Earnings Call: Q4 2017

Feb 28, 2018

Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor and Analyst Conference Call on the full year and fourth quarter 2017 results. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If any participant has difficulty hearing the conference, please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Mr. Oliver Maier, Head of Investor Relations at Bayer. Please go ahead, sir. Emma, thank you very much. Hello, everybody joining us on the call and also from the internet. Very much appreciate your interest and your participation. I would like to welcome all of the participants to Bayer's fourth quarter and fiscal year 2017 conference call. With me on the call are Werner Baumann, our CEO, Johannes Dietsch, our CFO, and the different businesses are represented by the responsible management board members. For Pharma, we have Dieter Weinand, for Consumer Health, we have Erica Mann with us, and for Crop Science, we have Liam Condon. Werner will start off the call today by presenting some of the highlights for the fourth quarter as well as for the fiscal year, cover the status on the Monsanto transaction and our outlook for 2018. Finally, including some more insight on currency sensitivity, since we get the impression that some more insight would be helpful for you guys. A little heads up again from my end, I know there are always lots of questions, but we would appreciate if each participant would ask maximum two to three questions so that we will be able to cover as much ground as possible in the timeframe available. I really would appreciate your support on this matter. From my end, I would like to start out the call by mentioning our cautionary language as always, that is in our safe harbor statement in all the materials that we have distributed today. With that, Werner, the floor is yours. Yeah, thank you, Oliver, and also welcome from my side to our earnings call, full year earnings call. Clearly, operationally, 2017 was a mixed year for Bayer. While we saw higher sales and also encouraging growth in earnings in Pharma, as a matter of fact, another record year. Business and consumer receded mainly as a result of the weak business development in the U.S. and, of course, some of the more recent issues in China with the two products that had been recategorized. Crop Science, all of you are, of course, aware of the mid-year effect we had on the inventory adjustments. This is actually an industry issue that we addressed as a leader first in Brazil. On group level, with that, we came in at about EUR 35 billion, which is 1.5 percentage points up on a currency and portfolio adjusted basis versus a year ago. Earnings were flat with 2016, with EUR 9.3 billion, and core EPS was 1% up and came in at EUR 6.74. On earnings per share, if we adjust that for the mandatory convertible that is included in the numbers, if you back that out, core EPS would have been up by 6% without that technical impact. Looking at the dividend proposal, our proposal is to increase the dividend by EUR 0.10 to EUR 2.80 per share for fiscal 2017, which is a 4% increase year-over-year. That will also bring the payout ratio slightly above the 40%, 30% to 40% corridor. It's going to stand at 42% of core EPS, and that is also a signal of our strong confidence in terms of earning growth going forward that we will see with the combination of Monsanto. It's actually going to be a continued growth of our dividend also going forward that we expect. Coming to Covestro, certainly one of the highlights last year. We further reduced our interest from 64% going out of 2016 to just about 25% at the end of last year, and we have further reduced our stake by another 10% in January. Looking at 2017, we generated proceeds of about EUR 4.7 billion and benefited very strongly from the strong stock performance of Covestro. Of course, with the remaining 14% we own directly still, we continue to look for opportunities to fully divest in a value-optimizing fashion. Now let me come to some key figures very briefly. I was looking at Q4. Sales were up 3% year on year and came in at EUR 8.6 billion currency and portfolio adjusted. Adjusted EBITDA was about EUR 1.8 billion and 1% below previous year, predominantly driven by weak business at Consumer Health. Of course, also looking at about EUR 100 million we had in negative FX in the quarter. Special items, special charges on EBIT came in at EUR 632 million for Q4 2017. That was a combination of about half of it, EUR 300 million in impairment losses on intangible assets and a little bit more than EUR 130 million in cost that was related to the preparation for the acquisition of Monsanto. Last but not least, we also increased our provisions for litigation and defense costs by roughly EUR 90 million. U.S. tax reform led to another adjustment in our deferred tax position, which hit us with about EUR 455 million. That was a one-off overall, and looking at the sustained effect of the U.S. tax reform, it will be a net positive for the company going forward, offsetting the one-off adjustment of our deferred tax position in the balance sheet. Core earnings per share advanced by 28% to €1.41 per share, very much driven by positive tax effects in our ongoing tax position. Of course, the effect of the changed reporting of Covestro, which now in Q4, was reported at equity in our figures. Looking at the individual businesses for the quarter, Pharma grew by 4%, and again, very much driven by our key growth products. Xarelto, Eylea, Stivarga, Xofigo, and Adempas, which increased overall by 16%, just about the same rate as for the full year to EUR 1.7 billion. EBITDA before special items increased by 1%, and we had already guided for a more expense-heavy fourth quarter during our Q3 call to EUR 1.2 billion. Also here, currency has started to weigh heavier on us in quarter four, looking at where the currency basket had ended the year. Consumer Health were down on the sales level by 4% versus prior year. One effect being the U.S. situation that has already been mentioned. Second, we have two products, Kang Wang and Pi Kang Wang, that surprising to us and without any further or let's say any advance notice, were reclassified from OTC to RX only, now behind the counter. That does, of course, affect the product. It meant an overall effect of about EUR 70 million in top line in the quarter. That combined with the overall weaker business, also means that we saw an effect on the earnings line with EBITDA declining significantly to roughly EUR 250 million. The Chinese effect in that was about EUR 50 million. That burdened quarter four for Consumer Health. Crop Science continues to normalize. We were up 1% to EUR 2.3 billion in the fourth quarter. The situation in Brazil in particular is very much under control, and we are ending the year better in Brazil than we had originally expected at the time when we announced the Brazilian situation mid-year. Seeds growth was very pleasing with 7% growth, very much driven by strong canola business in Canada. EBITDA before special items at Crop was down by 13% and came in at just slightly above EUR 300 million. Very much driven by lower prices in Brazil and of course also here, almost EUR 40 million in FX impact. Animal Health top line grew 2% in line with full-year growth compared to prior year, driven by Seresto which again had a very strong quarter. Overall, the product grew by 25% full year. Then EBITDA before special items increased by 29%. Of course, also helped by the acquisition of Cydectin from Boehringer. That has actually benefited Animal Health. Now, let me switch gears and come to the status of the planned acquisition of Monsanto before we then go into full year 2017. First of all, we continue to make real good progress on the regulatory front. We continue to be in very good and constructive discussions with the remaining regulators that have not approved the transaction as of yet. Roughly half of them have so far, very importantly, the Brazilians that approved the transaction in early February. Of course, we also achieved CFIUS approval, very importantly, last year, and we continue to work diligently on getting the remaining approvals, of course, very importantly in the U.S., where the authority in charge is Department of Justice and the European Commission. One of the things we had already proactively done in order to ready ourselves for an as early as possible closing and an ability to close was that in October, we announced that we had come to an agreement with BASF to sell select assets, essentially large part of our seeds business, and then our non-selective herbicides platform, so the LibertyLink platform to BASF for EUR 5.9 billion. The sales level that relates to the package that goes to BASF was about EUR 1.5 billion if you look at sales and turnover in full year 2017. Based on the feedback of the agencies, we have by now also offered our vegetable seeds business to be added to the divestiture that we are willing to consider. The vegetable seeds business had a top line of about EUR 430 million in full year 2017. Very important, all of the contracts that have been inked or will be inked will always be subject and contingent on the entire transaction closing successfully. Given where we are today, essentially the end of February, starting into March, and looking at the discussions status where we are today, we now see that the transaction is going to close, that is our expectation, in the second quarter. It will not close in the remaining four weeks of quarter one. Let me now move to 2017 full year and our performance against our most recent guidance as of quarter three update. Sales came in line with guidance. We had guided for about EUR 35 billion, and a low single-digit increase, EUR 35 billion-EUR 36 billion. At the end of the year, we reached EUR 35 billion. Of course, we do also here see a significant currency impact that weighs on top, but also on bottom line. Adjusted EBITDA was flat year-over-year and thus slightly missed also our own expectations. In the numbers, we had roughly EUR 200 million of currency effect at the adjusted EBITDA level. Core EPS came in slightly better than expected, up by 1% in 2017, or as already mentioned, 6% on a like-for-like basis if we adjust for the mandatory convertible effect. Special charges came in at EUR 1.2 billion, if you look at EBIT level. Mostly driven by EUR 450 million in impairment losses on intangible assets and then EUR 300 million in expenses that are related to the preparation of the acquisition of Monsanto. Further special items of EUR 227 million were related to some efficiency improvement programs that continue to run the company. Last but not least, close to EUR 200 million or EUR 188 million to be exact, were related to provisions for legal risk and litigation. Let me now go into some operational details, and starting with pharma. Pharma overall grew by 4%, which is better than market in 2017 and reached a top line of EUR 16.8 billion. As already mentioned, very much driven by our key growth products. Could have been even better if CSL, that is the company that distributes Kogenate under the brand name of Helixate, had lived up to its contractual obligations. They started to actually cease their orders in the second half of the year, and if they had their normal contractual order pattern, pharma sales would have been up by 6% year-over-year. Xarelto continued to develop very nicely. Also, last year, growth came very much from higher volumes, in particular in Europe, China, and Japan, and the U.S. grew as well. Eylea saw very strong growth, particularly driven by strong volumes in Europe, Canada, and Japan. Xofigo was up almost 26%, mainly driven by the launch in Japan and higher demands in the U.S. Stivarga increased as well very nicely. Here we benefited from approvals for Stivarga in 2017 for second-line treatment for patients with hepatocellular carcinoma, and that was very much driven by effects then positively in the U.S. and Japan. Adempas volumes were up, in particular in the U.S., and with that Adempas also grew solidly double digits with 18%. EBITDA before special items increased by a very nice 9% year-over-year, despite negative currency effect of roughly EUR 100 million. If adjusted for currency, it would have been even double digits with 11%. Growth was very much driven by higher volumes, and with that, efficiencies in our cost of goods position. R&D was on prior year level, and we also had included in R&D, in our R&D line, a mid-double-digit million amount from a development collaboration that we booked at income and that netted against the R&D line. In addition, we recorded a positive earnings effect from a receivable in the mid-double-digit millions as one of our distribution partners, which is CSL, for Kogenate, did not fulfill its purchase obligations, and we booked a corresponding receivable that they owe and that we will go after. Sales of Consumer Health fell by 2% in 2017 and came in at $5.9 billion. As mentioned, very much driven by the U.S. situation and then further enhanced by the Chinese situation with Kang Wang and Yi Kang Wang. I already mentioned the EUR 70 million impact on top line in quarter 4. Aspirin, including Aspirin Cardio, was up 6% year-over-year to EUR 1 billion. Claritin was down slightly versus previous year, where we benefited from a product line extension in the U.S. The reason for Claritin being down was very much driven by fairly stiff competition both in the U.S. and in Japan. Very nice growth came from Bepanthen, here particularly driven by Europe, Middle East, and Africa, while Aleve faced heavy competitive pressure in the U.S. and also cycled over a product line extension in 2016. EBITDA before special items at Consumer fell by 13% to EUR 1.2 billion. Negative currency effects weighed in with EUR 25 million, and the decline overall was very much driven by lower volumes. Of course, with the reverse switch in China, that contributed with an additional expense of EUR 50 million, as already mentioned, so full year the same as for quarter 4. With lower volumes than expected, we had a higher cost of goods position and also saw some further inventory write-downs. Earnings were, on top of that, held back by further investments in sales and marketing. In contrast, we had some positive impacts from the divestment of a non-core brand. We continue to cleanse the tail as every other company does it in order to optimize and streamline our product portfolio, and that had a positive effect year-over-year. Let me now come to Crop Science. Our sales fell by 2% to EUR 9.6 billion, mainly attributable to Crop Protection business in Brazil. If you adjust for that, sales would actually have been up by 3% year-over-year at Crop Science. So, absent the Brazilian issue, we had actually a good underlying growth momentum in crops. Except for Latin America, all regions improved. In Latin America, of course, Brazil weighed heavily on the performance, and with that resulted in an overall decline of 18% year-over-year, whereas in the other regions, we saw a much nicer picture. The deloading program in Brazil continues to work very well. After the announcement and implementation of the measures after quarter two, we have seen a significant reduction of channel inventories, and we are slightly ahead of our plan at year-end. We have also seen a significant positive adjustment in our remaining working capital, and that means in our days of sales outstanding in Brazil in particular. EBITDA before special items for Crop declined by 16% to EUR 2 billion. Included in that number is about a EUR 63 million currency impact. The significant decrease in earnings was, of course, driven by the EUR 355 million hit we took in line with the end of quarter two announcement of the Brazilian issue and us working through the cleansing of the Brazilian situation. Let me now come to Animal Health. We saw an increase currency and portfolio adjusted of 2% to EUR 1.6 billion. We have seen very nice and strong growth of Seresto, which grew by 25%, and with that offset the erosion that we continue to see in our Advantage family. Adjusted EBITDA benefited, among other things, from the acquisition of Cydectin and very good cost management plus the increased margin from increased sales and came in at EUR 381 million for full year 2017. Moving on to the group outlook for 2018. Given the fact that we see a significantly adverse currency environment compared to full year 2017 or even worse, beginning of 2017, we added to our guidance that is based on the currency rates as of the end of 2017, also a currency adjusted view so that you can better see the underlying business development that we would see absent these massive changes in our currency basket. First of all, for 2018, we expect flat sales based on December 31st currencies to come in at EUR 35 billion. Adjusted for currency and portfolio, this corresponds to a low to mid-single digit increase, and EBITDA before special items is to come in at prior year level as well. Also here, currencies hold back the underlying development, which would otherwise have seen a mid-single-digit increase on a comparable like-for-like basis year-over-year. We have also included the temporary supply interruptions due to the remediation issues that are being addressed in our production facilities, most predominantly in Leverkusen. We expect an adjusted EBITDA impact of about EUR 300 million. That is included in our guidance. Out of that EUR 300 million, the by far largest portion relates to Pharmaceuticals and a minor part also impacts our Consumer Health business. Earnings per share in continuing operations are expected to come in at prior year level. Also here, if we were to adjust for currency effects, we would see an increase of core EPS by a mid-single-digit percentage. Looking at the divisional guidance for Pharma. We plan to generate sales in excess of EUR 16.5 billion, taking into account the aforementioned supply constraints coming out of Leverkusen predominantly. The corresponding underlying growth rate would be a low single-digit increase year over year on a currency and portfolio-adjusted basis. Looking at our key growth products, we target a sales level that moves us towards EUR 7 billion top line by the end of 2018. EBITDA before special items will decline by a low single-digit percentage. We also anticipate a slight decline in the EBITDA margin before special items based on the rates as of the end of 2017. If we also here look at constant currencies, we would see an increase of EBITDA before special items by a low single-digit percentage. You really see the severe impact currencies will have based on where we stand today on our business going into 2018. Consumer Health sales will come in at a targeted level of above EUR 5.5 billion, which would then translate to be at prior year level on a currency and portfolio-adjusted basis. EBITDA before special items will decline by a low single-digit percentage. Here, adjusted for currency, we would see a low single-digit increase of our earnings in Consumer Health. Crop is expected to come in at a sales level of above EUR 9.5 billion. That corresponds to a mid-single-digit growth on a currency and portfolio-adjusted basis. EBITDA is expected to increase by a mid to high single-digit percentage. Currency adjusted, we would see mid-teens year over year earnings performance in Crop, which then also takes into account and normalizes the negative effect from the Brazilian issue we have been exposed to in 2017. In Animal Health, we expect a currency and portfolio-adjusted increase in sales by a low single-digit percentage. The expected EBITDA before special items is going to be below last year by a single-digit percentage. Currency adjusted, EBITDA before special items would come in at prior year level. We have a technical effect in Animal Health, and that is that both sales and EBITDA before special items are negatively impacted by an accounting regulation, and that is the revised IFRS 15 in financial reporting standards for multi-year contracts and how they have to be accounted for. Let me now come to currencies and what they do. I think it is very important to understand also in order to properly judge our underlying performance and the exposure we see based on where we stand currently with the overall currency basket. In terms of sensitivities, you see on the chart that a one percentage point move of the currency basket against the euro would impact top line by a quarter of a billion euros and bottom line, looking at the adjusted EBITDA impact by roughly EUR 70 million. If you now look at what that would mean based on the rates as of the end of 2017 for 2018, we will see a top-line impact of minus EUR 1.4 billion. EBITDA will be impacted by roughly EUR 450 million due to the currency exposure we see as of the end of 2017 and going into 2018 where currencies stand today. The most important foreign currencies are depicted here as well. You can see that it's very much driven by the U.S. dollar, the Chinese renminbi, and the Japanese yen. But I would also draw your attention to others on the EBITDA line because a number of currencies that are very expensive to hedge are then floating freely in our exposure, and they contribute a significant part of the overall currency exposure. With that, I think the overall sensitivity should be well understood. Then in terms of divisional exposure, both top and bottom line, a 1 percentage point impacts pharma. Roughly 50% of the company exposure for Consumer Health, top line 20% and bottom line 15%. Then for Crop, it is about a 30% impact on top line and 35% of the overall company exposure on bottom line impact. With that, I would like to conclude my remarks, and we are now happy to take your questions. Thank you. Great. Thank you very much, Werner Baumann. Emma, I think we are ready to open up the lines for Q&A. Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press the star followed by 1 on your telephone. If you wish to cancel your request, please press star followed by 2. Your questions will be answered in the order they are received. If you are using speaker equipment today, please lift your handset before making a selection. Anyone who has a question may press star followed by 1 at this time. 1 moment for the first question, please. First question comes from the line of Mr. Verdult. Please state your name, company name, followed by your question. Thank you. Peter Verdult, Citi. Just 3 questions, please. Werner Baumann, number 1. I understand you have meetings with DOJ coming up next week. The Attorney General was in Europe last week. In the event you do get both U.S. and European clearance over the coming weeks, are you willing to provide today an update on potential deal financing and likely size of the rights issue? Effectively, is EUR 9 billion a sensible number to assume? Secondly, on guidance, either for Johannes Dietsch or Werner Baumann. 2017 only includes 1 quarter of contribution from Covestro. Should we assume that your guidance that you have laid out today for 2018, only includes 1 quarter's contribution from Covestro? I just want to make sure that there is a proper like-for-like comparison when we compare the numbers. Then lastly, Dieter Weinand, on pharma. Could you provide a rough split between what you think will be lost revenues and the actual remediation costs as it relates to the EUR 300 million EBITDA hit that you have laid out? Then ending on a positive note, the Loxo collaboration, with the filing and potential launch this year, what is Bayer's peak sales expectations for the lead asset, larotrectinib? Okay. Thanks, Peter. Let me start with your question on Monsanto and our meetings. We cannot comment on meetings that are supposedly scheduled or not, and I hope you understand, because to the extent that we are concerned, those are confidential dates that we cannot comment on. As a matter of fact, it is of course true that Mr. Delrahim was in Europe last week and had a number of discussions both in Brussels and to the extent we know, also in other countries such as Germany. Your second question relates to the expected clearance and when that will happen. You can safely assume that we will update you as fast as possible once we have higher visibility on clearance in the U.S. and the European Union in particular, because those two are of paramount importance for the level of comfort we need to start our financing measures, and very importantly also, the equity issuance. So whenever that is going to be, we will very swiftly inform you. And with it, then also inform about the size of the equity issuance. What we have said here all along is that we do, as a matter of fact, benefit from the significant proceeds, also substantially better than expected, I have to say, from the Covestro divestiture. And that will weigh in when it comes to sizing the equity issuance and we are on record, have been for some time, that it will be quite a bit lower than what we had originally guided for. What the final number is going to be, we will update you with once we know that we already start the equity measures. So with that, Hanno will take the question on guidance and the Covestro at equity, then followed by Dieter. Yeah, Peter. Covestro was included in Q4 with 25% of their net result. That translates into roughly EUR 0.16 per share, which was included in Q4. In January, we did another block trade, and our share in Covestro is now 14.6%. With this share, we will include the net result of Covestro going forward until we have further reduced our shareholding in Covestro. So you can assume roughly 15% of net results to be included in our financial results. Dieter? Hi, Peter. The impact of the supply is mainly on the revenue that we have included. There's some minor adjustments associated with that, and that is due to the time periods of shutting down, restarting lines across a number of mature products in our established products portfolio. So the fairly broad number of products that include Adalat, Aspirin, Nimotop, Levitra, and so on. Each part is only small impacts, but the accumulation of that then impacts, it adds up to the total. But it's mainly the revenue impact, the margin associated with that. With regards to Loxo, we have not really finalized our peak sales forecast yet. As I said before, it was tested across 19 tumor types. It had an 80% response rate. It was a dramatic response in those patients treated, with a very durable response. We estimate that roughly half to 1% of all patients across these tumor types, it varies by tumor, are affected with that TRK mutation. We believe that once more commercial routine testing is in place, that we will see more accurate numbers of the prevalence of that mutation. So suffice to say, with that kind of efficacy and the broad applicability across tumors we have, we are optimistic about the outlook. Thank you. Next question comes from the line of Mr. Munoz. Please state your name, company name, followed by your question. Hello. Thank you for taking my questions. The first one is a follow-up on Monsanto. Assuming the later closing in second quarter of this year, would you consider selling more Covestro shares to further reduce the size of the right issue? Regarding pharma, a broad question on the evolution of your R&D budget for 2018, but also the period covering 2018 to 2020, because more products are entering clinical stage, and we would assume an increase of the R&D budget. I have a question on Crop Science as well. You talk about the measures in Brazil taking effect. Can you give more color on the dynamics? Particularly, what kind of inventories adjustments should we expect in 2018? Thank you. Okay, Vincent. Thank you. Regarding the Monsanto financing and what we do with Covestro, our objective for Covestro has been stated very clearly. We want to divest fully and completely of our Covestro stake in the midterm. We are timing the divestiture such that we can actually value optimize our exit. We have done another step, as Johannes Dietsch has already mentioned. In January, there is 14.2% that we still own directly, and we are looking at further opportunities to reduce net stake during the remainder of the year. Of course, the net proceeds will weigh in when it comes to sizing the equity. Dieter on R&D. Hi, Vincent. The evolution from 2017 to 2018 obviously benefited a bit from the winding down of the COMPASS trial early, and that is what you see reflected. We will continue half onwards, and we will continue to invest as the opportunities present themselves in our pipeline to optimize our pipeline augmented by external opportunities to offset the loss of exclusivity. That is not only holding true for 2018, but beyond as you asked for that guidance beyond or that direction beyond. We do not have a particular ratio target or amount target in mind. We will properly fund our R&D pipeline to achieve our long-term objectives. Okay. On Brazil and the dynamics, Liam. Vincent, you mentioned the measures. I just outlined three of the key measures that were taken. One is, of course, there's always a personnel implication here. So there were personnel consequences that were taken out of the issue in Brazil. Second one was ensuring transparency in the distribution system. So this is now being ensured by a much more IT-based information system as opposed to a purely human communication-based information system. The third one is related to incentivization ensuring that the right incentives are in place to encourage usage at the farm gate level as opposed to just a product going into the distribution channel. So these were key measures that were taken to ensure that the issue has now been fully addressed. Thanks to very robust underlying demand in Brazil, the inventory channels have been worked down very significantly already now, and we expect them to be completely normal now at the end of the season, which is coming up in Brazil. So going into the new season, we will be at a completely normal and healthy level of channel inventories. With that, you shouldn't expect any other changes or any additional provisions related to the Brazil effect this year. Quite to the contrary, you'll see a rebound in our Brazilian results this year. Okay. Thanks. Thank you. The next question comes from the line of Mr. Cespedes. Please state your name, company name, followed by your question. Good afternoon, gentlemen. Thank you very much for taking my questions. Florent Cespedes from Société Générale. Three quick ones. First, a follow-up on the manufacturing issues in Leverkusen. Just to clarify, it is really the tail portfolio products which are impacted. Should we see some impact on top line during the course of the year? More importantly, when do you believe that all the issues will be fixed? Then two other product-related questions. First on Kogenate. Could you give us more color on the Kovaltry ramp up? How do you see the market going forward given the entry of new products in the coming quarters? Last one on Xofigo. After the strong Q4 with a 10% growth guidance for 2018, why such a relatively modest guidance for this year, given the strong Q4? Thank you. Okay. Thanks, Florent. Dieter is going to take your questions. Yeah. I will start with the manufacturing you asked, is it a top-line impact? Yeah, that is what we referred to earlier. It goes across a number of the more mature products that I mentioned, such as Levitra, Adalat, Nimotop, and so on, each affected to a small bit, but when you add it up, it adds up quite a bit. We will see that in a rolling fashion throughout the year, depending on when we shut down what line and restart what line. It will be staggered throughout the year. You asked us when we believe we have resolved this. We are working feverishly on addressing the issues outlined since we first got the observations, and we hope that we will bring this to conclusion before the end of the year to resolve this. You asked about Kogenate and Kovaltry. If you exclude Helixate for a moment, the order patterns, we had a very good quarter with over 9% growth in the fourth quarter of our Kogenate, Kovaltry franchise, excluding the Helixate orders to CSL. You can never look at quarter to quarter because of timing of orders in that business. Overall, we grew Kogenate and Kovaltry, excluding Helixate orders, 1% last year. You asked me about the Kovaltry performance. That is included in that. While we give up some on Kogenate, we are converting to Kovaltry, and we are pleased with the performance of Kovaltry thus far. You asked about the hematology market. We believe that you will still see Factor VIII as a mainstay, particularly the short-acting Factor VIII products based on pricing, and you will see most of the children probably started on that. The patients that we have seen switch to longer-acting, Eloctate or Kovaltry, are patients that had some kind of dissatisfaction, either with breakthrough bleeds or other, rather than convenience. We believe that the switch will continue to be slow and steady over time, as there is only once or twice per year that the patients will see physicians, and that provides an opportunity to switch, mostly patient-initiated rather than physician-initiated. The shift might come with two long-acting products, once-weekly products coming to market. This would be our damoctocog alfa, hopefully launched this year. You will see that with ACE910, Hemlibra potentially coming to market first in the inhibitor patient population only. You will get with one damoctocog alfa once-weekly dosing potentially with the familiarity of a Factor VIII product with the known PEG inhibitor potential that we see with PEGylated Factor VIII products. On the other side, you get ACE910 or Hemlibra with a new mechanism of action with the risk of rare but quite severe thrombotic events. I believe that the market will still be favorable for Factor VIII products going forward in that environment. Sofigo. Oh. You asked about Xofigo. We grew new patients over the year from about 18% new patient starts last year. We see Xofigo continuing to develop nicely going forward. We had obviously anticipated different results in the abiraterone and prednisone combination trial. That will probably impact our growth a little bit going forward. But the underlying business is healthy, continues to increase in new patient starts, as well as the number of administrations is now at 4.5 per patient. So overall, good progress being made with Xofigo. Thank you very much. Thank you. Next question comes from line of Mr. Vosser. Please state your name, company name, followed by your question. Hi, it's Richard Vosser from JP Morgan. Three questions, please. Just thinking about the disposals and your guidance for Monsanto in the release. Obviously saying the core EPS would be a slight decline in the guidance. Just, is the vegetable seeds disposal and the BASF disposal included in that guidance? Also, how should we think of synergies included in that guidance or maybe even cost avoidance plus synergies? Those two together, would they be a sort of a similar positive impact on EBITDA from the transaction that you originally highlighted when Monsanto was announced? Second question on Crop Science. Just looking at insecticides in Q4, it seemed pretty weak. Just, could you give us some color on the underlying demand, particularly in Brazil there and maybe more generally, the underlying growth in sales and EBITDA when you take out the provision relative to the market for crop protection products. Then finally, just on Xarelto. Had maybe a slightly weaker Q4, not in the teams growth, and I think you're guiding to high single-digit growth in 2018 with some impact of COMPASS, I would expect. Just, what's the thought process in that high single-digit guidance, and can we see that accelerating throughout the year? Thanks very much. Richard, let me start briefly with guidance and core EPS and what is in and what is not in. Our existing guidance for 2018 is a standalone guidance for Bayer only, excluding a closing of Monsanto. The only effects we are going to have as part of our guidance is, of course, the ongoing preparation costs that we will incur, and of course, the ongoing financing costs that we will incur already prior to the closing and the consummation of the transaction. Our perspective on core EPS accretion after closing in terms of accretion year one, single digits, and thereafter, increasing to double digits, has not changed either. That, I think, has been a very important question you are asking, because it allows us to clarify. The effects on fiscal 2018 with the combination of Monsanto really depends very much on the time of closing, because this being a seasonal business, the first half of the year has a disproportionately higher contribution to sales and particular earnings compared to the second one. So the earlier the closing would be, the higher the positive impact would be from a combination. Then, of course, one-time cost integration, purchase price accounting, inventory adjustments, and all the technical things that will then have to be calculated and explained the way in. But really, this is standard accounting then, but it really depend in terms of the overall impact on the time of closing. Again, the perspective has not changed a bit. So with that, we come to insecticides and Q4. Yeah. There was, in Q4, basically a weak performance, particularly again driven by Latin America, specifically Brazil. This time, also North America. On the positive side, there was very strong double-digit growth in Europe on the insecticides portfolio. For the full year, the picture is again, heavily distorted overall by the Brazilian situation. That had a heavy negative impact. Apart from Brazil, Europe was again very strong on a full-year basis, and North America and APAC were weaker. If you look at it overall, the overall crop business without the Brazilian effect, we had 3% underlying growth. Specifically for crop protection, we grew in every region except for LATAM. LATAM, again, was completely driven by the Brazilian situation. We see this as a specific one-time issue, which we believe has now been addressed and will have been completely cleared out of the system by the end of the ongoing season, which ends in April in Brazil. Okay. Hi, Richard. Xarelto, Q4 2017 versus Q4 2016 grew 13%, full-year grew 14%. Q4 over Q3 grew 14%. Performance of Xarelto in the fourth quarter didn't seem to be out of line with what we had actually seen throughout the year. We took the price reduction, as we had mentioned at one point earlier to you, in the last quarter in China on purpose. That was the decision we made in order to get the national product price listing that will be compensated for over time with increased volumes, and we see that already picking up. I think that Xarelto continues to do well, and we see that going forward. The full-year negative price impact of China is included in our guidance. Okay. Thanks, Dieter. The next question comes from the line of Mr. Faitz. Please state your name, company name, and followed by your question. Yes, sir. Good afternoon, gentlemen. Christian Faitz here. Pleasure. Couple of questions on the Ag business side. First of all, in U.S. herbicides, it seems like you are losing some market share potentially against a competitor who actually has the intention to buy a good chunk of your U.S. herbicide business. Can you just highlight how glufosinate sales in both U.S. and also in LATAM have evolved lately? Then again on the deloading program in Brazil, where are we at present compared to, say, a somewhat more normal historical average in terms of channel inventories? Then third and final question, can you give us an early indication about demand trends in the Northern Hemisphere starting into the crop season? Thanks. Yeah, Liam. Yeah. Thank you, Christian. On the U.S. herbicide side, we have continued robust growth, particularly very strong volume growth for glufosinate-ammonium. But we have had significant generic entries. So this has been a pricing issue, and that's where what you refer to, what looks like a market share loss. There has been a loss in value due to the pricing situation, due to the entry of basically generic Chinese company into the glufosinate-ammonium market. The underlying growth, as I said, with GA, is actually very robust and will continue to grow. On the Brazilian channel inventory situation, we consider a healthy channel inventory for crop protection around about 25%-30%. That's the minimum that's required given the logistics involved in such a big country with sometimes a relatively weak infrastructure. We are already now pretty close to that level, and we will be for sure there at the end of the season, which again, is end of April. We believe here we're fully on track towards what we would call healthy channel inventory levels. Indications now, where is the market going? Our overall expectation is that there will be low to mid-single digit growth for the overall market this year. As you know, very difficult to call right now because we're basically between seasons. A lot depends now on the planting conditions in the Northern Hemisphere. A lot depends on the quality of the harvests coming in now from the remainder of the season, particularly in Argentina and to a lesser degree in Brazil. What we can see is significant negative weather impacts in Argentina, where there's a severe drought, the worst drought in the last 44 years, which will for sure negatively impact the harvest. With that, there's already been an increase in the Chicago Board of Trade future prices for soybeans and to a lesser degree for corn, based on concerns about the quality of the harvest coming out now. Still too early to make any call, but we believe there will be a return to growth for the overall industry this year. Apart from Southern Hemisphere and acreage growth for soybeans, there will be technology upgrade in North America, and also further adoption of technology in APAC that we expect to drive growth. Okay, great. Thanks very much, Liam. Next question comes from line of Mr. Leuchten. Please state your name, company name, followed by your question. Three questions, please. One for Werner Baumann and Johannes Dietsch, and two for Liam Condon, please. It is Michael Leuchten from UBS. Just given what you said about the sensitivity around timing of the closing of the transaction, I was wondering what the intention was of giving a pro forma EPS 2018 indication of a slight decline. Just trying to figure out what the financing assumptions are around that. That would be question number one. Then two questions for Liam Condon. Firstly, given that we are going into the second half, and then Monsanto having the most important part of its season, in Q1 and Q2, do you think there is enough time to run potentially a full integration ahead of that season and not run the risk of disrupting the season? Would the season, or would you have to go slow and then go full blast in 2019? Just going back to your commentary around Argentina right now, if I strip out the impact in Brazil out of sales and EBITDA in 2017, and then look at your guidance from an underlying perspective for the division, you do not seem to indicate a lot of growth on EBITDA in underlying terms. Is there anything else beyond Argentina and the weather that you just flagged that makes you cautious? Thank you. Liam Condon, why don't you go first, and then we come back to the EPS guidance? Yeah. Thanks, Michael. On the question of how much integration can we actually do and what would be the business impact, for sure this is going to be a rolling process from an integration point of view. Our very first and utmost priority is to ensure business continuity of the two standalone companies. We have, as you know, we have given out guidance for synergies, both on the cost and the commercial point of view, which will be phased in over three to four years post-closing. For sure, you shouldn't expect much of that to be coming in 2018, for the simple reason that you already stated, the main season is definitely gone in the Northern Hemisphere. For the Southern Hemisphere, by and large, we will not be a fully integrated company already in 2018. That will take some time. So we will, at the time of closing, be giving an update on synergies guidance. But basically, we will be ensuring solid business continuity for the business going forward, and we will do the integration at the right pace that will ensure that we can maximize the benefits out of the whole combination. On the EBITDA side, our outlook, again, currently adjusted, is mid-teens increase, which we believe is a good reflection of what is achievable. There are some additional headwinds that we simply need to absorb within our business and take countermeasures to try and cushion those headwinds. Just a couple I would mention, one is some registration losses of important products in Western Europe. This has an impact on profitability that we will need to absorb through other measures, basically cost efficiency in running our business. And we also have some idle costs, given the fact that our volumes are, given the Brazilian situation from last year, somewhat higher. Our production volumes are lower than what we would have originally been planning. So here, overall, we simply need to take additional measures, and do not want to be over-bullish on giving out an EBITDA growth forecast that is higher than mid-teens growth. Yeah, Michael, thanks again for the follow-up question on core EPS and the core EPS guidance. Maybe I try to repeat what I said earlier with different words. Given the seasonality of the Ag business, the incurrence of earnings is not evenly distributed over the quarters. And due to the fact that we now expect the closing to only take place in quarter 2, the overall impact on the combination, irrespective of the fact that for first full 12 months period nothing has changed, may lead to a slightly negative impact on core earnings per share based on our current assumptions. I think one of the questions that was out there was, is the guidance that is reflected on let's say "pro forma impact" of the Monsanto transaction, is that reflective of an higher than anticipated rights issuing? And the answer, clearly, is no. But we cannot comment on the number Peter Verdult has mentioned earlier. I can clearly tell you that we are very cognizant of the sensitivity of the size of the equity issuance. We are working on optimizing it, and nothing has changed in that respect compared to where we were a month, 2 months or 4 months ago, when we assumed it is somewhat earlier than quarter 2 closing still. Thank you very much. Thank you. Next question comes from line of Mr. Redenius. Please state your name, company name, followed by your question. Hi, it's Jeremy Redenius from Bernstein. Thanks for taking the questions. The first question I had was around the divestitures. You've planned to divest a portion of the business from Crop Science to BASF, and now you've announced you'd expect to sell the entirety of vegetable seeds as well. So by my math, that gets you to about EUR 1.9 billion of sales to be divested, which is well above the hurdle you set in your terms of the offer to Monsanto of $1.6 billion. So I'm wondering about the implications for that. So presumably that's exceeded your plans. So I'm wondering about the implications for that for the synergies that you've announced, the $1.5 billion in synergies, if there would be a revision there, knowing what you know now. Secondly, in Brazil, I understand you saw some pricing weakness in Q4, and I understand it partly is a strategy to help flush out some of that stale or expiring inventory that you had in the region. I am wondering a little bit more about the mechanism that you are able to do that by to reduce prices, but yet do so in such a way that you do not incite price competition as you go into the next season. Thanks very much. Yeah. Jeremy, let me take the first part, and then Liam is going to comment on Brazilian pricing. As a matter of fact, the divestitures are higher than we had expected earlier. That is very clear, also based on our own assessment at the time. Secondly, when we gave initial guidance, we were very clear about the fact that that was on a pro forma combined basis, and that, of course, once we know what the divestitures are, the size of them, the areas, we would have to rerun the numbers. We will only do that once we know what the entire package that has to be divested of is, because otherwise, we will give you different reference points all the time, depending on where our current discussions stand. Having said that, there is no change in perspective on the overall profile of the business going forward, including the profitability of the combined business once fully synergized, where we talked about, let's say, an approx 30% EBITDA+ margin business going forward. The incurrence of synergies, the areas of synergy generation will for sure be somewhat affected. That is what we would share with you once we have rerun the model. Of course, there is also an element of maybe relabeling. If you look at certain activities that we are going to give up as part of the divestiture packages. For example, if we have to sell an entire site, whereas we had priorly assumed that we will only sell and divest of certain activities of the site and then we will have to rightsize or divest of the site. Some synergy value that would have been baked into our numbers based on the rightsizing or maybe, let's say closing of the site would now be looked at as a site that has been fully divested of as part of the divestiture process. With that, we come to the same cost position as if we had closed the site, but by a different mechanism. In other words, this is actually getting rid of cost with no one-time cost and no effort, quote unquote, other than readying a complete site for divestiture. So all of these effects will weigh in, will be shared with you. But one more time, there is no change in the profile of the business once fully synergized based on where we are today. Okay, Jeremy, thanks for the question. The mechanism or what's going on with prices in Brazil in Q4, the price decline is clearly directly linked to our channel de-loading program, which we've done, I believe in an extremely responsible manner. The mechanism is also of such that we try to ensure that the premium quality of our products is also reflected in the pricing. So, apart from offering to take back goods, we have also offered, of course, distributors the choice to keep inventory. A lot of distributors actually prefer to do that because the underlying demands are more than we had expected because the underlying demand is so strong. In such cases, we then renegotiate the prices according to the current price list. That's what we call a stock novation. Between the time when they originally bought the product, there's been a significant deterioration between the BRL and the dollar. So basically, technically, their prices and the product value to them right now is too high. We simply have to restate according to the current currencies. When we do that, we get a technical price decline. This is literally just bringing the product up to the current market value according to the current currencies. That basically ensures that we don't have an ongoing negative price impact in the market, because we're simply pricing according to the current currency rates. I think the system that we put in place is very responsible and will help ensure that also in future, we can continue to get premium prices for innovation. Thank you very much. Next question comes from the line of Ms. Hector. Please state your name, company name, followed by your question. Well, thank you for taking my questions. It is Louisa Hector from Exane. I wanted to revisit some of the margin questions, in specifically consumer and pharma, and then a question on animal health. Looking at your 2018 guidance, in consumer, really trying to tie in what looks like a bit of an improvement in margin, but looking at that in the context of 2017, having those one-off disposal gains around EUR 80 million. Are you anticipating a similar level, perhaps higher in 2018? Again, in consumer, with the situation in China, should we assume that everything is, the full hit is taken in 2017 with that EUR 50 million on EBITDA? Did that include returns? Could there be any more to come in 2018? Then the pharma margin question, again, looking at those numbers, a little bit of margin pressure, you highlight a slight decline. Is that completely to do with the manufacturing, or is there anything else that we should be aware of putting a negative pressure on? Finally, in animal health, still seeing a good performance. Obviously, some of your competitors looking strategically there. Are you comfortable with your market share, or is this an area where you maybe need to take on board more assets or exit? I also just wanted to say thank you for the help with the currency this quarter. It is very useful. Thank you. Okay. Thanks, Louisa. Hanno is going to take your questions on margins for 2018, and then I will come back to your animal health question. Thanks, Hector. You had a specific question on China and with the situation of the two products, not behind the counter. We have taken accounting measures for product returns, and that is included already in the 2017 full year financial statements. We do not anticipate a further set up of provisions for product returns in this respect, but of course, we will lose the margin from that business, which was still in the first nine months of 2017. So when you compare 2018 to 2017, please take care that those two products were in a full steam in the first nine months of 2017. In our guidance, we have not put in a significant amount on disposals. That is not reflected. Behind this pharma, we have said that in revenue, currency, and portfolio adjust, we grow in single digits. Actually, if you currency adjust, we have a commensurate low single digit improvement also in EBITDA. It is the currency headwinds that impact our EBITDA next year. Okay, Louisa, on Animal Health, we are continuing to grow our business, as you've also seen in 2017. 2018 growth is somewhat below market growth, but that is a technical effect based on the accounting measures that we have to implement in line with IFRS 15. If you back that out, also growth would be just about in line more or less with the anticipated industry growth. Having said that, we are of course aware of the fact that the industry continues to consolidate and that we have lost in relative scale over the last years. We continue to be the lookout for further ways to strengthen and build our business. Of course, we do have, going forward, some limitations in terms of financial muscle, which we also understand. There's not much more to be said other than the fact that with bits and pieces from time to time, we find opportunities to strengthen the business, such as with the acquisition of Cydectin, that we acquired out of the disposal process of the combination of Boehringer and Sanofi's Animal Health business in the beginning of 2017. Next question comes from the line of Mr. Parekh. Please state your name, company name, followed by your question. Good afternoon. It's Keyur Parekh from Goldman Sachs, and three questions, please. The first one, at a very big picture level, one of you referenced is that you had some operational issues during 2017, be it on the OTC side, be it on the crop side in Brazil. Now you're pointing to some production issues on the pharma side. Can you give us some sense of comfort that as you go through the Monsanto integration, which will be the biggest integration you've ever done, how are you confident of the base business not going into operational issues? What comfort can you give us around that? That's one. Secondly, not commenting on the size of the equity raise, I understand. But can you still remind us if doing a rights issue is indeed your preferred way of raising that equity? Or given the lowered size that one might be looking at, would you be open to considering other options beyond that? Lastly, talking about Xarelto, it seems like the Eliquis market share battle seems to be going in favor of Eliquis. Is there anything you can do specifically to reverse those trends from your perspective? Thank you. Okay, Keyur. Thank you for the questions. First of all, on Monsanto and the level of distraction, I guess, that's where your question is heading with some of the operational issues we have seen 2017 and what it means for 2018. Let me state very clearly that the operational issues we have seen in 2017 are not related to our preparations of the acquisition of Monsanto. These happened inside of our operating businesses in different areas that were unencumbered in terms of prep work, because the prep work is being done by dedicated resource. These are operational issues that we take, of course, full accountability for, and we do whatever we can in order to make sure that we run our businesses as well as we can. Having said that, from time to time, things don't go according to plan or schedule. We have had a couple of negative surprises and issues last year. The last one was certainly the supply tightness we are going to see in the wake of the FDA inspection in Leverkusen. That will be in effect in 2018 as reflected in our guidance. Again, just let me reemphasize one more time, nothing to do with Monsanto. In absence of the Monsanto activities, these issues would still have occurred. Last point here, the acquisition of Monsanto and the size of the acquisition were significantly bigger in terms of monetary value. In terms of level of complexity, the size of the organization to be integrated and a few other dimensions you would typically look at in terms of getting a grasp of complexity, just about the same compared to the acquisition of actually Schering about 12 years ago. Also, an organization with about 25,000 people around the globe and a very internationally dispersed business. With that, I turn it to Harold before Dieter is going to answer the question on Xarelto versus Eliquis. Yeah, with the equity financing, we have to stay within the limits of the capital authorizations of our shareholders meeting. Here we have 10% authorization to issue new shares without subscription rights. Out of this 10%, we have used already 5.5% for the mandatory convertible bond. Therefore, there's only a small piece left for her to do a block trade or an ABV. Therefore, we will use Authorized Capital I, which is with subscription rights, and therefore, the rights issue, as you mentioned, will be a major element for the capital financing going forward. From my perspective, it's still very beneficial for existing shareholders because those subscription rights are allocated only to the current shareholders, and that is a shareholder-friendly way of raising equity. Dieter? Okay. Xarelto is still market leader globally and still market leader in most major markets around the world. Globally, there is about a 33% market share versus a 31.5% versus apixaban. Later this year, we hope to get approval for the PAD, CAD indication that would be very unique to us. That represents a significant opportunity for us to continue to grow and regain share. In addition to that, in China, apixaban is not applied for submitted for SPAF due to the clinical data issues that they had there. We are now nationally listed on the drug reimbursement list, and that represents another significant volume opportunity for us. I think going forward, we are well positioned to continue to gain share and maintain our market leadership. Okay. Thanks, Dieter. The next question comes from the line of Mr. Kapadia. Please state your name, company name, followed by your question. Hi there, it's Vimal Kapadia from Bernstein. Thanks for taking my questions. There's just a couple, please. The first one is, it's been a while since Bayer gave us peak sales guidance for the pipeline of EUR 6 billion. Can you provide us with any update as to how Bayer think about the potential, given we have seen additional data from some of your products in the clinic? Number two, just following on from Peter's question earlier in the call on Loxo, should we expect to see any deals of similar size and nature over the next one to two years through the Monsanto acquisition? Is it less likely until at least some level of integration is complete? Thank you. Okay, Vimal, thank you for the question. On first one, our guidance says that we expect sales in excess of EUR 7.5 billion for our top-selling products at peak, and above EUR 7.5 billion covers the entire range. We have traditionally been somewhat, how shall I call it, conservative or careful that once we reach a target, we are more than happy to update. Doing that permanently and jacking up numbers is not the most prudent way to do this. That's at least the policy we have been following. So that was on our top-selling products. On our pipeline, we have given the in excess of the EUR 6 billion number and also here, no update at this point in time. We have always been looking at peak numbers depending on different indications and let's say fairly broad range of indications for our pipeline products. If you, for example, look at anetumab and the breadth of potential indications it could work in. So no news here at this point in time either. With that, I turn it over to Dieter on, let's say, Loxo-likes. Yeah. As I've said for quite a while now that we will continue to accelerate our internal pipeline and augment that with external bolt-on acquisitions and licensing deals. If the question is related to Monsanto and how that might impact our strategy, you know that we have extended our partnership with Ionis for the Factor XI LICA technology product. We have done Loxo, so we continue to do deals, and I would anticipate us to continue to evaluate opportunities externally as we have done in the past and stick with our strategy. No impact due to Monsanto on our strategy in pharma. Great. Thank you very much. Thank you, Vimal. I think we have time for one more question. I am not sure. Are there any questions in the pipeline? There are no further questions registered at this time. Okay, great. Thank you so much, everybody. Thank you so much for participating. Really appreciate your interest and your questions. Looking forward to talking to you soon. Thank you so much. Take care. Bye-bye. Bye-bye. Ladies and gentlemen, this concludes the full year and fourth quarter 2017 results investor and analyst conference call of Bayer. Thank you for participating. You may now disconnect.