUR 170 billion in sales and forecasted to grow in mid-single digits, with established players like us generating EBITDA margin well in excess of 20% on average.

We have 3 business units, namely Research, Process and Applied, each of them with their own characteristics and a distinct subset of growth drivers. We have shared and discussed these with you in detail at various occasions, including our recent Capital Markets Day. So I really won't bore you with reading them out from the slide.

But let me pick out one prominent example, which is familiar to you, but still describe the drivers of our industry extremely well, and this is the ongoing rise of biologics. It is really a brilliant time to be in Life Science. In my 2.5 decade association with pharma, I don't remember a time when so many effective approaches and modalities, including cell therapy, gene therapy, mrNA, siRNA-based approaches, have all made it to the clinic. Almost 33% of the biologics pipeline consist of these novel modalities today. Now we not only need new research tools to interrogate these complex molecules, but we also need new and efficient manufacturing processes, regulatory processes and collaboration models to get these to patients in need. We, as Merck, are right in the middle of this trend with our links to the global research community. Almost 1.6 million researchers come to our e-commerce site. We are also a leading provider of consumables and hardware for biologics production. So the market is indeed attractive and dynamic, and we are positioned quite well in it.

Now I'm moving on to Slide 14.

In this attractive market, we really have challenged ourselves to set the benchmark for performance. I was entrusted by our board to take over as CEO of the Life Science business back in April of 2014. And together with my team, we have developed and executed a strategy that has included the largest acquisition in the 351-year history of Merck and the largest to date in the tools industry. I guess it would become the second largest in the industry if another one closes.

Our strategy included very specific choices that not only deliver the synergies from this acquisition, but we also allocate the resources to accelerate the growth of the business. And let me give you some examples. I mean you will remember, single-use bioprocessing. The single-use business was growing roughly 20% organically back in 2016. And with investments to standardize production in our Danvers, Massachusetts site and to increase our capacity both in Danvers and in Wuxi City in China, the single-use and hardware business grew close to 30% in 2018. So from 20% to 30% in a matter of 2 years.

Back in 2016 and early 2017, and you will remember if you were following Sigma-Aldrich in the prior years, the lab and specialty chemicals business was flat and declining. This has been turned around with really strong execution from our teams around specific focus on bulk product sales launch of Synthia, a retrosynthesis software, and of course, better performance on e-commerce.

And finally, to give you an example from Applied Solutions, we felt we were not the best owners of our flow cytometry business where we lacked scale and we're somehow underperforming, so we divested this business about a year ago.

So what you can see from this chart is a result of some of these deliberate choices. Every year since 2015, we have outperformed the market in terms of organic sales growth. And here, I just picked 2 other scale competitors. By this time, a lot of our competitors have already reported, so you see the 9-month results also on this chart. And you can see that at this point, year-to-date, while the organic growth of key competitors is between 5.5% and 6.5%, clearly, more dynamic than the last 2 years, we've hovered around the 9% organic growth mark. And the team has remained really focused on cost management, so you'll see a steady margin expansion of 300 to 400 basis points. And there is such a lead versus competition even if you penalize us with 2% to 2.5% of corporate costs from the 31.1% that you see in the first 9 months of this year. So all in all, I think it is a safe assumption that our teams are performing at a rather acceptable level.

Let me move on to Slide 15 and cover Q3 for each business in a bit more detail.

Process Solutions has been the standout again with roughly 16% growth this quarter. And if you were to look a bit deeper, bioprocessing grew in the low 20s and services in the mid-teens. Geographically, really nice performance across the board. But again, I would mention China. And here, the organic growth is in the low 40% range. Yes. I think you heard that right. And very often, this is due to large orders that come in some quarters, but low 40% organic growth is quite nice for China as well. We augmented our portfolio in the Process Solutions business with the acquisition of ProcessPad to collect data from all our unit operations in the BioContinuum Platform in a single format. In gene editing and novel modalities, you would have read the acquisition of FloDesign. And we continue to file patents in the -- patents for CRISPR/Cas9. And we recently signed a deal with Evotec for use of our CRISPR/Cas9 IP.

For Research Solutions, the growth of the lab and separation workflow tools business is actually really endearing for me. This portfolio has hovered around 2% to 3% growth for a very long time. And this year, we've really doubled -- almost doubled that growth rate. E-commerce and Research Solutions contributes 2x the rate of off-line growth. And finally, just to point out China. Again, China is growing in the mid-teens even for Research Solutions in the third quarter, where we recently announced a partnership with Alibaba to expand our e-commerce platform for smaller customers.

And we move to the third business, Applied Solutions, where the advanced analytical business grew double digits in Q3, bringing it to high single digits year-to-date. Lab Water continues to benefit from the solid consumables that followed the launch of our Milli-Q IQ 7000 platform launched last year. And geographically, really nice performance with high single digits in emerging markets and solid mid-single-digit growth rate in many mature markets. Here too, we augmented our portfolio with the acquisition of a software company called BSSN to connect all instruments in a laboratory. So all in all, a pretty broad-based strength across both geographies and portfolio.

Before I hand it over back to Marcus, I wanted to spend a bit of time on sharing some of our beliefs and investment opportunities for the future. This is all on Slide 16. And I want to highlight 3 trends that we really believe are benefiting us quite a bit.

Starting with the first one, this is complex biologics or novel modalities. Just as a reminder, that market growth in mAbs is forecast to remain in the low teens up to 2023, while those of novel modalities, for example, cell and gene therapy, are expected to grow in excess of 30%, so almost double that rate of mAbs. Against this backdrop, we've expanded our single use and joint facility in Danvers, Massachusetts, as I mentioned earlier. We opened an assembly plant in Wuxi, China, which already, within 6 months of opening, has full utilization. So that's been -- that really reflects strong, strong demand in China. We've also expanded our viral manufacturing site in Carlsbad, California. And we've successfully launched our antibody drug conjugate express offering for rapid production of ADCs.

Digitization is the second trend. That, of course, is affecting many industries and it's also shaping many of our day-to-day activities as well as many of our client interactions. We, of course, are very well positioned with our leading e-commerce platform, sigmaaldrich.com, and we constantly invest behind this to grow its agility and greater customer-centricity. Today, more than 90% of the old Millipore products are available online, while year-to-date, we've seen sales through the online channel growing double the rate of the off-line business in each of our 3 businesses, and we believe this trend is likely to continue.

Last but not least, I've already mentioned quite a bit about China. We are seeing superb growth across Asia these days. And we believe this market is clearly in its early days and with many projects to come as we look ahead. We've significantly invested in manufacturing and distribution in Nantong in China, while successfully driving commercial expansion in Tier 2 cities, and we continue to leverage our strategic e-commerce partnership with Alibaba, as I mentioned before.

So all in all, we feel confident that we are putting our capital to work in the right spots, and we will hopefully see these strong results going forward.

I will be happy to take your questions towards the end of the call and to provide additional color during the Q&A. But for now, let me hand it back to Marcus.

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [5]

--------------------------------------------------------------------------------

Thanks, Udit.

I'm now on Slide 17 with Radio Performance Materials.

Overall, PM had a soft quarter, but in line with our expectations and the guidance. Sales in Q3 declined 11% organically, with all businesses down year-over-year. Please note in this context that we are delivering on our promise for increased transparency by showing growth rates now for each of the 3 business units in PM for the first time. Display Solutions was the main driver, with a 15% organic decline, as strong growth in OLED was more than offset by declines in liquid crystals against tough comps. The numbers are reflecting the expected end to the extensively discussed temporary boost we have enjoyed from capacity ramp-up projects of several panel manufacturers in China. Semiconductor Solutions recorded an organic sales decline of 3.5%, which is somewhat better than the market and proof to a good position, which we believe will be further enhanced by the recently accomplished acquisition of Versum. Surface Solutions was down by 6% organically in terms of sales, reflecting weak end markets in automotive and an increased industrial portfolio focus amid our Bright Future program. EBITDA pre came in at EUR 177 million, implying a decreased margin of 30.5% and the 19% organic decline despite change in cost management. Finally, we are confirming our guidance for Performance Materials, although, based on what we have seen year-to-date, we believe that landing in the lower half of the range is more likely.

On to Slide #18 with a few remarks on our balance sheet.

The increase of cash and cash equivalents in the first 9 months of the year mainly reflect the financing measures related to Versum, which we'll have on the balance sheet as of Q4. We are currently going through purchase price allocation and will provide guidance on related D&A with our full year results in March.

That being said, net financial debt has increased from EUR 6.7 billion to EUR 7.3 billion since December, as free cash flow generation was more than offset by effects related to the first-time adoption of IFRS 16, dividend payments and temporary investments of cash proceeds from the Consumer Health disposal. So our net financial debt-to-EBITDA ratio as per end of the third quarter stands at 1.8, while following the closing of Versum acquisition, we expect this ratio to be around 3x by year-end.

With that, let's take a closer look at the cash flow statement on Slide #19.

The strong operating cash flow was mainly due to favorable changes in other assets and liabilities, reflecting, among others, the milestone payment we received for RCC approval of Bavencio in the U.S., the P&L effect both in the second quarter, the respective payment now entered our books in the third quarter. The investing cash flow has remained pretty stable, while the much higher financing cash flow obviously reflects the previously mentioned financing measures related to the acquisition of Versum.

With that, let's move to the outlook section.

I will start by discussing, as usual, our key earnings drivers for 2019.

For Healthcare, we told you in August that we expect organic growth in the N&I franchise as of the second half. And in fact, as already mentioned, we have delivered this already in Q3 and expect further rising contribution in Q4, which should definitely be supportive of our mix and sector margin going forward. Staying with Healthcare, we confirm our guidance of EUR 100 million to EUR 150 million of nonrecurring income in H2, with EUR 30 million from GSK recorded in the third quarter. For Q4, we expect another EUR 30 million from GSK, plus a total of EUR 55 million for Bavencio milestones and potential further support from pipeline and portfolio management measures. Moreover, we aim to become less dependent on nonrecurring income as of 2020, while our focus on cost will continue. As such, we confirm our guidance for about stable R&D expenses in Healthcare in 2019, while aiming for at least stable to slightly declining R&D and marketing and selling expenses in 2020. Note that we have moved the R&D piece from reducing to supporting factors as to illustrate our increased cost focus while still investing into our strategic and promising pipeline projects.

For PM, we expect a significant decline in Display Solutions seen in Q3 to continue in Q4, as reflected in our guidance. We also stick with our ambition that 2019 will be the sector's trough year, excluding Versum. However, this will, to some extent, also be dependent on the overall market environment, both in liquid crystals where we expect ongoing structural declines, in semi, where we continue to anticipate a return to growth in 2020.

On Versum, and this is new, we obviously expect positive earnings contribution following the recent closing.

Last but not least, we expect ongoing strength in Life Science and have slightly upgraded the sector guidance accordingly. But note that we expect Q4 not to be as strong as the prior quarters, as Udit has explained to you earlier.

Coming to the group guidance on Slide #22.

Based on our good 9 months performance and successful closing of the Versum acquisition, we raised our outlook for sales and EBITDA pre, while keeping it stable for EPS pre. Please note that in guidance terms, we include Versum only at group level and not in PM as to make your life easier and allow for a like-for-like comparison. Organically, that means without Versum and FX effects, we fully confirm our group guidance for sales and EBITDA pre, while from a business sector perspective, we point you to the lower half of the range in Performance Materials, confirm it for Healthcare and slightly raise it for our Life Science.

On Versum, as communicated with the closing early October, we factor a contribution to year-end of EUR 270 million in sales, EUR 80 million to EUR 90 million in EBITDA pre and EUR 0.11 to EUR 0.14 EPS pre. It is important to note that the EUR 0.11 to EUR 0.14 in EPS pre do not include the respective interest expenses for the Versum acquisition financing because we have given -- or we have factored this in in August already in our financial result guidance for 2019 as the financing basically was done at this point in time. This is important to mention because, eventually, when you do the calculation, you come to a somewhat lower number of EPS contribution of Versum. Also, you may wonder why we have left EPS pre guidance unchanged. There are a couple of drivers at work here, including higher LTIP provisions and higher interest expenses, where for the latter, we now point you around the higher end of the guided corridor. And for the avoidance of doubt, we obviously still expect the Versum acquisition to be immediately accretive to EPS pre as just noted.

On FX, while we now expect slightly more tailwind on sales, earnings remain less affected due to hedging.

And with this, we are happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will take our first question today from Richard Vosser of JPMorgan.

--------------------------------------------------------------------------------

Richard Vosser, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

Richard Vosser from JPMorgan. Three, please. First question, just on Mavenclad. You very helpfully gave us the splits between North America and the ex North American sales on the last call. I wondered if you could give us that split this quarter and maybe give us some updated dynamics on new and returning patients in Europe. Second question, just on China, in Healthcare. Maybe you could just talk about the potential for tendering impacts or the 4 plus 7 tenders on Concor user of Glucophage, when we might anticipate impacts. Could that be in '20? And then final question on Life Sciences. Perhaps -- it sounded like China is very, very strong, and we should think about the maintenance of those growth trends. But could you give us any help around any bolus characteristics around the Chinese demand? Is there any sense of rationalization of the biotech players, products? Or is this for a time -- a long time in the future?

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [3]

--------------------------------------------------------------------------------

Richard, thanks for your questions. I would start (inaudible). Mavenclad split Q3 was one of your questions. You can think about that we have in the third quarter, in total, EUR 89 million sales, and we have to split roughly 1/3 attributable to North America, 1/3 attributable to Europe. And let me also mention that we have, in both regions, seen a positive sales growth dynamic in the third quarter, so very satisfactorily picture.

A little -- a couple of more words on the dynamics in Europe. So we have very good adherence, with more -- around about 90% of the patients coming back in the second year. And yes, as I said, favorable demand dynamic in the ex U.S. sales for the third quarter. Moreover, approval, so far granted in 69 countries, with more than half of these countries where we get, meanwhile, reimbursement.

Last but not least, in Germany, we saw, for example, nice market share uptake, a sequential increase now as a major market in Europe to 17% within the last quarter. And also, Italy and Spain, we have made further progress. And there, we are now reimbursed and we see also an increasing contribution of smaller countries.

Your second question, China, in Healthcare. So let me first elaborate a little bit, so this volume-based procurement thing. Just to reiterate, we have seen no effects on us with the so-called wave 1 of this initiative that has started recently. However, there is good reason to believe that, especially with Glucophage and Concor, we could be included in wave 2. We expect at the moment that we will have more details on that until end of this year. However, we do not expect an economic effect on our numbers, on our sales before half of 2020. So any kind of sales impact you should expect, if we are included in wave 2, only from H2 2020 onwards.

Let me also say, we are carefully watching the development, and we will definitely factor in everything what we know and see into our planning and thus also into our guidance for 2020. We would expect that the price cuts are quite relevant, but we would also expect that those will be partially offset by the strong volume growth we have already seen in recent quarters. So yes, there will be an impact on us. But don't forget, I mean China will remain a strong contributor to our company's growth because we have also other compensating factors in China, like, for example, the strong growth with Erbitux since we have made it finally to reimbursement list.

And with that, I would hand over to Udit for question number three.

--------------------------------------------------------------------------------

Udit Batra, MERCK Kommanditgesellschaft auf Aktien - CEO of Life Science & Member of Executive Board [4]

--------------------------------------------------------------------------------

Thank you, Marcus. Richard, thank you very much for your question. I think, first, just a couple of facts. We've, in fact, seen acceleration in growth in China over Q3. In fact, Q3 is in the low- to mid-20s overall for the organic sales growth. And if you remember, I said something in excess of 40% organic growth for Process Solutions. That means that Research and Applied were also growing in the low teens, so really broad-based growth.

And your question then is, well, do you see this as a onetime impact, or do you see this slowing down? Let me just give you a couple of specific examples that makes us confident. On the Process Solutions side, we opened up an assembly center for single use in Wuxi City less than 6 months ago. It is completely full. So here, we can't assemble things fast enough to ship to our customers there. From a Research Solutions perspective and Applied Solutions perspective, you would have seen that we've recently signed a deal with Alibaba to reach some smaller customers, and that business has picked up very, very nicely. E-commerce, the e-commerce platform is doing extremely well with our Research and Applied customers in China, especially Tier 2 customers. So we see really no signs of a slowdown. I mean, of course, especially with Process Solutions, bioprocessing, it's a little bit of a lumpy business where there can be large orders one quarter versus the others, so I would not get used to the 40-plus percent organic growth every quarter. But you can safely assume that China is our strongest growth market, and we expect it to remain so for a while to come.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Our next question comes from Joseph Lockey of Morgan Stanley.

--------------------------------------------------------------------------------

Joseph W Lockey, Morgan Stanley, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

Marcus, thinking about the Healthcare P&L in 2020, you said we should expect other operating income to be less than in 2019, but your bintrafusp development partner said earlier today that they might be paying you the full EUR 500 million development milestone in 2020 based on a possible interim read of the lung data. So does this mean that you would not book a development milestone within other operating income? Or is it at your base case is that you will not receive any development milestones for bintrafusp in 2020? And then, Udit, you've advised caution on extrapolating Life Science revenue trends, but you just lapped a very tough comp with 10% organic growth. And you just flagged a number of quite strong attractive trends. Consensus of 6% growth for next year, which seems quite conservative. China has done strong. But are you seeing any areas of weakening demand that would suggest growth materially slows?

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [7]

--------------------------------------------------------------------------------

Yes. Joe, I'll start with your question on bintrafusp. So obviously, when we say that 2020 -- or let's put it this way. Similar to the upfront payment that GSK has paid to us in February of this year, also the milestone payments of up to EUR 500 million will be recorded as deferred income over the period of working together and over the period where we incurred costs in the context of the collaboration. So that means that even when we will be or would be eligible to those milestone payments, we would record only a fraction of that up to EUR 500 million into our P&L. More details to come at a later point in time.

--------------------------------------------------------------------------------

Udit Batra, MERCK Kommanditgesellschaft auf Aktien - CEO of Life Science & Member of Executive Board [8]

--------------------------------------------------------------------------------

Superb. Joe, let me take your second question on Life Science. As you can imagine, this question has come up before as well. And this is one of the reasons why we showed you the market growth as well, right? So if you look at -- and by this time, you would have seen that most of our peers have reported. And the growth rates are between 4% and 6% and closer to 6% this quarter, given the strong dynamics in the market. In that market, we are definitely on the high end. We are well in excess of 6%. So your question is a fair one.

Now that said, while the market is 6%, we will -- we do believe we can exceed those growth rates.

For next year, as you think about comps, they do get tougher. And let me just take an example of Q4. I commented on this earlier. If you go back to last year, Q4 was the highest quarter ever for us in terms of absolute sales, about EUR 90 million above Q3 of the previous year. So that makes the Q4 comps a bit more difficult for us as -- for the balance of the year. And the same logic applies to next year. The stronger our growth this year, the comps become tougher. That said, I also don't want you to walk away with the message that we see any weakness in demand or any weakness in our business. We don't see that. But I would just say the comps get tougher as you continue to outperform. And this kind of outperformance, while we are happy that we are outperforming the market by this much, I think one has to be pragmatic about how much you can sustain -- how much lead you can sustain for the long term.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from Florent Cespedes of Societe Generale.

--------------------------------------------------------------------------------

Florent Cespedes, Societe Generale Cross Asset Research - Senior Equity Analyst [10]

--------------------------------------------------------------------------------

3 quick ones. First, on health care, on Gonal-f, could we have more color on the performance of this product in the U.S. and Europe? And regarding China, even though some of your competitors highlighted that the injectable products will not be impacted, is there any risk? What's your view on this Gonal-f China?

Second question is on Performance Material. You, in Q3, outperformed the market. The Semiconductor Solutions is minus 3%. Could you share with us what's your view on your ability to outperform the market following Versum acquisition and given the product mix from this company?

And last question, Performance Materials again. On OLED, you mentioned that the growth is slowing down a bit. Could you maybe share with us which are the reasons behind that?

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [11]

--------------------------------------------------------------------------------

Thanks for your questions, Florent. I start with your 2 PM questions. Yes. So first of all, you are right. Q3, so in Semicon, was down minus 3.5% organically, and that is slightly ahead of the market. If we take, for example, the MSI Index as representative for the market, the MSI index for 2019 is supposed to decline in the range of minus 7%. And here, at the moment, we are indeed doing better. When we look forward, of course, it's -- let's say, we don't have a crystal ball, yes. But what I can tell you is that we continue to believe in the mid- to long-term trend of the industry, with the semiconductor materials market mid-term, growing in the mid-single digits. And when we look, let's say, to 2020, we see at the moment some signs of recovery already, when we talk to customers, when we talk to suppliers, when we listen to the markets. Also, the MSI forecasts points to a moderate growth of around 2% into next year. And when we follow, let's say, the track record that we have, that we always outperform a little bit the MSI index in the past, and if you project this to the future, we should see some growth in 2020.

And to your -- to the second part of your question. Of course, the zoom is supposed to help us there because we believe that the 2 portfolios are very complementary. Our spin-on dielectrics, combined with resumed strength in deposition materials, we are both quite decent in silicon. That, from my point of view, will bring us in a good position actually to have a successful 2020 and beyond.

On your second PM question, on OLED, I can only say that we are continuing enjoying strong growth in OLED, in excess of 20% organic sales growth rate. I mean it was a little bit higher in Q1 and Q2, that's true, but Q3 was still above 20%. So coming from a basis of already EUR 100 million plus by the end of 2018, this is, meanwhile, nice, more and more sizable business, with also a very healthy margin. I pointed out already in August that OLED is no longer margin dilutive, neither to the group nor to PM as a division.

So now to your question on Gonal-f, which is a little bit more tricky. So on North America, we have seen double-digit growth. Key contributor there, very positive development. And there, in the U.S., at least, biosimilars is much less of a threat to us than, for example, in Europe. In China, very attractive market, but we see somewhat an economic downturn, so we are not too bullish at the moment but still a good business there. And overall, we definitely stick to the mid single-digit growth until 2022 for our fertility portfolio. And don't forget also, fertility is, in most regions, an out-of-pocket business, so it means not being reimbursed.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

We will take our next question from Wimal Kapadia of Bernstein.

--------------------------------------------------------------------------------

Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

Wimal Kapadia from Bernstein. Could you just first, on PM, your previous guidance for PM margins was around 30%. But given the change in business mix, how should we think about the division moving forward given that OLED is margin accretive like you just suggested and also growing quite nicely? And we know that Versum is also margin accretive. And then tied to this, just a comment you made, Markus, on mid-single-digit growth for semis. You previously guided to a 19 to 22 CAGR of a mid- to high single-digit growth. Should we now think of it as a mid-single-digit growth guidance looking from '20 to 2022, given that Versum will be in numbers in the 2020 base?

And then my second question is on Mavenclad. The slide on how you -- how revenues are recognized is very helpful. But can you provide a little bit more color on what that means for 2020 and 2021 for the product? Should we expect to achieve peak sales much sooner than the patent expiry? So i.e., we have a very strong growth in 2020, 2021. And then we see sales being a little more flat beyond that period.

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [14]

--------------------------------------------------------------------------------

Thanks, Wimal. First of all, addressing your PM question on the margin guidance. So we have given the guidance for the legacy Performance Materials portfolio, excluding Versum, that we said we would not fall below the 30% going forward. What is obvious -- or what is from today's point of view, the fact is that Versum will be margin accretive to our overall portfolio because the stand-alone margin of Versum is slightly higher, and we should also factor in the synergies of EUR 75 million cost synergies only that we have already committed to. So that means the Versum -- full consolidation of Versum since October 7 will give us some protection and some tailwind when it comes to protecting the 30% margin going forward. We should also however not forget, we have made this commitment in July 2018, and since then, also some things have happened. Yes? The semiconductor market is now going to a temporary weakness. Please note that I stress they were temporary because we definitely believe it will come back to good growth and development in 2020, but still. And we are facing at the moment the pretty lackluster environment in the automotive space, which is pretty significantly affecting our pigments business, which was not so much on the screen in July 2018.

The only thing I want to express is that is -- that there are some additional challenges also that we have to master and to cope with. We have put very strong focus on the last couple of months to stress cost consciousness and cost discipline, not only in PM, but through the entire group. And all this taken together, I would say, today, we clearly commit to the 30% -- to the minimum level of 30% margin in Performance Materials. However, when we come to March 2020, we'll give you a more detailed outlook for 2020, then having also a better understanding how the semicon market is going to develop and where we stand in terms of our endeavor to turn around pigments as quick as possible.

On your second question, I'm not sure whether I recall it rightly. It was referring to the Versum CAGR, I think 2020 to '22. Was it right, Wimal?

--------------------------------------------------------------------------------

Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Just that in the past, you've guided to semis as a business ex versus growing between '19 and 2022 between mid and high single-digit, but the comment you...

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [16]

--------------------------------------------------------------------------------

That's fair.

--------------------------------------------------------------------------------

Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

To the previous question was mid-single digits. So should we think of the guidance moving forward as mid-single-digits for semi?

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [18]

--------------------------------------------------------------------------------

No, Wimal. Our -- so our midterm guidance for semiconductors stays unchanged, mid- to high single digits. So no reason to take this down at this point in time. So we stick to it.

And last but not least, on Mavenclad. What was the question here? Sorry. What was your question on Mavenclad, Wimal?

--------------------------------------------------------------------------------

Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

Sure. So in the slide deck, you've given an example, an illustrative example of how you recognize the revenues for the product. But I just want to get a little bit more color on what that means for 2020 and 2021.

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [20]

--------------------------------------------------------------------------------

Yes. (inaudible).

--------------------------------------------------------------------------------

Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

Yes. Yes. Should we expect the sales to ramp up quite fast pre patent expiry and then see more steady sales? I'm just trying to get some context for what the growth profile should look like.

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [22]

--------------------------------------------------------------------------------

Yes. So we are seeing -- let's say, we are now still in the ramp-up phase, yes? So that means we have, year-to-date, 2019, recorded EUR 194 million. We have guided for EUR 300 million by the end of this year. You should expect this dynamic to continue into 2020, 2021. Yes. We would not provide at this point in time the more detailed view going forward and really phasing and timing of the exact ramp-up to the peak sales number of EUR 1 billion to EUR 1.4 billion. You should just note that while we have given you the sales recognition, and so how we recognize sales independence on, let's say, the 2 times prescription and that we only record sales, obviously, in year 1 and 2 of the active treatment period for the patients. You should not forget that, obviously, also we will get new patients on board, yes, which then will have their year 1 and year 2, while the older ones have their year 3 and year 4. So we do not -- definitely do not expect, let's say, reaching a plateau soon, neither in Europe nor in the U.S. So you can expect to see a continuous ramp-up of sales. I mean, otherwise, we would also have or run into troubles to reach our EUR 2 billion in 2022. So we need to see further sales ramp up, and that is exactly what we believe for 2020 and 2021.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Jo Walton of Crédit Suisse.

--------------------------------------------------------------------------------

Jo Walton, Crédit Suisse AG, Research Division - MD [24]

--------------------------------------------------------------------------------

I'm going to chance my arm and ask you to think about some of the pushes and pulls as we move into 2020. And in particular, what sort of signs we might look for, for a recovery in the Performance Materials business? You've talked about semiconductors returning to growth in 2020. Do you think that for the full year, it will have returned to growth? Or will it be a continuing decline probably in the first half of the year? I'd also like to ask if you've got any initial observations now that you own Versum, as to whether it's exactly as you thought when you got it, and whether versum sales have been equally impacted as the rest of the sort of semiconductor business? So when we think about Versum's contribution, it will be slightly lower than perhaps we might have expected as we move into next year, and whether that's also true at the profit and the sales level.

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [25]

--------------------------------------------------------------------------------

Yes. Thanks for the questions. Let's start first with the recovery. So as we said, we think that the semicon market will come back in 2020. Please do not forget that we were still in the first half year of 2019 enjoying the effects from the capacity ramp-up investments in China. That means in the first half of 2020, we are still running against pretty tough, pretty high comparables. At the same time, we would expect the semicon market to take up speed or drive regularly. So that means it is eventually fair to assume that H1 2020 will still be negative. However, H2 then should be positive, and the growth in the second half of the year should slightly at least overcompensate the decline in the first half of the year. That is our current view.

When we look a little bit on the sectors, for liquid crystals, we expect the decline to continue further. However, not at the same pace like at the moment, because at the moment, we are still coming from, as I said, from a very high point that we have reached mid of the year 2019. But you can expect liquid crystals declining further. On semicon, as I said, we think that, at a certain point in time in 2020, we are definitely back to growth. The earlier, the better. And we are working hard on turning around pigments. So here, we believe that, 2020, we will have at least, hopefully, a stable business in pigments. So -- and that should all add up to slightly growing business -- PM business in 2020.

On Versum, we have actually no big new insights now compared to what we have seen in the period where we were, let's say, between signing and closing and when getting in touch with them earlier this year. So the business there from our point of view is still in relatively -- or in good shape. We are heavily now working on the integration. The big focus at the moment is threefold. First of all, cultural integration, keeping the top line intact, and of course, now substantially adding the synergies with very, very detailed measures, monitoring them, following up to fully deliver on that front. And we see Versum sales basically similarly impacted from the overall market weakness and what we see or observe on our own semiconductors portfolio and on the somewhat, I don't know. So the sales number that we have given for 2019, the EUR 270 million, please do not forget that we do not record Versum a full quarter in our books, but only 86 days. So we have closed only on October 7. So basically, we are missing 1 week. So this might also add a little bit to normally a somewhat slightly higher number than you might have expected.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

We will take our next question from Simon Baker, Redburn.

--------------------------------------------------------------------------------

Simon P. Baker, Redburn (Europe) Limited, Research Division - Head of Pharmaceutical Research [27]

--------------------------------------------------------------------------------

3 quick ones, if I may. Firstly, for Udit. I wonder if you could give us some idea on the level of visibility and your expectation for the duration of the new modalities growth within buyer processing. We can see certain potential indications that could take almost 50% of current global capacity. So it look -- it feels like the potential upside is enormous. But I just wonder how much visibility you actually have on that?

And then moving on to health care. It's been an unusually busy week for lupus. So I wonder if you could give us an update on your development plans for evobrutinib and atacicept.

And then finally, one for you, Marcus. Just on the LTIP impact on net financials, I wonder if you could just remind us exactly how this arises and the potential for smoothing or hedging that risk in the future.

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [28]

--------------------------------------------------------------------------------

Udit, do you want to start?

--------------------------------------------------------------------------------

Udit Batra, MERCK Kommanditgesellschaft auf Aktien - CEO of Life Science & Member of Executive Board [29]

--------------------------------------------------------------------------------

Sure. Thank you, Simon, for the question. And I think you're totally right that there is a terrific, terrific momentum in the novel modalities area. But I would present 2 facts. One, in support of your argument that there is a lot of momentum. In our services business, between 30% to 40% of the new tests are in the novel modalities areas. So that tells you how much of the new testing protocols are in that particular segment. I mean it's a small part of our overall business, but it also gives you an idea of the leading indicators. However, on the other side, I would caution against assuming that the growth in bioprocessing or in process solutions is stemming from novel modalities now or any time in the near future. The Mavs growth is, by far, the lion's share. Over 90%, I would even say 95% of our growth, comes from the continued strength in monoclonal antibody consumption. And you'll recall the chart that I presented almost 1.5 years ago on the double-digit volume growth of mavs. I mean we are seeing that play out. And you see that if you just look at our portfolio and the growth -- where the growth comes from, it comes from our standard filtration products, downstream filtration products, that comes from cell culture media, which is used in monoclonal antibodies that comes from single-use bioreactors, which has been used in monoclonal antibodies. So the -- so novel modalities are growing almost double the rate of mavs but from a very small base. So from a growth contribution perspective, over -- I would say, over the next 4, 5 years, you should not expect that trend to change. Yet, the trend is unmistakable that you'll start to see a pretty nice trend buildup that should continue to strengthen this market for a very long time to come.

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [30]

--------------------------------------------------------------------------------

Okay. I continue, Simon, with your question on the LTIP. So LTIP, just to wrap up or to give you a short, short recap is our long-term incentive program for max higher management levels. We have across the company. So it's not only a program for the Executive Board. It's much broader. We have roughly 3,500 eligible managers within the group receiving LTIP. LTIP is consisting of -- 50% of the remuneration is based on the achievement of internal KPIs, which are our, let's say, our most important steering KPIs. And the other 50% is depending on the relative share price performance, Merck versus the DAX as a reference index, the German DAX. The valuation of the LTIP is an option valuation. And the time value component of that option, this is finally the thing that is entering into the financial result. So -- and as you may know, option valuation contains a lot of different parameters, which make the option valuation and, of course, also the share price development in the future, very, very difficult to predict. Unfortunately, that adds some kind of volatility to our financial items, which we neither can hedge, to be honest, and which we can also not really reliably predict.

What you can assume, however, is that what I said during the presentation, that in times when we have a bigger disparity between the Merck share price and the DAX, you can assume also bigger fluctuations in the LTIP, yes? But other than that, as I said, it's really, really basically not possible to give it some kind of rule of thumb to estimate this impact, and we also cannot really hedge it, yes? So we can only then explain what happened. And also, in Q4, we had this earlier, the LTIP effect might be there. However, obviously, it can also be positive or beneficial for the P&L. However, we are -- honestly, we are more happy if it's negative.

What you should also have in mind eventually is that what you see in the P&L is a delta. And it is -- the effect is especially strong if the delta in 1 year goes on the one direction and then prior year goes in the other direction. Then you see the effect especially strong. And unfortunately, that was exactly the case in the third quarter, and that is why the effect this time is so significant.

On your last question. No, second question. Yes, evo and atacicept. So on evobrutinib. So for -- let's start with systemic lupus. We will have data in-house in late 2019, and this is the primary completion date. So also keep in mind, we need a little bit more time then to read this out. So the readout would then be in early 2020. Then -- so after this readout, we will see where we stand and then also how we move forward, and that is highly depending on the outcome. The SLE is basically that part of the evo program, which is a high-risk, high-reward part. And we will give you an update once we know more.

On atacicept, we already said at the Capital Markets Day that we actually would not continue with atacicept on our own. That is one of the typical cases where we say, with regard to pipeline prioritization, we would focus to spend somewhere else in more strategic areas of the pipeline. However, so if we would be able to find a partner, let's say, externalize it in some way, we would be open for that.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

We will take our next question from Daniel Wendorff of Commerzbank.

--------------------------------------------------------------------------------

Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [32]

--------------------------------------------------------------------------------

A few on Life Science, please, one on Applied Solutions. And I wonder whether you could outline the contributions actually coming from Lab Water Solutions and Advanced Analytical. And maybe an add-on to this one. If you think of the type of customers for your Milli-Q IQ 7000 platform, who -- what type of customers are actually buying this mainly? That would be my first question.

And my second question is on the China growth and Process Solutions. And you mentioned that (inaudible). Well, that's it, actually. Yes.

--------------------------------------------------------------------------------

Udit Batra, MERCK Kommanditgesellschaft auf Aktien - CEO of Life Science & Member of Executive Board [33]

--------------------------------------------------------------------------------

Thank you. Thank you, Daniel. Let's start with lab water Milli -- lab water and [AA]. I mean, these are 2 very dynamic businesses. I mean lab water, as you know, is benefiting from the launch of Milli-Q IQ 7000 from last year, and our consumables are growing pretty nicely. So Q3, we saw growth in the high single-digits. And year-to-date, it's similar, a bit of acceleration in Q3 from, let's say, 7.5% to 8.5% or so. And then in Advanced Analytical, which is our analytical standards business, this has been doing extremely well. I mean it's really picked up momentum in this particular quarter in the low double digits, and for the year-to-date, it's in the high single-digit range.

Your next question was around our customers for Milli-Q IQ in particular, or lab water, in particular. We usually don't give out portfolio and customer information at that level of granularity. But just to give you an idea, our customers for this kind of product across the board, so for instance, there will be customers in pharma and biotech, that end market has been growing nicely in double digits. So you can assume the same for lab water industrial and testing. These are industrial labs and food and beverage labs. And there, you see a bit of a high single-digit growth you would also have customers in academia. We expect their the growth to be, again, in the high single digits, although that market, as a whole, is rather flattish. We feel, given the new launches, people are replacing their lab water tools.

The next one is diagnostics. Again, you see a flat to -- flat to at least low single-digit growth there. So you'll see across the board strength and demand for lab water. And here, what you really need to think of is anyone who's doing an experiment in the lab wants purified water. And that's the most ubiquitous reagent in a lab. So any lab wants it. And if you have a better platform, and this has come after about a decade or so, people are really rapidly replacing it in any laboratory across the board. The reason I read out those numbers to you is to illustrate that it's a very broad-based growth, and we don't expect a lot of volatility.

Now to your China question. Look, given that we've seen such a dramatic growth, I mean we dug in quite a bit deeper. Indeed, there are some large projects like we saw last year. But if you just compare -- I mean the way to look at it is to compare the year-to-date growth versus the Q3 growth. The year-to-date growth for China is roughly 20-ish percent, and you see 23-ish percent also 24% or so growth for Q3 itself. So you see a bit of momentum build up. You see the biggest change in momentum in Process Solutions, where the growth went up, I would say, by roughly 50% from what it used to be year-to-date before then. And that's largely due to some placement of our single-use and hardware. And then you saw a similar trend in Q4 of last year, where we saw an uptick in Q4 with about EUR 50 million or so increase in sales in Process Solutions. So indeed, it has to do with some onetime orders. So that's why I was cautioning in extrapolating that into Q4 and the trend that's ongoing.

That said, I want to just take a step back and say, look, we are very confident about this market. The end markets look extremely, extremely solid in China and globally, for that matter. And we definitely believe that we can continue with our strong portfolio and really have a lot of confidence in this team. And we can continue our strong execution and continue to outpace this market organically. And then that should flow through to the bottom line with the margin expansion that we've talked about. Thank you very much for your question, Daniel.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

We will take our next question from Keyur Parekh of Goldman Sachs.

--------------------------------------------------------------------------------

Keyur Parekh, Goldman Sachs Group Inc., Research Division - Equity Analyst [35]

--------------------------------------------------------------------------------

3 questions, please. One on pharma, one on capital allocation and then one for you, Udit. On health care, would you expect the MS franchise to be a growth franchise in 2020? Or would you expect the drags on Rebif to not be enough to offset the growth in Mavenclad? That's question #1.

Second, on capital allocation. Marcus, can you just remind us of your priorities? And can you reiterate your commitment to no big transactions over the next couple of years? Or do you think if an interesting asset was to come along, there might be some room for you to rethink that?

And then thirdly, for you, Udit, obviously, you had a phenomenal performance the last 5 years, whether this relates to growth and to margins. How sustainable do you think both of those are growing faster than your peer group and maintaining the margin that you have and the delta on the margin? Where do you see the biggest risk growth are to margins? And what do you think might drive that?

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [36]

--------------------------------------------------------------------------------

Thank you, Keyur. I'll start with your healthcare -- health care question. So the first one is an easy one. The answer is, yes, we are very confident that the neurology and immunology franchise in 2020 will be growing. And the -- so to say, the seizures will go up further. That means the outperformance of Mavenclad over Rebif decline will increase going forward. We have seen a 2.3% organic growth already in the Q3. This will widen further to the positive in Q4 and even more in 2020 when Mavenclad is further gaining traction and when the sales are going up.

Second was your question on strategic capital allocation. So as outlined now after the closing of Versum, if you look on the year-end 2019, we have a net debt-to-EBITDA ratio of roughly 3x. We have EUR 12.5 billion of net financial debt. And we have clear commitments out there to the rating agencies to restore our financials and to bring our cash flow from operations to debt -- gross debt and on net debt, depending on which angle you are looking on it, back to numbers that are actually supporting our current credit ratings, which have not been touched at all after the Versum acquisition. So we expect this to last roughly around about 2 years. And our agenda for the next 2 years is deleveraging. And we would have a little bit money left for small M&A but don't think that it is more than EUR 150 million to max EUR 200 million per year from 2000 -- or after 2021, we would have regained financial flexibility, also to think about some bigger things if there are opportunities, which makes strategic sense and which would also represent an attractive financial case. With that, to Udit.

--------------------------------------------------------------------------------

Udit Batra, MERCK Kommanditgesellschaft auf Aktien - CEO of Life Science & Member of Executive Board [37]

--------------------------------------------------------------------------------

Okay. Well, thank you for your question. I guess it is the #1 question we've been getting for a while now. Firstly, just reviewing the sources of growth from an organic growth standpoint. I mean you would recall that we talked about a portfolio advantage. So we have certain portfolios that give us an advantage versus the broader market, which grows 4% to 6%. This is not just bioprocessing, but it also includes parts of our Applied Solutions and Research Solutions businesses as well.

And the second is executing at a certain high level. Let me dig just a little bit deeper to give you some color and give some color to what's happening behind the scenes and what choices we have made. If you recall, back in 2015, '16, we shared our strategy. And the strategy really took our portfolio, which is 12, 13 business units, and put them on a market share and market growth chart. Portfolios that were growing faster than the market where we had good market share, we double down on and we invested quite a bit in these areas, right? This is bioprocessing. This is single-use. And here, you've seen the growth go up dramatically from 20% to 30%. It was 20% back in 2016 and 30% at the end of 2018. And that growth continues to this day.

Then we dug deeper into the portfolios where we had good market share but we were growing below the market. This was life Science Chemicals. And here, also through license chemicals and reagents. And here, through deliberate effort, we saw, first, the turnaround of our chemicals business. And this year, you've been seeing the nice performance of our workflow tools business. In fact, yesterday, I was with the team, and we were -- we had a lot of visitors from different customers. And we were sharing our latest Stericup -- our Stericup products. These are filtration products that are used in laboratories. And here, what we've done is reduce the plastics footprint by over 50% with our new launch of our platform. And that product is picking up very nicely and has very good gross margins as well. So really, it's a sum of small parts.

And then finally, in the Applied Solutions area, we felt we were not the best owners for our cellular analysis business. It's a nice business, but we were not the best owners. We had low market share, low growth. And we parted ways and sold it to Luminex. So we are very actively managing our strategy and focusing on allocation of resources.

And when you think about risks to the sustainability of growth, I will turn your attention to some of the growth vectors that I've talked about in this call and also in the past. We had identified process development and CDMO, especially as a tool to plant our consumables way back in 2016 when we build up our business unit in gene editing and novel modalities, right? We invested in our viral vectors contract manufacturing business. We have an antibody drug conjugate contract manufacturing business that we've invested in. And we have some really nice customers there. We are a leading producer of toxic payloads for antibody-drug conjugates. We've invested in that capacity in Verona and in Madison. We've invested in our end-to-end bioprocessing and process development business out of Martillac, France. We've opened sites in Shanghai and in Burlington outside of Boston. So we've identified growth vectors (inaudible) so the leading e-commerce platform. First, we put all our Millipore products onto the platform. And then we invested further in making the content better, making the experience better. And we are continuing that journey, and stay tuned. I mean there's a lot more to come there. And then finally, I would be remiss if I didn't mention our investments in Asia.

So you see, it's a very deliberate effort to try and identify these growth areas. I mean Life Science tools is not a business where you have big -- onetime big events that really make things go up. I mean none of our customers is larger than 2% of our sales and none of our products is larger than 2% of our sales. So it's a team sport, but the whole team has to rise.

And finally, let me conclude by saying that the growth is very broad-based. It is not just in Process Solutions and bioprocessing. In fact, the increased momentum that you see is because Research has turned around and Applied has picked up as well, and that's showing up in our top line. And to the margins, as long as the growth is -- as long as we focus on the growth in a high gross margin business and we do what we've done with our costs with the team that we have, we are seeing a nice margin expansion. I mean, basically, we are very thoughtful about it. We discuss it at a group level, at the Board level quite a bit, and we're finding room to invest while seeing a margin expansion with this stellar growth.

So unfortunately, I'm not going to give you a lot of ideas on weaknesses that I see. I mean I think it's a question of just managing deliberately where do you see weaknesses and acting on them rather rapidly, and that's what we've shown over the last 5 years. And as long as my team remains with me, I'm very confident that we will continue a reasonable track going forward. Thank you for your question.

--------------------------------------------------------------------------------

Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [38]

--------------------------------------------------------------------------------

I think we are well over the hour. We have time for 1 more question, please.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our last question will come from Falko Friedrichs of Deutsche Bank.

--------------------------------------------------------------------------------

Falko Friedrichs, Deutsche Bank AG, Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

It's Falko from Deutsche Bank. One quick question then from my side. In Life Science, you showed us the 3 areas of high interest within complex biologics, so that single-use viral vectors and ADCs. Could you quickly share your current market positioning in each of these fields with us?

--------------------------------------------------------------------------------

Udit Batra, MERCK Kommanditgesellschaft auf Aktien - CEO of Life Science & Member of Executive Board [41]

--------------------------------------------------------------------------------

Thank you for the question. We don't share the details on the market share, but I can simply tell you, in the viral vector area, we are 1 of the top 3 players. In ADCs, we are 1 of the top 2 players for producing these products. So I think that is as much detail as I can give you today. Detailed market shares for these nascent markets don't necessarily exist even today because every day, you'll see some expansion or the other happening. You can safely conclude that there is more demand than supply for both of these type of products today in the market and also for process development services and mavs.

--------------------------------------------------------------------------------

Constantin Fest, MERCK Kommanditgesellschaft auf Aktien - Head of IR [42]

--------------------------------------------------------------------------------

Great. Thank you. Thank you so much for joining this call today, for following the Merck journey. We look now much forward to meeting many of you in person in the upcoming roadshows. Thank you, and goodbye.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

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