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Edited Transcript of MRK.DE earnings conference call or presentation 8-Aug-19 12:00pm GMT

Half Year 2019 Merck KGaA Earnings Call

Darmstadt Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Merck KGaA earnings conference call or presentation Thursday, August 8, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Constantin Fest

MERCK Kommanditgesellschaft auf Aktien - Head of IR

* Marcus Kuhnert

MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board

* Stefan Oschmann

MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO

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Conference Call Participants

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* Daniel Wendorff

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

* David Paul Evans

Kepler Cheuvreux, Research Division - Senior Equity Research Analyst

* Emily Field

Barclays Bank PLC, Research Division - Research Analyst

* Falko Friedrichs

Deutsche Bank AG, Research Division - Research Analyst

* Joseph W Lockey

Morgan Stanley, Research Division - Equity Analyst

* Luisa Caroline Hector

Exane BNP Paribas, Research Division - Pharma Research Analyst

* Matthew Weston

Crédit Suisse AG, Research Division - MD and Co-Head of European Pharmaceutical Equity Research

* Peter Spengler

DZ Bank AG, Research Division - Analyst

* Richard Vosser

JP Morgan Chase & Co, Research Division - Senior Analyst

* Sachin Jain

BofA Merrill Lynch, Research Division - MD

* Simon P. Baker

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

* Wimal Kapadia

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

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Presentation

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Operator [1]

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

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Constantin Fest, MERCK Kommanditgesellschaft auf Aktien - Head of IR [2]

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Thank you, Summer, and a very warm welcome from my side. My name is Constantin Fest. I'm Head of Investor Relations here at Merck. And today for this Q2 2019 conference call, I'm delighted to be joined by Stefan Oschmann, our CEO; as well as by Marcus Kuhnert, our CFO. The next few minutes, we will be guiding you through the key slides of this presentation and after that, we are happy to take all of your questions. Having said that, I would like to directly hand over to you, Stefan.

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [3]

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Thank you very much, Constantin, and a very warm welcome to our Q2 earnings call. I think you all feel relieved that Constantin didn't feel compelled to read that disclaimer expresses where ever solitary. So let's get right into the substance. Q2 was a strong quarter with 5.6% organic sales growth, driven once again by our Life Science business as well as by Healthcare. And more importantly, group EBITDA pre grew by an impressive 20%, largely due to Healthcare's nonrecurring income from milestones and active pipeline management, but more on that later.

On Versum, most of you will have noted that in June, Versum's shareholders voted in favor of the acquisition. And the financing structure has been fully secured following the successful placing of a EUR 1.5 billion hybrid bond as well as a EUR 2 billion bond. We recently received the greenlight by Taiwan, and we remain confident on a closing in the second half of this year, likely towards the end of the year. And thanks to well-thought-out integration plan, we will be ready for day 1, once we receive the remaining regulatory clearances. Finally, we're confirming our guidance for the full year. We expect net sales to grow between 3% to 5% organically, while on EBITDA pre, we expect a significant organic increase between 10% and 13%. This will bring us to an EBITDA pre range of EUR 4.15 billion to EUR 4.35 billion and an EPS pre in the range of EUR 5.3 to EUR 5.65.

Now moving to Slide 7. Let's take a look at the individual contribution of the businesses to both the top and the bottom line.

Life Science's impressive delivery of 9% organic growth significantly contributed to the group's performance driven by strong demand across all businesses. Healthcare added another solid 5.2%, resulting from a stable core business and the increasing contribution of our recently launched products Mavenclad and Bavencio. Performance Materials saw an organic decline of 2%. You will remember us pointing to a temporary ramp-up of the liquid crystal business in recent quarters due to a number of Chinese swaps temporarily inflating the demand. We told you that we expected this trend to turn around by the second half and the first signs of that materializing is what you're starting to see now.

On the bottom line, the 20% year-over-year organic EBITDA pre growth is driven by the contribution of the Healthcare and the Life Science sectors. Marcus will come back to this shortly.

Moving to Slide #8. We take a look at the regional split. We see that organic growth is driven by all regions, and that the picture remains largely unchanged from last quarter in terms of APAC, again, hitting the double-digit growth rates.

And with this, I hand over to Marcus.

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Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [4]

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Thanks, Stefan, and a warm welcome also from my side. And now on Slide #10. As Stefan just mentioned, some more background and to see EBITDA pre drivers. You probably remember from our last call, our guidance of around EUR 140 million of nonrecurring income from the Healthcare business in Q2. Over the past month, we saw these materialize. EUR 75 million from the Peg-Pal milestone, around EUR 35 million for the approval of Bavencio in renal cell carcinoma by the U.S. FDA in mid-May as well as approximately EUR 30 million of deferred income from our alliance with GlaxoSmithKline.

Next to a higher profit after tax, the cash in from the GSK upfront payment also significantly increased our operating cash flow. And finally, net financial debt increased by nearly 17%. This was due to IFRS 16. Dividend payments and temporary investments of cash proceeds from the disposal of our Consumer Health business.

Moving on to Slide #11. A couple of comments on our reported figures and the financial result, in particular. You will find that the financial result of minus EUR 61 million has recovered from an unusually low Q1. Q1 had been impacted by the reevaluation of the F-Star purchase of option as you may remember. Going forward, please keep in mind that the H2 financial results will now contain a preparatory financing measures for Versum. As mentioned earlier, we have secured 2 financing rounds, which will incur an additional regular interest expense of round about EUR 20 million in the second half . This as well as other seasoned effects in connection with Versum financing raises our 2019 interest result guidance by about EUR 40 million to a range of EUR 260 million to EUR 280 million. We expect this increase to be partly mitigated in other lines of the financial results over the year.

Finally, second quarter earnings per share is substantially supported by the previously mentioned nonrecurring income recorded in the Healthcare business as well as the life science strong top line growth.

With this, let's have a closer look at the performance by sector starting on Slide #12. Healthcare had a solid quarter even more so factoring in a continued pronounced sales decline for Rebif, which was more than offset by the strength of the remaining base business. As such, our General Medicine's business did exceptionally well, thanks to double-digit growth of Glucophage as well as ongoing strong demand for Concor and Euthyrox in both China and Latin America.

Erbitux generated solid growth, driven by a strong performance in APAC, where we, again, benefited from the reimbursement recognition in China. As we expect this to be a supporting dynamic for the midterm, we are upgrading our expectations for Erbitux from stable to declining to stable to slightly growing.

As for our innovative medicines, we are happy to report another Bavencio approval in mid-May and have seen Mavenclad sales ramp-up nicely post-U. S. approval in late March.

Going forward, we expect the N&I franchise comprising Rebif and Mavenclad to grow organically in the second half due to these positive developments. I would also like to point out increase in R&D versus last year in the second quarter, which is a reflection of our increasing focus on cost discipline. EBITDA pre was, of course, further supported by the EUR 140 million of nonrecurring income mentioned before.

Including all these drivers, you can see significant margin expansion from 23.9% to 21.5%. I've read a couple of analysts reports this morning and most of you have already made a nice catch that even when we take out these nonrecurring income components in Healthcare, we have seen with the recurring income also and margin progression from Q1 to Q2.

I'm moving now on Slide #13. Life Science did very well, delivering another impressive quarter of 9% organic top line growth. As in previous quarters, while all businesses developed favorably, Process Solutions was, again, the main driver, which was 16% organic growth quarter-over-quarter across all major business segments. Applied and research contributed nicely as well. The increase of marketing and selling spend reflect both, this top line growth as well as our ambition to support the future performance through continued investment.

Looking at the bottom line, the strong growth to translate into an organic EBITDA pre growth of nearly 17% and an increased margin of 31.3%. This constitutes a positive margin development even when taking out the IFRS 16 effect.

Finally, I would like to mention that given this strong performance during the first half, we are upgrading our expectations for 2019 organic sales to a range of now 7% to 8% and EBITDA pre to an 11% to 13% growth.

Let's now move on to Slide 14 for some more insights on the P&L. In Performance Materials, Q2 showed a slight organic decline of minus 2%. This is in line with our expectation and still makes for a stable to slightly positive organic growth in the first half as well as margin levels that is still above our long-term target corridor of around 30%. We reiterate our belief that 2019 will be the trough year for PM. Display Solutions business saw a stable quarter as OLED's very strong performance mitigated the decline in liquid crystals. As you will know from the 2018 strategy update, following a temporary ramp up from new panel capacity, we expect liquid crystals overall not to show growth going forward.

Accordingly, for H2, you should also expect a decline that will be further emphasized by very tough comps. As we managed the liquid crystals business for cash, we continue to make cost focus a priority. The recent decisions to close our plants in (inaudible) and in Atsugi are proof points to that. While semiconductors came in softer this quarter, driven by a slowdown of the relevant end markets, we are still performing above market.

Surface Solutions is below prior year, driven by the ongoing automotive end market weakness. With this, we are adjusting our 2019 guidance expecting organic sales slightly lower at now minus 4% to minus 7% and adjusted organic EBITDA pre to minus 9% to minus 13% on softer, surface and semis due to the reasons mentioned before.

For semi, we expect a flat H2 and a recovery as of 2020.

Moving on to Slide 15. Briefly only on the balance sheet. The increase of cash and cash equivalents is due to the cash in from the Versum financing announced in Q2, amounting to EUR 1.5 billion. Since December, net financial debt rose from EUR 6.7 billion to EUR 7.8 billion. This is due to the IFRS 16 reclassification, which accounts for roughly EUR 0.5 billion. Dividend payments and the temporary investment of cash proceeds from the Consumer Health's disposal.

With this, our net financial debt-to-EBITDA ratio currently stands round about at 2x.

Let's now take a closer look at the cash flow on Slide #16. Let me briefly comment on some of the larger movements here. The strong operating cash flow is mainly the result of a higher profit after tax and an increase in other assets and liabilities due to the GSK upfront as well as a Peg-Pal milestone payment mentioned earlier. The investing cash flow also increased visibly by a total of EUR 671 million due to the temporary investment of cash proceeds from the sale of our CH business, while CapEx is on prior year level. And finally, the financing cash flow reflects a cash in from the issuance of the bonds linked to the acquisition of Versum. We have here included only the hybrid bonds. The euro bond was beginning of July so not included in the Q2 numbers.

Let's move on to the guidance.

I'm now on Slide #18, where you see the usual overview of our key 2019 earnings drivers. For Healthcare, we expect the N&I franchise to grow organically as of H2, following the further ramp-up of Mavenclad. This in turn will benefit mix and support the sector profitability going forward. Because it's the second half, you can also expect the total of between EUR 100 million and EUR 150 million of nonrecurring income. This includes some EUR 60 million from the GSK upfront in the second half, so roughly EUR 30 million in each quarter as well as in Q4, roughly EUR 35 million and another EUR 20 million from the expected approvals of Bavencio, RCC in Europe and in Japan. Also included in that range is potential Q4 support from additional pipeline and portfolio management measures. So Q3 will be relatively clean, except for the EUR 30 million deferred income from the GSK payment, the vast majority of the nonrecurring -- the remaining nonrecurring income will, therefore, occur in Q4.

However, as of 2020, we expect to be light less on other operating income and instead, expect to benefit more and more from the gross profit and margins driven by top line growth as pipeline sales continue to materialize. At the same time, cost discipline will remain the top priority. On that note, you can see here, that we now expect stable healthcare R&D costs for this year.

For Performance Materials, we expect to see in H2 the anticipated decline of the display business and liquid crystals, in particular, reconfirming our prognosis from 2018, that this year will be the sectors trough year. As mentioned earlier, a more volatile economic outlook leads to a higher levels of uncertainty in the semiconductor and market industries. We now factor this into our expectations and see a moderate decline in semi for this year, with growth only coming back next year. Assuming a normal development of the world economy, the view on growths of PM in 2020 remains intact.

Let me now hand back to Stefan for the full year guidance on Slide 19.

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [5]

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Thank you, Marcus. So as a result of our solid first half, we confirm our May guidance regarding sales, EBITDA pre and EPS pre. As we mentioned earlier, when you look into the businesses, you will see an upgrade in life science and a reduction in Performance Materials. All in all, we continue to forecast an organic sales growth of 3% to 5% and expect exchange to be slightly positive. Overall, we expect our 2019 sales in the range of EUR 15.3 billion to EUR 15.9 billion. Regarding our EBITDA pre, we also confirm organic growth from 10% to 13%, which, as you know, includes the EUR 130 million IFRS 16 effect. Currencies are also reconfirmed as a positive in the range of 0% to 2% year-over-year. And this gets us to the known EBITDA pre range of EUR 4.15 billion to EUR 4.35 billion for this year. And finally, EPS pre reconfirmed at EUR 5.3 to EUR 5.65.

And with this, we would like to now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Wimal Kapadia from Bernstein.

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Wimal Kapadia, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [2]

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Wimal Kapadia from Bernstein. The first one, how much confidence do you guys have in a return to growth of the semi business in 2020? And what drives that view? And then tied to that, you previously gave guidance in 2018 for mid- to high single-digit growth for semis to 2022. Maybe this is now a tough ask. So what do you think is a better reflection of your expectations today over that period?

My second question is on the matured drug portfolio, which continues to benefit significantly from China. Products like Glucophage and Concor, should we expect to see pressure from the 4 plus 7 policy in China moving forward? And how are you factor into your expectations?

And then my final question is very quick one just on first line renal cell and Bavencio, it seems like growth Q-on-Q was rather muted. So I wanted to know what contribution in renal actually provided in the quarter? What feedback you've had from physicians? And should we expect a bigger jump in 3Q from renal cell carcinoma?

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [3]

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Thank you, Wimal. So when it comes to a semiconductor growth, we continue to believe that there is a highly positive long-term trend within the semiconductor materials market. We see that the materials market is less cyclical than the equipment market or the chip market. As such, we see the exponential growth in data volumes. We see the need of a technology shift with many factories --for example manufacturers moving from 14 nanometer to 7 nanometer, and that requires a lot of new materials.

In '19, external sources had downgraded MSI forecast from 2% in January to minus 4% in June, which is an indicator for semiconductor materials demands. And our volumes have outperformed the market in the first half. What can I say? One of my favorite actors, Peter Sellers said when he played the role of Chauncey the Gardiner in my favorite film Being There. He said, "Growth has its seasons." And there will be growth in spring. I'm not sure whether I can be as precise as Peter Sellers was in that movie, but let me reiterate that we will see growth in Semicon again at the latest in the first half of 2020.

So that was on Semicon. And mature drugs, yes, we're very happy with the performance of our General Medicine portfolio in China. We are, as you know, we have a fully integrated supply chain in China. We manufacture in China. We had been on the essential medicines list for quite some while. So that means that we have a good ongoing working relationship with the authorities. We were not affected by the first round of the 4 plus 7 exercise. The second route is expected to come toward the end of this year, and it will probably be implemented in 2020. We realized that Glucophage and maybe Concor might be impacted mid next year, but we should keep a couple of factors in mind.

In the first round, we saw only 1 winner per tender. In the second round, there will be multiple minutes for each molecule. And we also expect that the price cuts could be offset by increased volumes in that huge market. And then thirdly, and I think importantly, that tenders only include of patent originators as well as high-quality generic and that could mean that low-quality generics might be driven out of the market. Moreover, we have factored in certain assumptions in our plans and you should assume that when we give forecast that this has been taken into account.

On Bavencio RCC, it's simply too early. We obtained approval in May. We will share more information at the Capital Markets Day. But it's too early right now to give any meaningful indicators.

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Operator [4]

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Our next question comes from the line of Matthew Weston from Crédit Suisse.

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Matthew Weston, Crédit Suisse AG, Research Division - MD and Co-Head of European Pharmaceutical Equity Research [5]

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Three, please. The first with respect to the tepotinib data from Vision in cMET exon14 patients. I think will do an update later this year. I wondered if you could confirm whether it would be world long or ASMO? Secondly, on the Versum transaction, Marcus, you set out the expected timing. I wondered given the slowdown in semis, whether or not you were still confident in the EUR 75 million run rate synergies?

And then finally, I think you're due a milestone from Kabi on the EU approval of biosimilar adalimumab. And it must be booked in the P&L somewhere. Is that right? And if so, where is it? And how much was it?

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [6]

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Matthew, I'll start on tepotinib. So there will be no update on Vision. There will be an update on INSIGHT 1 at a major conference.

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

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Yes. So I'll take question 2 and 3. Matthew, on Versum synergy realization, I can reassure you, we stand solid as a rock with our promise to realize EUR 75 million cost synergies once we have achieved the closing of Versum, which we continue to expect for the second half of 2019.

Your third question, you're right, we have achieved also milestone payment for or in context of the sale of the biosimilars business beginning of the second quarter. It is included in the numbers. It amounts to EUR 20 million. It is not P&L relevant so you do not find it in the P&L. It is -- it has corrected the so-called contingent considerations. You can see the amount on Page 60 of the quarterly report. And it has -- it was obviously a cash in and this is entered as part of investing cash flow EUR 20 million and we were granted this for the first commercial sales of adalimumab.

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Operator [8]

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And our next question comes from the line of Joseph Lockey from Morgan Stanley.

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Joseph W Lockey, Morgan Stanley, Research Division - Equity Analyst [9]

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Joe Lockey, Morgan Stanley. Marcus on other operating income, can you give any further detail what to expect for 2020? As you said, it is a bit of a plug to sell. So it'd be great if you could help us understand in broad terms how much lower you are expected to be? And then on Mavenclad, if you look at ex-U. S. growth quarter-on-quarter, it seemed quite low. Is there anything unusual going on there? Or is this another Peter Seller's seasonal growth issue?

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Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [10]

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So Joe, I'll start with your first question. So other operating income and expense for 2020, I mean you will understand that we cannot give you 100 precise guidance -- 100% precise guidance today. What I think is relatively obvious if you do the math is that 2020, we will have less 1 other operating income than we had in 2019. When you look back over the last couple of years we have always seen a certain volatility in that number. 2019 has a relatively high number. So if I do the math, we are, I would say, at least EUR 300 million this year, even a little bit more. So this obviously is not the level that we expect for 2020. However, we are strongly committed to continue our story of profitable growth going forward. And this will be a story predominantly of top line growth and of further gross profit delivery. But we would also touch this topic more in detail at the upcoming Capital Markets Day and give you more color and more flavor on that, especially, let's say, having also maybe a short glance into 2020.

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [11]

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On Mavenclad, Joe, I hate to disagree with you, but I would say that we're very well on track. So we are happy with the development. We have -- if you turn to Slide 31, you can see that we're making real progress here. We have a 40% increase in sales from Q2 versus Q1, that is global sales, obviously including USDA now approved in over 60 countries. We have achieved a reimbursement in about half of these to date. One of our key markets is Germany, so we have included some insights from Germany reflecting the progress capture that we have captured in recent quarters. On the top right, you see the improved clinical perception. I think this is highly relevant of Mavenclad versus the leading high-efficacy oral, we all know what that is and I think that sends a very strong message and some major improvement and perception of Mavenclad across all 4 factors listed. We were -- some of you were concerned because we didn't have a large ongoing clinical trial program prior to the introduction of Mavenclad and we are very happy with the progress that we've made when it comes to perception of key prescribers of the -- of this product. And you will get a lot more detail at the Capital Markets Day.

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Operator [12]

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And your next question comes from the line of Simon Baker from Redburn.

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Simon P. Baker, Redburn (Europe) Limited, Research Division - Head of Pharmaceutical Research [13]

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Couple of questions, if I may, please. Firstly, continuing on Mavenclad. I wonder if you could give us a little bit of color of your experience of the attitude towards and phasing of use of the high intensity therapies? We've seen and this was upon to AAN that there seems to be a greater willingness to use the more aggressive therapies a little bit earlier than it was in the past. And I just wanted to know how your experience with Mavenclad was seeing any potential changes there?

And then secondly, I wonder if you could give us a little bit more color on the recent universal display OLED deal in terms of when we should be expecting to see some impact from that arrangement?

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [14]

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Yes. Thank you. So yes, we obviously see in that field of multiple sclerosis, we see a certain paradigm shift. And it's probably not yet fully translating into clinical practice, but when talking to key thoughts leaders in the -- key thought leaders in the field of multiple sclerosis, there are quite a few people who would say we should actually -- we should move away from this stage therapy type of paradigm into a hit hard and early and then maybe switch to other options later on. And we think that this will also apply to Mavenclad we see as you also -- as we have pointed out on Slide 31, we see an increasing use in earlier lines of therapy in our major launch markets globally. 30% of the starts are actually treatment naive patients and we see switches predominantly from platform and oral platform injectables. So this is indeed an important trend.

Regarding the OLED agreement with UDC. This is basically a partner shift on product development where we're sharing informations about OLED materials that both companies have. We do not expect an immediate financial impact in that.

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Operator [15]

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And your next question comes from the line of Richard Vosser from JPMorgan.

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Richard Vosser, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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So just 1 more on Mavenclad, please, which is just, could you give us some idea of the percentage of patients that are returning from the first stage to have their second dose in the second year. And maybe a proportion of the sales in Q1 and Q2 that are from returning patients from prior -- from the -- for their second dose?

And then second question, just on the COGS within farmer or healthcare, rather, it seems very much higher than in previous quarters this quarters. So just some help there on what's going on? And how we should think about that for the remainder of the year?

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Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [17]

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Richard, I take your second question first. So COGS healthcare, our gross margins healthcare, here we see predominantly mixed effect. First of all, stronger-than-expected -- slightly stronger-than-expected decline of Rebif. Rebif, as you know, is one of the most profitable products in the entire group. We have seen similar to Q1, another 16% decline quarter for Rebif. That has had some marks in the P&L, especially in the reduction of the gross margin. At the same time, which helped us a great deal in the top line, we have seen the strong dynamic in Glucophage.

On the other hand, Glucophage is one of the comparably -- compared to other high margin products comparably lower margin products so also this has not contributed positively to the P&L from a margin mix perspective. So these are the 2 main components that has driven up COGS and which will also, let's say, an excellent amounts of COGS driven up by the strong volume development, but has especially deteriorated gross margin due to mixed effects.

Going forward, we expect, especially the Rebif component to be more and more compensated by Mavenclad. Mavenclad is also very, very profitable. And as we said during our presentation already, from the second half of this year onwards, we expect more Mavenclad contributions than Rebif declines. So net-net, we will be growing in the N&I franchise because the additional Mavenclad sales will overcompensate the Rebif decline going forward. And that should also give some relief on the gross margins from now on.

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [18]

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Yes. Richard, on your question regarding Mavenclad, we haven't disclosed any such information unless and I'll say it's too early given the timing of launches the fact that patients are being switching the initial patients majorities, which patients need a certain washout period, et cetera. So we have no reliable data on that yet. Obviously, we have some assumptions now internal -- in our internal model. I hope that Rehan will be able to share more information with you at the Capital Markets Day.

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Operator [19]

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And your next question comes from the line of Sachin Jain from Bank of America.

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Sachin Jain, BofA Merrill Lynch, Research Division - MD [20]

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Just 3 topics, if I may. Firstly, back for markets for 2021. I think the EUR 300 million you mentioned for '19, does that include the EUR 5 million amortization of the original upfront of the Bavencio-XALKORI deal that I think also goes away into next year. So that EUR 300 million include or exclude that?

And then second, and then we get more color at the CMD, but just as we think about bridging that gap, how much of it is organic product growth and Mavenclad, Bavencio versus cost discipline that bridges that gap into next year?

And second question just on Mavenclad U.S. launch reached at a high-level point to any differences or similarities in adoption versus the strong European launch noting as you did, I think, in the introduction that there've been less clinical trial involvement in the U.S. obviously Ocrevus more established?

And then the final question is on Life Sciences and the durability of the high single-digit growth or 7% to 8% you're now guiding for, are there any factors on the negative side that should reduce that as we think about 2021?

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Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [21]

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Sachin, I'll start with your first question. Just to make it very clear, the 2019 guidance on nonrecurring income does not include in no quarter the annual EUR 190 million from the Pfizer collaboration deferred income. This is not included and also all numbers that we gave that you have heard, are all incremental to that. However, we need to keep in mind that from 2020 onwards, unfortunately, these EUR 190 million will vanish. So next year, we don't have them anymore. So in order to continue our profitable growth journey, we have to compensate for that. Yes? So as I said, we will give you some more color at the Capital Markets Day and our thinking behind that, and so how we want to do that, but this is just important to note.

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [22]

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Sachin, your question regarding the U.S. launch of Mavenclad, again, let me reiterate, it's fairly early and if you look at what our competitors have disclosed at the respective point in time, I think we'll be following the same pattern. Obviously, the U.S. is a very different market compared to the international markets, and we have a different label in the U.S. I would like to draw your attention to Page 32, which gives you some flavor about some U.S. data, where we have strong physician access and we have a leading share of voice in the market.

We have 86% of neurologists, are willing to prescribe Mavenclad. We have 83% share in the highly efficacy dynamic market in RMS, and an 11% high efficacy dynamic share in SPMS. So we have a very solid market access foundation with 60 million lives with preferred access with a 170 million lives with no NDC block, which is key for the U.S. When we look at the type of prescribers, we have broad spectrum of early adopters neurologists from epidemic centers as well as from community practitioners are initiating therapy with Mavenclad. And we've seen that the profile of Mavenclad's mechanism with posology and the efficacy profile has made it a candidate for switches from all approved agents. And that you see on the right hand of the slide that in switches 40% of them orals, 25% are from traditional injectables and 35% are from monoclonals.

Your question regarding to the sustainability of Life Science -- of our Life Science performance, I would say, there are 3 factors: one is, obviously, the Life Science market, in that specifically the Process Solution market or the market for antibodies, we expect the monoclonal antibody market will continue to grow at a rate of 11 -- at a CAGR of 11% to 15%. We see that currently the top 10 originated perhaps represents 60% of the volume that will decline to about 20% in 2024. There are a lot many new monoclonal antibodies, biosimilars will gain share. And you know that we're somewhat agnostic to -- as to whether we sell equipment and -- or sell culture media or other products to original or biosimilars makers.

Then the other factor is that we have certain portfolio advantage that focuses on the higher growth segments of the market. For instance, bioprocessing Lab Water diagnostics offering, et cetera. And then, we think we also outperform the market. We grow faster than others in the relevant market segments. We have a broad range of differentiated products and services. And we believe that we have a superior ecommerce platform.

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Operator [23]

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And your next question comes from the line of Luisa Hector from Exane.

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Luisa Caroline Hector, Exane BNP Paribas, Research Division - Pharma Research Analyst [24]

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Maybe just start with the Performance Materials and the downgrade to the guidance there, can you give any color on whether that's coming across all the segments of the business or one in particular? And then back to multiple sclerosis, you talked about the pressure on Rebif, I wonder if you can split down that minus 16% in terms of volume and price? And whether you expect that kind of level to continue now? Or whether that could ease if you have some visibility there, please?

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [25]

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So let me start with the -- with our Performance Materials business. Basically, we have seen in the first half and we have been very transparent about this and obviously, proactive vis-à-vis the Capital Markets. We have seen this in a liquid crystal -- in the display business, we have seen a slightly better performance than expected. And that is due to the ramp up of new fabs in China. We've seen a better-than-expected performance of OLED, which is also driven by China, but not exclusively by China.

We've seen underperformance in the surface Solutions that is mostly caused by the automotive industry. And we have seen a reduction of market growth forecast for semicon, why we believe that we have outperformed the markets.

So you add this all up, this comes down to the statements we made early on in the call today. Marcus very clearly pointed out that we should expect a performance that in the second half, in liquid crystal that is clearly below the first half. We see if -- we continue to see -- we expect to -- we continue to see a strong OLED performance. OLED, which is growing very, very nicely and is not dilutive on a margin basis anymore.

We should remember that this company, if you go back a couple of years, was highly dependent on the liquid crystal business. And then, within the mix of PM and even more within the entire company, liquid crystal EBITDA is becoming much less of a factor.

When it comes to Rebif, I would hand over to Marcus to give some more details. We generally, we don't split -- we don't provide data or split by volume, volume and price. You have visibility to our pricing actions in the U.S. I'm not aware of any other market where in the world when there are price increases. Overall, just as a high level, it is that Ocrevus has come on stronger than expected, but everyone is suffering and we're keeping our share within the interferon market. We keep that roughly stable.

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Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [26]

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Yes. Not much to add actually as I -- well, as we don't give the price volumes, because I mean I wouldn't tell you too much. I think if I tell you that the volume component or the volume decline obviously is bigger than the price, pricing effect, so that I think is not too much to say. We have seen a similar decline, organic decline like in Q2 already in Q1. And honestly, last quarter, we were still a little bit more optimistic that this was a onetime effect in a way that the decline should be a little bit more moderate in the second quarter. However, as Stefan has lined out, in the meantime, we see that Ocrevus is doing better than expected and that points into the direction that eventually for 2019, the current run rate what you have seen, what Rebif has done over the first 6 months, we might expect also to happen in the coming 6 months.

Beyond that, we have to revisit the picture. Please also keep in mind what we said from H2 onwards, we will see the N&I franchise switching overall to growth. That means incremental Mavenclad sales will then be higher than the decline in Rebif. I think this is also an important message also with regard to the profitability as we also just discussed with one of your colleagues.

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Luisa Caroline Hector, Exane BNP Paribas, Research Division - Pharma Research Analyst [27]

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Thank you for sharing the U.S. reimbursement status. I can see there's still a little way to go until you have 100% reimbursement. Do you expect that to come online this year? Or is that still rolling into next year for that to be achieved?

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [28]

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That will be too early to speculate on.

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Operator [29]

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And your next question comes from the line of Emily Field from Barclays.

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Emily Field, Barclays Bank PLC, Research Division - Research Analyst [30]

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Just a couple of quick ones. Just another one on Mavenclad in the U.S. Just given the label, are you -- I just wanted to confirm whether you are able to promote for an efficacy claim of 2 years or of 4 years? And just in the real-world setting, over what timeframe would you expect that following the course of Mavenclad driven? You would expect patients to transition onto other MS treatments?

And secondly, did you see anything unexpected or surprising in Versum's third quarter report? On Tuesday, it looked a little bit light versus consensus, but I wasn't sure if the consensus was stale.

And then lastly, I was just wondering what gives you confidence to reiterate that 2019 will be the trough in Performance Materials given what it seems to be increasing macro concerns, particularly the trade tensions between U.S. and China and just how much of those trading concerns are impacting the current trajectory of the business?

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [31]

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So for Mavenclad, it's very simple, we have a 2 years' label, and that is it. When it comes to Versum specifically, I guess you would appreciate that we cannot comment on Versum's business or financials from a legal point of view. Versum is an independent-listed company. And message is that you contact them directly, but we feel the numbers fit the picture that we observed in the market over the last weeks and months.

You may -- on your third question, you may have picked up that we have said that we reiterate our guidance in our forecast on the assumption that there will be a normal overall economic development, heightened trade conflict, a large recession are not part of the scenario that we have built. So far, we don't see any concrete impact of the trade sanctions, yet, we see that places having customer -- companies like Huawei or so are not direct customers of ours. We're seeing -- obviously, we see that the U.S.-China trade situation is not necessarily improving. We will also be seeing friction between Japan and Korea. Interestingly, which relates to Semicon materials that is a mixture of potentially good and bad news for us. So we expect that there will be more techno nationalism or nationalistic policy that they could -- that could impact the industry. But, again, given the overall trends, given the unparalleled growth of data volume, the needs for logic, for memory, for sensors, we believe that this is a very and this is going to be a -- that the materials market will be very healthy growing in the mid-single digits. And we reiterate our 2019 as the -- a trough year assumption.

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Operator [32]

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And our next question comes from the line of Falko Friedrichs.

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Falko Friedrichs, Deutsche Bank AG, Research Division - Research Analyst [33]

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Falko Friedrichs from Deutsche Bank. Three, please. Firstly, when looking at your Mavenclad sales in Q2 and trying to figure out the U.S. contribution, in your Q2 reports, you mentioned that 24% of the Q2 sales from Mavenclad come from North America, that would be around EUR 15 million. Would it be fair to assume that the majority of the EUR 15 million is coming from the U.S. and then a smaller portion from Canada? Or should it rather be the opposite?

Then secondly, in Life Science, it looks like you launched quite a few products in the first half of 2019. So out of those, are there any that you would highlight of having received the most positive feedback and carry the most growth potential to sustain their growth going forward? And then lastly, on Performance Materials, you did make some larger decisions as part of the Bright Future transformation program and you closed your R&D sites in the U.K. and Japan. Can you just briefly walk us through that decision process here? And whether we can expect additional closures this year?

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [34]

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I'll start with the Mavenclad numbers. So the number that you mentioned is correct, it includes Canada and the U.S. And as a matter of policy, we do not disclose sales by country. In Life Science overall, our proportion of sales from newly launched products has increased significantly over the past couple of quarters and we are very happy about it. Long time since we had seen sluggish performance in the past our Lab Water -- in our Lab Water business and we're willing to launch of the latest generation Milli-Q has really provided -- has been a boost to our Life Science growth.

When it comes to the PM, that sutures to the components of that program have been disclosed. It had been discussed and negotiated with the relevant risk counsel, et cetera. So all components of the Bright Future program have been made public. The focus in Darmstadt will be on R&D and production, and we see an immediate bottom line contribution from 2019 onwards. That means an FTE reduction by about 15%, which is about 400 FTEs (inaudible). The closing of the site is expected soon in September 2019 in Atsugi. The shutdown of the activities there started and they will be completed during 2021 and the R&D production activities in Atsugi will be transferred and consolidated in other PM locations in Asia

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Operator [35]

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And your next question comes from the line of Peter Spengler from DZ Bank.

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Peter Spengler, DZ Bank AG, Research Division - Analyst [36]

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My questions have already been answered. Thank you.

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Operator [37]

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And your next question comes from Daniel Wendorff from Commerzbank.

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [38]

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Yes, Daniel Wendorff from Commerzbank. Two on Life Science, please. And the first one is on your adjusted EBITDA margin development in the division. So if I look at Q2 even excluding the IFRS 16 effect and the margin improvement was quite meaningful year-on-year in the second quarter. And if I look back at 2018 in the second half, at lease, I would conclude that the base is not too high. So my question here would be, are there any margin -- diluting margin mitigating measures or factors to come in the second half of this year?

And my second question on Life Science would be on process solutions, in particular. The growth rate, the organic growth rate there has even improved in Q2 year-on-year versus a very strong Q1 in my view already. And how should we think of this going forward in the second half of the year? And what drove this in the second quarter? And maybe one last question on Performance Materials. Thanks for the comments you made on the margin for OLED. Is it possible to give us a number here of the sales contribution of OLED to your divisional sales already?

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Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [39]

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Daniel, I'll start with your third question first because it's a relatively easy and short answer. So OLED sales are meanwhile in excess of EUR 100 million. And as we already elaborated on earlier that the margin contribution meanwhile is no longer diluted, more we cannot tell you.

On your first question on the EBITDA contributions of Life Science, yes, so you should have in mind that the second quarter of last year of 2018 was somewhat weaker. I think in the second quarter, we had this slide, EUR 20 million EBITDA miss due to a couple of factors that we were then elaborating a little bit more in detail out of my mind. This was a startup cost in cost part for novel modality manufacturing, there was a inventory valuation and there was a third one, I don't remember. So there were 3 factors, which led to an earnings miss last year. This year, obviously, was pretty clean quarter, where the nice strong top line growth translated very well, also down to the bottom line. So we have seen what we normally want to see with this strong top line dynamics, namely, leverage P&L. Looking forward, as I already said, there's not much reason to believe that the strong market sentiment -- the strong growth momentum in the market should somewhat significantly slowdown over the next 2 quarters. However, keep in mind that the comparables for Q3 and Q4, they get tougher, yes? So that is the reason why at a first glance, our top line growth guidance might look still a little bit conservative with 7% to 8%, but the comparables, the absolute numbers are relatively high with which we compare. On the margin side, actually, we and particularly you should not expect any major surprises in Q3 and Q4.

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [40]

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And Process Solutions business momentum? Sorry to ask that again.

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [41]

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Yes. So in addition to what Marcus said, we do not expect a change in market development or in our performance versus market, but the comparables are going to be tougher.

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Operator [42]

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And your next question comes from the line of David Evans from Kepler Cheuvreux.

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David Paul Evans, Kepler Cheuvreux, Research Division - Senior Equity Research Analyst [43]

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So just firstly, briefly on Rebif, just to check back again if the U.S. Q2 sales number had any rebate adjustments in there? Or any destocking? I'm assuming there wasn't any restocking after Q1. And then secondly, on your lower outlook for R&D spend, is there any more granularity on what costs are coming in less than you expected? Or what has maybe been kind of slowed or delayed?

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [44]

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So first of all, we never commented rebates. I'm sorry about that. When it comes to the R&D overall expense so we have mentioned to you actually 3 years ago that we're going to go through an investment phase given the quality of our pipeline and it would come back to lower levels as R&D spend as a percentage of revenue and this is what is happening. This is what is happening in future. There is -- so the ramp up was a conscious decision over a period of time. We also see that there is strict cost discipline in R&D, and we do also a very, very -- we're very disciplined at portfolio prioritization and the cost focus is here to stay.

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Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [45]

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If I may add one sentence, David. We also do not see any significant inventory or destocking effect when it comes to Rebif, so the number is, I would say, pretty clean.

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Operator [46]

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And your final question comes from the line of Matthew Weston from Crédit Suisse.

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Matthew Weston, Crédit Suisse AG, Research Division - MD and Co-Head of European Pharmaceutical Equity Research [47]

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Just one quick follow-up. Marcus, you were very helpful with the expectations in the second half of the year. Mavenclad plus Rebif showing growth. Can I ask the question, is that going to be true in Q3 individually and Q4? Or is that simply a statement about 2H?

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Marcus Kuhnert, MERCK Kommanditgesellschaft auf Aktien - CFO & Member of Executive Board [48]

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Yes. For the time being, I would stick to the statement that it is an H2 statement.

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Constantin Fest, MERCK Kommanditgesellschaft auf Aktien - Head of IR [49]

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Thank you. This concludes our call and I hand over to Stefan for the closing words.

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Stefan Oschmann, MERCK Kommanditgesellschaft auf Aktien - Chairman of Executive Board & CEO [50]

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Thank you very much for your question and your interest in our company. Again, I think it was a very strong quarter that we delivered in Q2. And I'm looking forward -- Marcus and I are looking forward together with the IR team to meet you at upcoming roadshows and at the Capital Markets Day. Thank you.

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Constantin Fest, MERCK Kommanditgesellschaft auf Aktien - Head of IR [51]

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Thank you. Bye-bye.

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Operator [52]

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