Arkadin Managed Calls
Event: Merck KGaA Quarter Results Call
Date: 19 May 2015
Speakers: Walter Huber, Marcus Kuhnert
Call Duration: 01:02:43
Conference Ref No: DE10035107 / EV00026975
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Tuesday, 19 May 2015
OPERATOR:
Ladies and gentlemen, welcome to our telephone conference to discuss the quarter
results. After the presentation you will have the opportunity to ask questions.
Should you need an operator during the conference call, you will need to press *0.
Dr Huber will start the conference.
WALTER HUBER.
I am Walter Huber. I am in charge of the corporate communication and would like
to welcome you to our conference. Our CFO, Marcus Kuhnert, will guide you
through the conference.
MARCUS KUHNERT: Thank you, Mr Huber. Good morning everybody, on my part, and thank you for your
interest, and welcome to our Q1 telephone conference that will be transmitted also
as a webcast. I will guide you through the presentation and after that obviously we
have also time for a Q&A session.
The first quarter 20015 was a solid and strong and challenging quarter. Our
businesses grew organically. We had tailwinds by positive currency effects, by
acquisitions - AZ Electronic Materials. This meant a growth in revenues, the merger
of AZ and of Pharma A&D produced Evofosfamide. We had the (Inaudible) check
for pancreatic cancer and we started the collaboration with Pfizer.
With regard to avelumab, we started the phase III for lung cancer this year.
Healthcare depends on the approval, obviously. The merger with AZ, we see
organic growth. 47 per cent of our revenues comes from growth markets and new
technologies, like UB-FFS technologies. We are innovative drivers with regard to
Performance Materials.
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The positive foundation is that whenever we publish our Q1 figures, we can give
more precise details on our data, growth. Sales have been growing by 15.5 per
cent due to a better organic growth performance in all three sectors by 1.3 per cent
and tailwinds due to the currency exchanges by 8.9 per cent. EBITDA pre
increases significantly and, as I said, the guidance for 2015, we plan for 2015 on
sales between €12.3 billion and €12.5 billion and EBITDA pre €3.5 and €3.55 billion
and an EBITDA pre before (Inaudible) between $4.60 and $4.80. I will give more on
that during my presentation later on.
In this context it's important to mention also that we see significant changes in the
exchange rates in the Q1 2014 and 2015. We believe this will continue in the next
quarter. I would like to underline that the prognosis and the guidance depends also
on the exchange rate situation. We believe that in 2015 we will find ourselves be
1.10 and 1.15 with regards to the dollar.
Let's continue with slide number 5 and take a look at the organic growth. As I said,
all three sectors grow organically. Healthcare grew slowly by 0.3 per cent
organically. The decline of Rebif was a little upset, especially due to our (Inaudible)
cases. In (Inaudible) we are below last year's growth, and I will give you more
details when we take a look at the figures. A positive effect is a technical growth in
the emerging markets, but also a positive growth rate in a lot of other franchises,
like infertility area.
Life Science sees a growth quarter, 3.4 per cent organic growth, mostly due to the
increasing demand from the biotechnology markets, especially Process Solutions,
with 5.4 per cent organic growth contributed to the performance significantly. We
have a significant growth also in Performance Materials on the integration and
consolidation of AZ Electronic Materials, is an important factor, almost 54 per cent
growth but also with regard to organic growth we have a growth figure of 1.6 per
cent. EBITDA of special effects on growth. You can see that in the graph. We see
a decline in Healthcare. This is due to the decline in royalty with regard to Humira.
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We will have to live with that in 2015 and then it's done. The increase in Life
Sciences is organic, but due to the exchange rate situation the exchange rate
situation is not favourable because in Life Science we have a significant cost base
in the US with a lot of production sites. This means that the costs increase due to
the exchange rate.
Performance Materials, on the contrary, we see a growth by €90 million due to the
acquisition of AZ but also positive exchange rate effects. Natural hedge is not bad
significantly like in Healthcare or Life Science. I will come back to that later on in
order to explain the effects of the exchange rate changes. The hedging losses
reduce the corporate EBITDA pre also. The Corporate segment sees the decline
apart from growth in administration costs. We lose hedging (Inaudible) due to our
strategy in Corporate, so this is also an effect due to the exchange rate situation.
On page 6 we see a new regional split. Compared to the first quarter 2014 we have
some new reporting. We don't use the term "emerging markets" any more but we
will report in a more geographic structure. Here you see Europe and Asia Pacific.
These are our single biggest regions, with very different developments. In Europe
we lost shares in the overall portfolio, while we gained in the region Asia-Pacific.
North America remains stable more or less compared with last year. On the one
had we see declines in sales with regard to Rebif, but we have a positive effect with
regard to the exchange rate.
Slide number 7 shows the development of net sales. You see the different growth
figures here, organic to the left, but you see in that in the mature markets, Europe
and North America, we see a decline. This is due to the Rebif effect in Europe and
organically also in North America. We see a growth in the areas Asia-Pacific as
well as Latin America. In the past we called these regions emerging markets. In
Asia-Pacific we have a significant driver with China, double-digit growth here,
especially with regard to the fertility products. The organic growth in Latin America
is mainly driven by the General Medicine franchise but also by Consumer
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Healthcare products. If we take a look at the left column, the figures, we benefit in
Europe and Asia from currencies and exchange rate but also from the acquisition of
Performance Materials.
After the operating performance some more figures on the financial details, so let's
go to chart number 9. Sales, as I said, increased by 15.7 per cent, EBITDA pre by
5.7 per cent on the (Inaudible) portion with regards to sales, so this means a decline
in margin, as you can see, a margin of 28 per cent now, last year 30.7 per cent.
The reasons for this are the loss in royalties and the decline in Rebif. It's a very
comfortable(?) product, so we can balance the growth by increased growth in the
emerging markets and we can compensate for that. But given the high profitability
of Rebif, there is still a negative effect on EBITDA pre and on the margin. Apart
from that, we have higher R&D costs that in the first quarter were unbalanced and
compensated by the Pfizer agreement. We see a negative effect in the shares, and
I'll come back to that later on and explain to you which this is the case.
The operating cash flow. As you might remember, in Q4 2014 the operating cash
flow benefited from a one-time effect, $58 million. In Q1 2015 it is burdened by onetime effects, because in 2014 in the first quarter we paid higher taxes. Together
with the higher interest payments, in order to pay the payments for the acquisitions
this meant that the cash flow is lower than last year. Compared to the end of
December 2014, we could reduce the net financial debt from €559 million to €78
million, so we are almost at zero. The free-cash-flow generation was positive but
also positive exchange rate effects, because when preparing to buy Sigma, we
converted cash into dollars, so we find a level cash position in dollars that benefited
from the exchange situation. Working capital increases almost by 15 per cent,
mostly due to exchange rate effects again. The number of employees increases
slightly by 0.5 per cent.
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On slide number 10 we see the results on the share, with two reasons. Due to AZ
we have higher depreciation with regard to the acquisition and purchase price and
location from AZ Electronic Materials.
The second factor that has an effect on these figures are the preparations for the
closing for Sigma acquisition. We have minus €35 million to €1.1 million here. The
drivers here are three: higher interest payments with hybrids and US bonds in
December and US dollar bonds in March as well as fees that we had to pay for the
financing of the bridge and to closing the acquisition. The second factor is our asset
programme. As you know, the asset programme consists of the share performance
of Merck with regard to tax, given that in 2015, the first quarter, we had a significant
growth of 30 per cent, then for our asset programme, and that it has an effect on our
EBITDA but it has a result in the financial result.
Last but not least, given that the interest rates went down, some of our long-term
accruals changed in value, so this has a significant impact also on the situation for
the financial situation. The guidance with the tax rate is below 25 per cent. The
changes with regard to EBIT and the decline in the financial result has an effect on
-- you see that in 13.4 per cent and the EPS of 13.3 per cent.
On the following slide we take at a look at the details in the different Rebif business.
Healthcare, slide number 11, as I already mentioned, a stable organic growth and
positive exchange rate effect of more than 7 per cent, so we have almost €1.7
million in net sales. We're very diverse development. If you take a look at the
organic growth, we're actually seeing Rebif go back with 15 per cent organic, almost
16 per cent, driven by the region of North America and Europe. In North America
we have a declining volume due to positive price developments. The price
development compensates for that. In Europe the growth is driven by negative
volume effects.
One effect here that needs to be mentioned is that in North America in the first
quarter 2014 we had a one-time effect by the wholesalers' provisions. This one-
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time effect had an effect on the figures of the previous year. So without this onetime effect the decline in Rebif would have been in double digits anyway.
Nevertheless, the decline in Rebif has been expected already by us, so we do
everything to postpone the decline and to compensate for it by pricing, but the
development is Rebif is no surprise. We have a negative development in Erbitux
with an organic decline of our 6 per cent. Erbitux in the first quarter remained below
our expectations (Inaudible) for this, our price effects in Europe where we were first
to go down in pricing. On the other hand, competitors were very active phasing
effects also, so these three components led to an organic decrease of 6 per cent.
We are not satisfied with that. So we have to undertake countermeasures to turn
the situation.
A positive development we have in Fertility and General Medicine, especially in the
emerging markets, supported the growth. Consumer Health developed double
digits, supporting my the marketing initiatives that we set up last year already. That
supported the figures to grow. Pfizer growing figures depend also on the exchange
rate again. We see also the already announced increase due to the collaboration
with Pfizer and the so-called R&D buy up for avelumab but also Evofosfamide, or
TH-303. In 2014 we guided also the capital markets in a way that for 2014 with
R&D costs of €1.4 billion, there's €350 million for the quarter. You see that reflected
in the P&L.
The exchange rate exercises a pressure, so with the ramp-up we expect an
increase in the R&D costs but we also have the positive effects. The (Inaudible)
margin from Healthcare is lower due to the mentioned reasons.
Life Science, a solid first quarter, with an organic growth of 3.5 per cent due to the
positive development of Process Solutions from a regional perspective. We can say
that in a regional perspective (Inaudible) market developed very well with positive
currency effects of almost 10 per cent and the sales of one sector. The sales in Life
Science grew double digit by almost 25 per cent with a control on the costs. We
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invested in selling and marketing in order to benefit from the growth momentum and
to push the momentum and ramp it up. Life Solutions has a moderate grown by 2.5
per cent organically. BioMonitoring, for example, is one of the contributing factors.
Bioscience is stable, basically, due to the fact that the demand, especially in the US
increased a little bit but it's still not very strong. EBIT declined due to the acquisition
costs that I already mentioned in double-digit millions, which is part of the P&L, and
EBITDA pre margin reaches 25 per cent. This is slightly below last year's margin.
The third division, Performance Materials, sees a strong quarter organic growth by
1.6 per cent due to healthy market trends but also tailwinds due to currency effects.
Performance Materials is our new sector with liquid crystal and the complementary
AZ Materials was a contributor and benefited from the UB-FFS method. That has
developed very well. This technology will be used in the liquid systems in place of
mobile phones with the newer generation. The biggest for market for TV screens,
we have a flagship technology, PS-VA and IPS. They performed very well, and we
see increased developed for large volumes and could realise increased volumes.
Pigments sector is supported by coating industries and the demand for Xirallic
products. EBITDA pre increases slightly but the drivers behind are AZ Electronic
Materials and positive currency effects.
One detail on the decline in EBITDA pre margin, it looks pretty heavy here with 1.5
per cent. Let me add on that that the decline is mixed driven: 25 per cent is AZ and
the EBITDA pre margin is at 30 per cent. So if you count the numbers, you see that
the EBITDA pre margin would have increased without the AZ margin. So we have a
positive margin development compared to last year's figures.
Two more slides before we come to the guidance. This is from inside the capital
situation, the balance sheet reflects the upcoming acquisition of Sigma-Aldrich. We
see significant changes in the balance sheet. €26 billion to almost €31 billion and,
to the right side, you have an increase of the cash situation due to the US dollar
balance in March this year. At the same time we have also Eurobonds with 25
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March and paid it back, so these transactions are mirrored here in the cash influx
but also currency effects as I mentioned already. A significant part of cash we hold
in US dollar and so the currency situation has a positive effect.
In terms of our assets, we did not have any acquisitions, so it's currently driven. On
the liabilities side we see an increase of the cash, due to the increase of the
financial debt, which is mirrored here. But we see also an increase of the cash
capital, €11.3 billion to €11.7 billion, due to currency effects but also the positive
market values of our cash-flow hedges with which we could secure the payment for
Sigma, €1.1 billion in the balance sheet. We see an increase of 1.8 per cent to 2.1
per cent here due to the currency situation.
Slide number 15 we see the cash flow, we see the decline in the operating cash
flow driven by higher cash payments in the context of the payment for Pfizer and
high interest payments due to the increased tax that's in the balance sheet. We can
see also an increase in the accruals, also due to the currency situation and longterm accruals or provisions. We see €1.1 billion cash flow, which reflects the sales
of financials assets and one month later we see the outgoing of this sum. We have
€3.7 billion influx due to the US dollar bonds, so $4 billion and the $1.3 billion from
the end of March.
Before coming to your questions, I would like to give you an outlook on our
prognosis, or guidance. It's a good tradition. We do this in May in a more detailed
way, so just a short update on Sigma-Aldrich. This is chart number 17. In March
2014 we will have the approval of the Federal Trade Commission. The Sigma
shareholders at the beginning of December approved the deal already. With
regards to the open approvals, we are working closely with the anti-trust authorities.
Certain things we cannot influence but we expect to be able to close the deal in the
middle of 2015.
An update on the financial aspects. The overall financial commitment is $17.4
billion and we expect $2.5 billion of our own cash that we can contribute. Shortly
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before the closing we will give our term loans with our 19 relationship banks that
come up to $4 billion. So we have a Federal interest-rate situation and therefore
allow for a maximum flexibility with regard to the payments in the upcoming three
years. Then there is $11 billion less, the so-called bridge financing. Of this $11
billion we have realised already two: $1.9 billion from hybrid bonds and $4 US dollar
bonds. The remaining amount will be provided in the upcoming months. The
bridging payments will be ready when we close the deal. With regard to the
currency risk, that was dealt with in last September already. Due to the strong
dollar the deal will not cost us more.
On slide 19 some additional information with regard to the currency situation. In a
global corporation company like Merck, this is a complex topic. In order to be able
to understand this topic, we came up with this slide. The message is that the
currency situation in the different divisions has a (Inaudible) effect. We see that in
the first quarter we have a positive tailwind of almost 9 per cent on the sales figures.
The message here is that this is not an effect that you can see in the EBITDA. The
reason for that is in the three divisions, due to the different structures, we have
different hybrids with regards to currency changes. In Healthcare and Life Science
the natural hedge is pretty high. This means that the result depends on a
proportionate strong on the currency situation. So in times when we have counterwind, this has a positive effect or breaks the development. In times like these where
we have an increase in the value of the currencies, we have an unproportionate
development.
In Healthcare we have a strong footprint in Switzerland. Biopharma is produced in
Switzerland. As you know, the Swiss franc increased in value significantly and a lot
of R&D activities are happening in the US. In Life Science an important aspect is
that we have manufacturing sites also in the US region. This is why we have a
significant cost base in dollars. That cancels, basically, the positive effects on the
EBITDA. The natural hedge is lower so this division is way more sensitive and this
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is positive now. The reason is that major parts of the Performance Material
business happen in Asia-Pacific. The whole industry is just dollar driven, so often
we invoice directly in US dollars while the costs are based in the euro region. For
example, liquid crystal production is happening in Darmstadt, so in the euro area,
and this means that we benefit from positive currency effects.
Let me come to chart number 20, the guidance for 2015 for our major KPIs. We
expect net sales between €12.3 billion and €12.5 billion. The EBITDA pre should
develop in a corridor between €3.45 million and €3.55 million. The EPS should
range between €4.6 million and €4.8 million. Let me underline that these figures do
not mirror the acquisition of Sigma-Aldrich because we don't have details on the
closing date. After that we will update our figures and include the effects.
Slide number 21 - this is my last slide - you see the different corporate divisions. I
would like to underline that the guidance is a major guideline for us. For Healthcare
for 2015 we predict an organically stable growth and EBITDA pre between €1.9
billion and €2.0 billion. For Life Science we expect for 2015 a moderate organic
growth with an EBITDA pre between €730 million and €760 million. For
Performance Materials we expect a slight organic growth, EBITDA pre, €1.05 billion
and €1.1 billion. As I said, the EBITDA pre is diversified for the different divisions.
The organic guidance for all three compared to what we said in March 2013 did not
change.
This is it with regard to my presentation and I'm available for questions now. Thank
you very much for your attention.
OPERATOR:
Ladies and gentlemen, we start our Q&A session. If you would like to ask a
question please press 01 and then one after the other you will have the opportunity
to ask your question. If you listen with a loud speaker, I would like to ask you to ask
your questions using the telephone not the loud speaker.
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The first question comes from Ms Weiss from Reuters. Your line is open, please
talk now.
MS WEISS:
Good morning, Mr Kuhnert. Thank you very much for accepting my questions. One
question on Sigma. You said you work closely with the anti-trust authorities, so one
question that I have is why does it take so much time, given that in the US it went
through very smoothly? We heard that by June latest there should be the approval
from Brussels. Are there any issues, any concerns that you need to deal with,
maybe that we have to separate from certain parts or is that not an issue, or maybe
will we see some delay? That's my first question.
The second question is I would be interested whether -- we have read in the press
communication that in 2015 you want to invest in immuno-oncology. Maybe you
can give us some figures on the investment for the immuno-oncology, how much
money you want to invest. I would be interested in that.
My last question goes to avelumab, which is a driver, and with regard to the
collaboration Pfizer. We believe it could be a blockbuster for us. Maybe you could
help us.
MARCUS KUHNERT: Good morning, Ms Weiss, thank you for your questions. First of all, with regard to
Sigma, nine months is just a normal period for a process like this. Sigma-Aldrich
has a complexity and a certain volume which means that we need to negotiate and
talk to anti-trust authorities in different jurisdictions, and that needs time. So we
work in a very confidential way with all anti-trust authorities with regard to the
approvals. With regard to the approvals, they are still open. The EU Commission
published certain concerns, limited concerns, that we are dealing with, so we work
very closely with the Commission in order to deal with these limited concerns and
address them in a timely manner and in order to deal with them in an appropriate
way. But we still expect that we will be able to close the acquisition by midyear.
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That doesn't necessarily mean 30 June, but give that the progress of the anti-trust
authorities is beyond our influence, we just chose the date of midyear. This does
not mean 30 June but it doesn't mean October or November because that wouldn't
be the middle of the year any more.
Your second question, the investment in immuno-oncology, we do not publish
precise figures here but what we do say - and I mentioned that in the call already that we have priorities on avelumab. So the collaboration with Pfizer with
(Inaudible) 1 and Evofosfamide 103 and we will promote that in the upcoming two
and three years with the investments behind. As I said in the past, in 2015 we
expect increasing R&D costs €1.4 billion. This is more than 2013. You have to
consider that in 2013 we have more than €100 million of investments. By finishing
pipeline projects, Evofosfamide (Several inaudible words), just to mention four of
them, that we published in 2014, so these €100 million, if you take them off from the
results of 2013 and take the figure of €1.4 billion you get an idea of how much we
invest in avelumab and TH-303 in 2015.
Avelumab also has the potential, that was your question. It's difficult to predict. Like
a lot of other experts in the market, we believe that immuno-oncology is a very hot
topic with a lot of potential, with a lot of therapeutic potential in the future and we are
positive and optimistic with regard to the collaboration of the Pfizer and the
(Inaudible) of our product. Mr Klein always underlines, and I would like to beg that
the proof of the pudding is in the eating. At the end of the day, what counts is
whether you get the approval in the market, and so we do our best, together with
Pfizer, to promote the programmes. In 2015 we will have 20 clinical programmes, 5
to 6 of them registering a project with regards lung cancer and more projects to
come.
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MS WEISS:
May I ask another question? You said that there are concerns with regard to the EU
Commission. You talked about limited concerns. Which kind of concerns are
these?
MARCUS KUHNERT: I cannot give details of that. You know what the anti-trust authorities do. They
check market share. With regard to our portfolio, there were limited concerns and
we are addressing them in an appropriate and comprehensive in order to come up
with a solution together with the EU Commission.
MS WEISS:
Thank you very much.
OPERATOR:
We have a question from the English-speaking area. The next question comes from
Oliver Staley(?), Bloomberg News. Your line is open now.
OLIVER STALEY:
(Not translated) Hi, thanks for taking the question. I had a question about the
decline of Rebif and your pricing strategy. It seems in the US, according to your
slides, you're raising the prices and in Europe you're lowering the prices. I was
wondering if you could talk to me about why the different strategies in the different
regions and what impact that has ultimately on the size of the decline in Rebif.
Thank you.
MARCUS KUHNERT: I'm not sure if I understood. Your question was about pricing with regards to
products that are already in the market?
OLIVER STALEY:
Yes. From your slides it shows that your response to the generic contribution for
Rebif is to increase the price of Rebif in the US and to lower the price of Rebif in
Europe. That's in one of the slides in the appendix. I was wondering if you could
clarify that strategy or explain why you have a different approach in the different
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regions and how that is working in terms of reducing the impact of the generic
competition.
MARCUS KUHNERT: I believe that pricing strategy is very important, especially in Healthcare and
Performance Materials. In Healthcare we have a pricing strategy, especially in
Rebif, and we tried to compensate with the volume losses with regard to all our
products. We want to balance it or compensate it or at least make sure that it's not
that strong. We are not a market leader in America. This means that a pricing
strategy -- with regards to our pricing strategy we need to orient ourselves to the
target groups and to the client groups and take a look at what the competitors do.
We have seen that the multiple sclerosis segment in America, you can still increase
prices there, and in the last month all our competitors increased the prices in this
area. This is where we also say last time in February 2014 but also in October 2014
we increased our prices 5 per cent in February and 7 per cent in October. So the
spaces in order to increase prices in Europe are way more limited in Europe. So
you don't have the possibility to have your individual pricing policy.
Another aspect with regard to pricing goes to Performance Materials. In
Performance Materials - and this is the normal logic of the industry - we have
positive volume effects with growth trends behind. For example, the trend towards
bigger TV screens. That means bigger volumes and this means more liquid crystal,
but also a growing prosperity in the growing markets as more people can afford to
buy a big TV screen, and also a faster replacement cycle. Consumers buy a new
TV screen more often than in the past. So we have this positive volume trend but at
the same time we see also negative pricing effects in the area because our
competitors, especially in China and in Japan, fight with their prices. And the
(Inaudible) products of our portfolio are finding themselves under enormous
pressure, but we can compensate for by innovations like UB-FFS technology that
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we can sell and introduce to the markets at attractive margins. Does that answer
your question?
OLIVER STALEY:
Yes, thank you.
OPERATOR:
Thank you very much. We have another question in German. Just one second,
please. The next question comes from Felix Fiedler(?), DPA, your line is open,
please talk now.
FELIX FIEDLER:
Good morning, I have two questions. The first is with regard to the new regional
structure. Tell me something about the growth rate and the development of the
growth rate. We talked about the growth rate last year when the regional still-called
emerging markets, so what about the growth speed, so to speak, in Asia-Pacific but
also in the new market segments? Can you give us the reason for this
development?
Second question is about the Pfizer agreement. One part of the upfront payment
was included in the result. How long will Merck benefit from this upfront payment
and how is it distributed on the upcoming projects? Thank you very much.
MARCUS KUHNERT: Let me start with your second question. The upfront payment to Pfizer has been
paid, as I said, in December 2014. It was realised completely and it will be included
in the P&L in a one-digit effect. The effect will be €40 million to €50 million.
The second question, regional structure and growth rates. You will see that the
growth in Asia-Pacific sees a positive development. This means that in Asia-Pacific
the share of the growth compared to the first quarter last year increased. So a
stable development in Asia-Pacific. In North America and Europe the growth
dynamic is declining, driven by the negative development in Rebif. In Europe in
2015 we see an organic decline of minus 3 per cent in North America, 3.5 per cent,
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and this is way more negative than in 2014. But we need to keep in mind that in
North America in 2014 we had this one-time effect for the wholesalers in Healthcare
that we're lacking this year. This is responsible for the fact that Rebif in the first
quarter doesn't look that good, worse than it is. In North America we see in 2014 20
per cent of growth above the figures of 2014.
To give you the figures, Europe grew last year organically by 1.5 per cent, so you
have a decline here. In 2015 North America grew organically slightly last year,
driven by the one-time effect that I already depicted. Latin America, organic by 6
per cent the first quarter 2015 19.9 per cent is much better. Asia-Pacific last year 9
per cent growth and this year we have 5.2 per cent, so below. Middle East, Africa
last year had a slightly negative development.
OPERATOR:
Thank you very much. We have another question in English. One moment, please.
The next question comes from Helen Thomas. Your line is open now.
HELEN THOMAS:
(Not translated) Good morning, thanks for taking my question. I had one question
that I just wanted to clarify to make sure I understood the translation earlier. When
you were talking about R&D spending for this year at €1.4 billion, were you saying
that if we compare that to 2013 but take off €100 million for programmes that have
finished, we can get a rough idea of what your spending is in immuno-oncology? I
make that about €320 million. I just wanted to check that I'd interpreted that right.
Then, when it comes to your collaboration with Pfizer, can you talk a little bit about
where, in a very, very competitive market, you see potential to differentiate yourself
in areas of the market where you have a strategic advantage with your product?
Finally, how long do you give that project to show real success? What is the
benchmark for success and how long do you carry on working and speeding R&D in
that area if you don't have success?
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MARCUS KUHNERT: We have termination costs by ongoing projects. During 2014 due to missing
success we stopped Ono Tecemotide in Q3 and Q4, (Several inaudible words) and
due to terminating the projects we spent more than €100 million. These costs we
will not have in 2015 but the R&D costs will increase nevertheless up to €1.4 billion.
If you take a look at these facts you get a feeling for how much money we spend in
2015 for the new projects like avelumab. You have to consider that we have a
50:50 cost-sharing agreement with Pfizer.
Your second question, the potential areas with the markets that are especially
interesting for us. These are first of all markets where the competition is not that
strong, so where the big players who work in the area of immuno-oncology don't
have strategic priorities. So we try to pick markets where we have competencies
and expertise that might be a niche here and there. To give you an example, the
areas that are interesting for us in the collaboration with Pfizer are stomach,
bladder, lung and ovarian. These are the areas where we would like to prioritise
with up to 20 programmes that I already mentioned before. The first phase III study
comes from the lung area.
OPERATOR:
Thank you very much. We have another question in German. The next question
comes from Heide Oberhauser(?), (Inaudible), your line is open.
HEIDE OBERHAUSER: Good morning, I have two more questions. The first one goes to Erbitux. You
said that you were disappointed, given the developments, and you will undertake
measures in order to improve the situation. My question is what do we need to do
are which are the measures that need to be taken.
My second question goes to chart number 19. You said that Healthcare and Life
Science have a natural hedge, and the positive effect of the currency does not have
a strong effect on the result. How will this situation change once we will have
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Sigma-Aldrich added in Life Science? Will it stay more or less the same or will there
be significant changes? Thank you very much.
MARCUS KUHNERT: Thank you, Ms Oberhauser. First of all I would like to underline that I did not use
the term "disappointed". I said Erbitux finds itself in a challenging market situation
as is below our expectations. With regard to the measures, currently we are
assessing and analysing the situation and the measures will be implemented.
Erbitux is an older product, so with phasing effects, with pricing issues, with limited
influence on our side, we have topics that we need to address in commercial and
we will focus on improving the sales activities. We will focus on this area in the
upcoming months in order to turn around the performance and enter positive
territory again.
With regard to slid 19 and your question, once Sigma-Aldrich is on board, the
picture for Life Science will not change significantly. The reason for that is that
Sigma -- the euro is the exposure currency. The euro for Merck is not a risk. The
price on that, Sigma is similar to Merck, so our Life Science business has a cost
focus in North America in their home-turf market. This means that the US dollar
exposure will increase moderately only, because the US dollar is a trend currency
and Sigma has hedged very well naturally.
We will increase in Asian currencies, but this is within the limits of what we expect,
so this will not change our overall exposure or change our exchange rate strategies.
So it's just a little bit more of what we already have. Thank you very much.
Given the time, we will allow for one more question, so whoever wants to ask the
last question, please ask the last question.
OPERATOR:
The last question comes from (Several inaudible words). Please speak now.
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MALE SPEAKER:
Good morning, Mr Kuhnert. I just wanted to ask one question. The result with
regard to the upfront payment, €40 million to €50 million, for how long will that effect
be there? The stock market has not been as positive on what has been published
by Merck, so how would you like to convince the analysts this afternoon? Will you
dwell more on the currency effects and the tailwinds of figures? What will you
communicate? Thank you very much.
MARCUS KUHNERT: With regard to upfront, the background is €500 million from Pfizer, upfront payment.
The upfront payment needs to be structured with regard to our upcoming R&D
activities and will be part of the P&L. €40 million to €50 million that I mentioned does
not refer to one year but to a quarter. So in addition to the upfront payment there's
the additional aspect. We have a collaboration agreement with Pfizer with regard to
Xalkori, lung cancer product. The requirements say that this collaboration
agreement needs to be assessed, it needs to be an asset - as an asset part of the
balance sheet. So this happened in the financial statement 2014 and it will be
depreciated but this value will also be continuously part of the P&L. These two
effects result into a contribution of €40 million to €50 million per quarter.
With regard to your second question, what are we going to communicate to the
analysts this afternoon, basically I can say that we will not tell them more than we
tell you. It depends then on their questions, but basically we gave them a couple of
examples and I believe that our guidance for the overall year is okay and did not
disappoint. So the true consensus lies in the middle of the situation. So I think that
we are within expectations. The EBITDA pre for the first quarter was a little bit
below the guidance. The focus will be during the year to compensate for that and to
make sure that the performances of Q2, Q3 and Q4 compensate for that. If you
take our Q1 EBITDA pre and calculate it for four quarters, this is below the expected
EBITDA, so we will provide more EBITDA in the next quarter than we did in this first
quarter.
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With regard to the currencies, we expect a strong tailwind until the middle of the
year. After the second quarter we will see a currency effect in a positive way in Q3
and Q4. This effect will go down. If you sum up this situation, as I said the dollar
range will be 1.10 to 1.16, we expect a positive revenue result driven by currencies
of 5 per cent to 7 per cent. As I said before, this will not have a direct influence in
the P&L so this is why I depicted things on slide 19 in a more detailed way. We
hope that during the year we will have positive news also with regard to uprising
business but also with regard to progress in our strategic pipeline projects. Thank
you.
Thank you very much. Thank you for the Q&A sessions. I give the floor back to Mr
Huber.
WALTER HUBER:
Thank you very much to everybody who is with us this morning. We speak again
with regard to the Q2 figures. If you have questions, please contact our media
team, who is available. Enjoy your day. Thank you very much for your attention
and goodbye.
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