Earnings Call: Q4 2015

Feb 25, 2016

Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor Analyst Conference Call on the full year and fourth quarter 2015 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 star followed by zero for operator assistance. I would now like to turn the conference over to Mr. Jürgen Beuning, Investor Relations of Bayer AG. Please go ahead, sir. Ladies and gentlemen, good afternoon and welcome, also on behalf of my colleagues, to our Q4 conference call. I am Jürgen Beuning from Investor Relations on behalf of Alexander Rosar. Today, we'd like to review our 2015 figures with you and to discuss our 2016 outlook. With me on the call are Marijn Dekkers, our CEO, and Johannes Dietsch, our CFO. Healthcare today is represented by Werner Baumann and Crop Science by Liam Condon. Marijn will start off with an overview of the highlights in 2015, give a brief summary of the developments in the fourth quarter, and then elaborate on the outlook for 2016. We assume you've all received and reviewed our annual report, the briefing document, and the presentation slides, so Marijn will focus on his presentation on the main points. Before handing over to Marijn, I'd like to draw your attention to the safe harbor statement. Thank you. Marijn. Thank you very much, Jürgen, and good afternoon, ladies and gentlemen. It also gives me great pleasure to welcome you to our conference call today. 2015 was a transformational year for Bayer. We performed well in our markets, delivered growth, and significantly higher earnings. It was another record year. We are focusing our organization and our portfolio on our four life science businesses with growth potential and innovation power. In this context, we IPO'd Covestro and divested the diabetes care business. Significant progress was also achieved with the integration of the acquired Merck OTC business. We achieved as well major innovation milestones. Phase III clinical trials were initiated for copanlisib and finerenone, and then vericiguat successfully completed the first phase II study. We have thus more than achieved the targets that we had set up for ourselves at the beginning of 2015. Against this background, we are proposing a dividend of EUR 2.50 per share, which represents an 11% increase over the prior year. The resulting payout ratio of 37% of core EPS lies within our targeted 30%-40% dividend payout range. We remain optimistic about future developments. Our financial outlook for 2016 projects further growth and higher earnings. Let me now briefly review some of the key figures outlining the performance in Q4. Group sales increased organically by 2% over the prior year to $11 billion, driven by the business expansion in all of our life science businesses. Reported EBIT advanced by 65% to $908 million, mainly due to lower special charges versus the prior year quarter. Adjusted EBITDA was EUR 1.9 billion. That was 4% above the previous year, mainly driven by the good business developments of Pharmaceuticals, despite higher expenses for marketing and sales as well as research and development. Currencies added around $200 million in the quarter. Core earnings per share in the quarter declined by 9% to EUR 1.07. Previous year's core EPS benefited from a tax gain and still also included 100% of Covestro's shares. Moving to slide 5, let's take a look at some key fourth quarter figures for the individual businesses. When referring to sales growth, please note that this is portfolio and currency-adjusted data. Pharma sales grew 10% with our launch products driving this performance. These products contributed $1.2 billion or 34% of sales, up 38% over the prior year quarter. At Pharma, EBITDA before special items increased by 6% to $991 million, primarily due to the strong sales growth. This was partially offset by higher expenses for marketing and sales as well as for R&D. Consumer Health sales advanced by 7% versus the prior year. This performance was mostly driven by our Consumer Care division, which grew 10% in the fourth quarter on the back of strong performance of our key brands. In Animal Health, sales advanced 3% compared to the prior year, thanks to Seresto, which performed again ahead of expectation. In our Medical Care business, sales were overall flat. EBITDA before special items of Consumer Health increased by 11% to $520 million. Our Consumer Care business contributed especially well to this positive development. Crop Science delivered strong growth in the quarter considering challenging market conditions. Sales advanced 5% to EUR 2.4 billion, and this performance was driven by higher volumes. Selling prices were almost unchanged. Crop Protection grew 4% with a contribution from pre-season sales in North America. Seeds grew a remarkable 15%, driven by strong developments in vegetables and soybeans. EBITDA before special items at Crop Science declined by 9% to EUR 334 million, and this is mainly related to the currency devaluation of the Brazilian real. While we were able to increase prices in local currency, for example, 25% in the fourth quarter, this was not sufficient to fully compensate the devaluation of the Brazilian real. Covestro added EUR 2.8 billion to group sales and EUR 257 million adjusted EBITDA to the group performance. Let me now very briefly review some of our key figures for the full year 2015 and compare them against our original guidance. I'm pleased to report that we were able to overachieve group targets for the full year. Sales grew organically by 3% to EUR 46 billion, in line with our guidance. We delivered on our earnings promise with adjusted EBITDA rising 18%. Earnings growth was held back by higher R&D expenses of about EUR 740 million. On the other hand, we benefited from a positive currency effect of around EUR 680 million. We exceeded our low teens percentage increase guidance on core EPS, achieving 16% growth in 2015. This success was primarily driven by the strong performance of Pharmaceuticals, the business expansion at Consumer Care, and a strong earnings contribution from Covestro. Crop Science managed to improve sales and profit slightly in an undoubtedly challenging market environment. It's also worth noting that our businesses performed relatively well in the emerging markets. Let me now elaborate on these highlights in some more detail, beginning with Pharmaceuticals. Driven by the continued success of our launch products, Pharmaceuticals sales advanced an impressive 10% in 2015. Collectively, our launch products generated EUR 4.2 billion in sales, up 42% versus the prior year. Hence, we overachieved our target of increasing new product sales towards EUR 4 billion that we had set at the beginning of 2015. Xarelto ended 2015 with EUR 2.3 billion in sales, firmly establishing Xarelto as the leading novel oral anticoagulant, achieving 34% global market share in the overall anticoagulant market in December. These most recent IMS figures represent an increase of around 2 percentage points compared to December 2014. Since Xarelto's launch, we have treated more than 18 million patients. With EYLEA, we generated sales of EUR 1.2 billion, an increase of 57% over the prior year. Impressive market gains were achieved in important European markets, and in particular in Japan. Stivarga finished the year with EUR 330 million in sales, up 25%, mainly driven by successful rollout in various geographies and price increases in the U.S. In France, the reversal of price rebate provisions supported the positive development. Xofigo ended the year with EUR 257 million in sales, mainly driven by higher demands in the U.S. Adempas sales attributable to Bayer amounted to EUR 181 million in 2015. Let's look at Consumer Care as part of Consumer Health in 2015. As you know, what was Consumer Care last year is now the division Consumer Health. Consumer Care last year performed also well in 2015, in particular during the fourth quarter, which was the first quarter with real year-over-year comparables after the closing of the acquisition of Merck OTC business on October 1, 2014. For Consumer Care, sales were up 6% in the year and 10% in the fourth quarter. Impressive progress was achieved in further developing our brands. On an annual basis, Aspirin sales, including Pharmaceuticals, were up 2%. Aleve showed substantial growth, up 5%. Bepanthen showed an improvement of 12%, and Canesten achieved a remarkable sales growth of 70% for the year. The performance achieved so far underscores that we are making good progress with the integration of the acquired businesses, as well as driving the sales of the traditional Bayer brands. Driven by the ongoing success of our commercial strategy, the Crop Science business has shown a solid performance in a challenging market environment, with sales advancing 2% in 2015. We thus grew faster on average than our most important competitors. Business expansion was driven by our fungicides and herbicides business, up 10% and 5% respectively. Insecticides, down 14%, suffered from low pest pressure in Brazil, and our SeedGrowth business, down 11% from high inventories of already treated seed in the U.S. market. Our seeds business delivered EUR 1.3 billion, translating into 9% growth over the prior year, with double-digit sales increases in soybean and canola. From a regional perspective, CropScience developed particularly well in Europe, saw slightly higher sales in Asia Pacific, and a small decline in North America. Due to weak farm economics in Brazil and Argentina, business in the region Latin America, Africa, Middle East declined slightly. Taken together, I believe that 2015 was a very successful year for our Life Science business. From a regional perspective, we saw our business expanding in key emerging markets. In these markets, sales advanced 6%, including Covestro, and by 11%, excluding the Covestro business. Our Pharma and Consumer Care businesses each contributed with double-digit growth. In China, Pharma achieved a solid 6% growth and Consumer Care advanced 12%. Our Consumer Care business performed especially well in Brazil, up 23%, underpinning the successful execution of our emerging markets strategy. Let's now move on to our guidance for the year 2016. With the company's focus now on the Life Science businesses, a new organizational structure was introduced effective the 1st of January of this year. The company operations are now managed in three divisions: Pharmaceuticals, Consumer Health, and CropScience, and then in addition, the Animal Health business unit. The former Bayer Healthcare subgroup has been dissolved, and the radiology and Pharmaceuticals businesses have been merged together to form the Pharmaceuticals division. The Consumer Health division now consists only of the Consumer Care business. Animal Health has become a separate reporting segment, and the Bayer CropScience subgroup is now called the CropScience division. The former Material Science subgroup, of course, is now Covestro, became legally and economically independent on the 1st of September of last year. The corresponding restated figures, and this is important, are available on our webpage. I am sure you will appreciate the additional disclosure and transparency of those numbers. So now on slide 11, I would like to give you an overview of our outlook on 2016. Our guidance for 2016 is based on December 31, 2015 exchange rates, and this includes a euro to the dollar rate of 1.09. That stated, we plan to grow our Life Science sales organically by a mid-single digit percentage to approximately EUR 35 billion, and we plan to improve EBITDA before special items, each by a mid-single digit percent. In this guidance, EUR 130 million dyssynergies as a consequence of the portfolio transformation are included. In our group guidance on Slide 12, and this is now including Covestro, we have assumed Covestro's sales at prior year level and the decline of Covestro's adjusted EBITDA. Consequently, we expect to report group sales to exceed EUR 47 billion in 2016, and this corresponds to a currency and portfolio-adjusted growth in the low single-digit percentage range. Group EBITDA before special items is expected to improve in the mid-single digit percentage range and full-year core EPS, and that includes our remaining stake of Covestro, which is 69%, is anticipated to also improve by a mid-single digit percentage. During 2016, we will continue to invest in organic growth. We plan to increase R&D expenditures to EUR 4.5 billion, with the largest proportion invested in our Pharma division. In addition to R&D, we are continuing to build up new production capacity for our products. Fixed asset investments are planned at around EUR 2.5 billion in 2016, and investments in intangible assets with EUR 400 million. Now let's look at the outlook for our divisions. Slide 14. Despite anticipated price declines, we expect sales of approximately EUR 16 billion at Pharmaceuticals, including the radiology business. This corresponds to a mid-single-digit percentage increase on a currency and portfolio-adjusted basis. We plan to raise sales of our recently launched products to above EUR 5 billion, and we expect a mid to high single-digit percentage increase in EBITDA before special items. In the Consumer Health division, we expect sales to come in at more than EUR 6 billion, and this corresponds to a mid-single-digit percentage increase on a currency and portfolio-adjusted basis. EBITDA before special items is anticipated to improve by a mid-single-digit percentage. Crop Science, we expect sales to be at the prior year level, and this corresponds to a low single-digit percentage increase on a currency and portfolio-adjusted basis. We plan to increase EBITDA before special items by a low single-digit percentage. At Animal Health, we expect sales slightly above the prior year level, and we plan a currency and portfolio-adjusted sales gain and an increase in EBITDA before special items by a low to mid-single-digit percentage. In summary, we feel 2015 was a transformational year for Bayer, with record sales and earnings as well as important strategic progress. Each of our life science divisions contributed to our good growth momentum, and operationally, we have overachieved our set targets. We continue to be optimistic that we can also deliver further growth and higher earnings in the future. Jürgen, that concludes my remarks. At this point, I assume we're now happy to take questions. Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. If you have a question, please press star followed by one on your telephone. If you wish to cancel your request, please press star followed by two. Your questions will be answered in the order they are received. If you are using speaker equipment today, please lift the handset before making your selections. One moment for the first question, please. The first question comes from the line of Sachin Jain. Please state your name, company name, followed by your question. Hi, it is Sachin Jain from Bank of America. Thanks for taking my questions. Three, please. Firstly, on the Consumer division, I wonder if you could just update us on your delivery of synergies, and two sides to that. One, given the pressure in emerging markets, are you still confident in your sales synergy target? Your full year 2016 guidance implies limited margin expansion. Appreciate there is some FX in that, but could you comment on the cost synergy delivery? Secondly, very broad question on your Crop guidance. What market outlook is embedded within that? Just some color on how much you expect to outgrow the market, and any comments you can make on volume, price, inventory. Then thirdly, on the earnings guidance for 2016, it assumes limited to no financial deleverage. Just some questions around that. Firstly, the net financial guidance of EUR 1.2 billion, I understand, includes exchange losses of roughly EUR 300 million. Could you specify what those are, given the neutral-ish FX impact at EBITDA? Secondly, any color on the limited debt deleverage within the 2016 guidance. You have guidance roughly EUR 10 billion of EBITDA, but only EUR 1.5 billion-ish of net debt deleverage. Thank you. Okay. We will start with your questions on the consumer. Werner? Yeah. Hi, Sachin. Just run you through quickly where we stand with our synergy delivery. That was your first part of the consumer question. We happen to be and continue to be ahead of our original plans in the generation of cost synergies. Just about 20% ahead of plan as we speak. At the same time, we have a lower uptake of our sales synergies that is driven by a number of different effects. First of all, we took over an under-invested portfolio from Merck. We had to also discontinue some of the growth drivers that were part of the Merck business when we took it over. The most prominent probably was Oxytrol in the U.S. Third, we do suffer from difficult market conditions, partially driven by, let's say, national issues, partially driven by the geopolitical situation in some of the emerging markets where most or actually a significant part of the synergistic growth potential outside of the U.S. was supposed to happen. Most prominently Russia, China, Brazil, and also Mexico. With that, we are actually slightly ahead of our sales synergy target. So it's not that it's not going to happen, but it's going to happen with a delay of probably 12 to 18 months that we ramp up to that sales synergy target of about $400 million that was mentioned at the time of the acquisition. I think in the same token, I've already covered the emerging markets question. Maybe a little bit more color on that one because we have We see different things in different markets. We actually do enjoy continued very dynamic growth in Brazil. So things are going well in Brazil, both with our, let's say, legacy Bayer business, but also with the introduction of Coppertone, actually further new product development and brand introductions or revitalizations in Brazil. Secondly, in Russia, the situation is actually very difficult, and we do hold our ground here, let's say, in nominal terms, and that means that we actually compensate the significant currency erosion with price increases in order to also protect the value and our margins. Third, we had a very, let's say, complex situation in China with a three-party integration. So it was not only the Bayer and the Merck business, but at the same time, the integration of a fully fledged, very large operation that Dihon had in China. That has been concluded. We are kind of gaining momentum now, but certainly not in 2015. We do now have coverage of our sales organization in more than 300 cities in China. Last but not least, what happens to the margin? We have guided for mid-single growth, both top and bottom line. Also in light of some of the, let's say, market conditions we are seeing in 2016. We also assume that we do see a somewhat lower growth of the market compared to 2015 because we don't have any major prominent product switches. Last but not least, what you should not forget, it's actually covered also in the guidance, is that inside of our divisional guidances, we have absorbed the EUR 130 million of dyssynergies, because they have to be redistributed now to the businesses that come from the large portfolio changes, switching from 2015 into 2016 with the separation of Covestro and also in healthcare or then healthcare, the sale of our diabetes care business. Okay. Thank you, Werner. Crop Science market outlook. Yep. Thanks a lot for the question, Sachin. In a nutshell, you could say similar to last year, but let me try and give you a little bit of flavor on where we see the similarities and differences. Overall, we're expecting flat market growth. We're expecting that the Americas, particularly North America, will remain challenged because of low level of commodity prices. LATAM will also be challenged more on, I think, the risks we see there are more on the devaluation side as opposed to market volumes per se, because market demand is actually good. There's acreage expansion, particularly in soy, both in Brazil and in Argentina. It's more a question of pricing there. What we will probably continue to see is a rather solid Europe and a solid Asia Pacific. On the indication side or the asset side, if we come specifically to Crop Science, we had basically a solid performance across most assets and business units last year with two big exceptions. One was insecticides, which was due to low pest pressure in LATAM, and one was SeedGrowth, which was due to lower corn acreage and higher inventory channels of treated seed in North America. We think that we will also see this year a weaker, if look at how the year has started and orders, probably insecticides, at least in the initial part of the year, will remain a challenge. There are also a lot of inventories in the market, particularly in LATAM, not from us, but there are simply a lot of insecticides in the channel. In North America, there are still clearly there's a lot of treated seed in the channel. We think those two areas for us will remain slow, not as slow as last year. All other areas, we would expect them to see continued growth. For example, fungicides, where we've had tremendous growth so far, herbicides, our seeds business overall, both on the soy, canola, and vegetable side. Also not to forget our Environmental Science business, particularly on the professional side, which saw good growth. It's a mixed picture, and the challenge will rather be, again, in the Americas due to the depressed commodity prices. That's why we expect the overall market to be flattish, and our goal is clearly to grow above the market. Clearly, that will not only be based on volume, that definitely needs to involve positive pricing as well. That's more or less our outlook. Okay. Thank you, Liam. Johannes Dietsch, our CFO. Sachin had a few questions specifically on the guidance. First of all, I would like to answer, Sachin, your question on exchange losses in the financial result. We are roughly having EUR 250 million each year in order to protect our operational and financial exposure. Those are hedging costs for booked exposures, which are in our balance sheet. The hedging costs are relatively high since we have a low interest environment in EUR and also high interest environment in some of the emerging markets. A major portion of the EUR 250 million relates to the financial exposures. We are financing our subsidiaries with intercompany loans, and those intercompany loans are hedged with cross-currency swaps that also result in hedging losses or hedging expenses. You can assume that given our profile and our system of intercompany loans, that we have up to a level of EUR 250 million of foreign exchange losses each year. When you were referring to the so-called limited net debt deleveraging, just looking at the numbers for 2015, we generated free operating cash flow of EUR 4.4 billion, and then we had a dividend payment from prior year as well as interest payments arriving to a free cash flow of EUR 2 billion. We had two more effects last year regarding the IPO proceeds of EUR 1.5 billion, but also foreign exchange losses and other contributions of EUR 1.3 billion since we have 40% of our debt in the U.S. dollar. That gave us a free cash flow of EUR 2.2 billion last year, and that is roughly also the number we are using for our guidance, where we said we want to deliver to the level of below 16, coming from the 17.4 we had in end of 2015. I hope that answers your question. Thank you. Thanks, Sachin. The next question comes from the line of Florent Cespedes. Please state your name, company name, followed by your question. Good afternoon, gentlemen. Florent Cespedes from Société Générale. Three quick questions. First, on Pharma. Could we have more color on the Pharma margin trend going forward as you have to invest more into research and marketing? Will you give an update on your long-term guidance at some point of time? My second question is on the pipeline. Would you consider to license out more assets in research to maximize the value of your research portfolio and also to better manage and optimize your R&D costs? The last is a product-related question on Xofigo. Could you give us an update on the situation and on the ramp-up of this product, which seems to be a little bit below my estimates and the potential of these drugs? Thank you. Werner, three wonderful questions. All right, Florent. Thanks for the question. You can assume that we will see some margin improvement in 2016 based on the top and bottom line guidance that was given for 2016 with margin, or let's say, with earnings increasing faster than top line. We are still on record with our existing rolling three-year aspirational targets. You know that we normally don't adjust and update during the annual guidance call. That update is reserved for a later point in time, e.g., a Meet Management that you will then still receive an invitation or a date for in due time. Secondly, in terms of pipeline and pipeline development and financing, we don't see at this point in time beyond the current and already mentioned increase in R&D that is also factored into the 2016 guidance for Pharmaceuticals. Nothing that we could update you on at this point in time. In terms of out-licensing, we continuously review our R&D portfolio, looking at both technical and economical probabilities of success. To the extent that we either don't see a fit of, let's say, most promising indications these assets can be developed on and/or a lack of prioritization in terms of allotting funding, we would, of course, look at the optimization of the value of these then identified assets, and that would typically lead into an out-licensing. Normally, it's very difficult to make money in terms of sunk investments on early pipeline or also early to mid-stage pipeline assets. We don't develop in order to out-license, but in the regular review and then also the forced ranking in terms of prioritization of our pipeline, we do look at that regularly. In terms of Xofigo, yes, the progress was a little bit slower than we had expected for 2015. We were a little bit too optimistic because we expected a faster uptake. We had a lower number of patients in some countries compared to what was planned, and that situation is being addressed, particularly in better education of physicians by re-emphasizing the overall survival benefits as we have seen in our clinical studies, but also the further rollout of patient identification tools and training, because that is one of the major issues, that we can't identify the patients early enough. That is actually not untypical because we see that also with some of our competitors in the prostate cancer. Everybody is working on identifying these patients a little bit earlier. Against that backdrop, you should expect that we see quite dynamic growth actually for 2016. We expect very significant double-digit growth. I think it's about 50% that we expect Xofigo to grow. There is building momentum and dynamic we see from 2015 going into 2016. Thank you very much, gentlemen. Thank you, Florent. Your next question comes from the line of Jo Walton. Please state your name, company name, followed by your question. Thank you. Jo Walton from Credit Suisse. Three quick questions, please. We do not have a full P&L for the Pharma division as we would for other companies. You do obviously give us your overall margin, and you give us the R&D as a percent of sales, and we can see that has gone up. I wonder if you could help us in some of the other aspects. Has there been an improvement in your gross margin in Pharma that you have been able to reinvest in higher SG&A? Or has there been very little change there? Looking further forwards, is the R&D level that you are seeing now your step up in R&D? Do you think that is a reasonable run rate going forward? Do you think you have reached that peak level of R&D or not? On the Crop Science side, I wonder if you could just tell us from the cost perspective, any benefits that you have from the lower oil price. I appreciate farmers are concerned and may be buying less with the commodity prices, but do you have some benefit now in lower oil prices for your raw materials to help us look at your margin progression? Finally, I wonder if I could ask you just to go back a little further, to talk about the Consumer business. I think I was surprised, maybe others were as well, at how little overall progress you are making in terms of additional margin. I appreciate you say you are slightly ahead of your cost savings from the merger, but not as far ahead in the sales synergies. I wonder if you could just tell us a bit more about the background environment in that Consumer business to help us forecast going forwards. All right. Thank you, Jo. So, who wants to take the elements of the P&L and- Yeah. Hi, Jo. Maybe I start with the Pharmaceuticals and then also the Consumer Health questions. First of all, on the Pharmaceuticals P&L, we see different effects. Some of them are technical in nature, others are more underlying and fundamental in the P&L dynamics. We do see a gross margin improvements, yeah, as a first step, certainly driven also by FX. That is a technical one in 2015. For 2016 on a like for like basis, that would of course, be neutral. Then we have some product portfolio induced effects. We do see in the underlying, an improvement driven by the gross margin of Xarelto. Then if you look at the overall EBITDA margin of the business, the second biggest growth engine, looking at an almost 60% growth year-over-year in 2015, has been EYLEA. EYLEA is not as profitable a product because we happen to be in a 50/50 profit sharing regime. That of course, holds then margin expansion back again. In terms of resource allocation and efficiencies, what we can afford to reinvest in R&D, we do. That is why you also see a further increase year-over-year as we run very significant and large clinical trials with huge additions of patients. Then, a second effect that is, I think, quite important is that we are becoming quite efficient in our marketing and sales operation. For the first nine months of 2015, there was a zero increase in underlying marketing and sales cost despite the quite dynamic growth and the investment behind the number of launches. We see a flat marketing and sales line for 2016, again, despite roughly 200 launches we are going to support across the geographies. So there is efficiency, and part of that is being reinvested and as mentioned already, and also in Pharmaceuticals, which happens to be our biggest operation, despite the reallocation of the synergies from our portfolio changes, we do see some margin expansion. Now let me come to Consumer Health. I may repeat myself in looking at the dynamics. We are, again, ahead of our cost synergy targets. We see a lower ramp-up of our sales synergies for the aforementioned reasons. Most predominantly driven by actually macro issues beyond the under-invested portfolio that we took over and that I mentioned already as well. In line with the underinvestment, that was a status quo when we took over the business. We of course, do invest behind the potential of our brands. Most predominantly, just to give you an example, the new product development in Coppertone to really unlock the potential, which is unchanged in our perspective in Coppertone and the remainder of the marketed Merck portfolio. That, in combination with some of the technical effects I mentioned, e.g., dyssynergies, but also, let us say, full absorption of other allocations, as this portfolio is now part of the company, holds back the margin improvement you might be looking for in 2015. Then in 2016, we are going to see top and bottom line kind of march in sync with each other. All right. Thank you, Werner Baumann. The cost benefit. You want to take it, Liam? Yeah. Thanks a lot, Jo Walton. In a nutshell for Crop Science, we don't see cost benefits from the lower oil price. On the contrary, what we have right now is a situation where the dollar is basically going up versus the EUR, and this increases our cost of goods, specifically in Crop Science. There's a transactional impact in there. We don't get relief on our COGS or on our bottom line, and we don't notice the lower oil prices within our business. I think, if you look at it from a farmer's point of view, it's a little bit different, because the biggest cost factor for the farmer is fertilizer, which is, to a degree, dependent on oil prices, and it's machinery and energy, which is directly dependent on oil prices. Their costs there are clearly lower. But the driver for the farmer, at the end of the day, is commodity prices, and commodity prices are simply dependent, again, on the supply-demand balance. After ample supply now for two harvests in a row and a reasonable outlook going forward, we expect commodity prices in the crop world to remain relatively low this year, only to see a recovery from next year onwards. Oil is unfortunately not giving us direct relief. Thank you. Thank you, Jo. Your next question comes from the line of Tim Race. Please state your name, company name, followed by your question. Hi there, team. It is Tim Race here from Deutsche Bank. A few questions, if I can. First up, just going back to Werner on the dyssynergies you talk about in the new reporting structure. Just wanted to make sure that that EUR 130 million is an ongoing cost. Also just to explain, is that just purely through the Covestro move, as such, or a spin-out, or is it actually you have changed over their central functions, which means that these business operate more independently going forward? A second question then on Covestro, just in terms of the way you report this. It is still a consolidated business, so does that mean that when you look out on a one-year horizon, that you still expect to have a majority stake in this business going forward? Then two little quick questions on Crop. Just wondering, in terms of the European season thus far, the weather has been very mild. Should this mean that we have got a good season going forward? Then on Crop EBITDA, just wondering on the lag effect in the fourth quarter with your pricing in Brazil. Obviously, your price rises go through, and is there a lag effect on invoicing making it so that the profitability is a bit worse than perhaps seen line is really there? If you could just potentially answer those. Thanks. Okay, Tim. Let me start with the dyssynergies that actually affect the entire company. First of all, that EUR 130 million that was mentioned in our guidance, is exclusively driven by portfolio changes. We have actually completely separated organizationally from Covestro. There is an unabsorbed cost base that stays with the company. That is one driver. The second driver is the diabetes care business that has been completely divested of as of January 1st as well. That EUR 130 million, while it is actually an order of magnitude we see in 2016, is something we are going, of course, to manage down over the next years. Looking at the infrastructure we run, it is actually not that meaningful to simply say now we cut it, let us say, with a razor, 10%-15% everywhere, and we are done. We are driving it in, I think, a more intelligent way, and that is that we look for further functional excellence and efficiency coming out of that. That is a large project that is being driven inside the company across the entire portfolio, and that is going to yield the necessary savings to offset the dyssynergies over the next years to come. There is nothing that would have been added, driven by the operational setup we have as of January 1st. We continue to operate in the same efficient way with corporate functions cutting across and supporting all of our businesses. There is no new infrastructure that is being built. Actually, to the contrary. Okay. Johann, our plans with Covestro. Yeah. On Covestro, there are actually no news. We are consolidating Covestro 69% stake. We are still in a lock-up period, and we have currently no concrete plans to further work it down. Midterm, of course, we stick to what we said before, that we want to go down to 0% with Covestro. Okay. Crop Science. It is warm. That is good. Yeah. Thanks a lot, Tim. It actually, yeah, it is always a good one with the weather. We are always looking out and if you feel that the weather is pretty bad in Europe, it is usually a good sign for agriculture. It has been a good start for Europe. There is enough rain, but not too much. It is cold, but not too cold. So basically, all the ingredients are in place for a solid start in Europe. It is actually quite similar in the harvesting and second planting season in the southern hemisphere, in Latin America. The conditions, on average, something is strange somewhere in the world, but on average, the start of the year, from an agricultural point of view, has actually been quite good. Thanks for your question on the Q4 EBITDA, which is, I think, not necessarily self-explanatory when we say there has been a price realization impact related to devaluation of the Brazilian real. I just take a minute to explain what is happening here. Basically, Brazil is a U.S. dollar country for us. We book our sales in U.S. dollars. This is important for us because it is basically the commodities are traded on the U.S. dollar base, and a large part of our inputs are also based on U.S. dollars. So for us, it makes sense to have Brazil as a U.S. dollar country. What we try and do is link the Brazilian real to the U.S. dollar as tightly as possible. So whenever there is a change in currency exchange rates, we update our prices very quickly within a short space of time. There is a logistical effort required behind that. But it is very important for us to tie our business in Brazil to U.S. dollar prices as closely as possible and use mechanisms like barter trade to ensure that this happens. What happened in the fourth quarter is a very special effect that we have in the middle of the year, May, June. We take pre-orders from certain customers. These usually tend to be cooperatives in the south of the country. It makes sense for us to agree on pre-orders at that point in time because it gives us planning, basically visibility, and it gives our customers certainty that they can get access to our products. But those pre-orders are then at the fixed prices, basically currency rate at that point in time. In June 2015, the real dollar exchange rate was 3.10 to $1. In Q4, or basically in December, this was 4 Brazilian real to $1. Our issue is simply here we have to honor the commitments that we have made. We basically then book this difference then between the 3.1 and the 4 Brazilian real to the dollar as a negative pricing impact. In actual fact, it is purely in relation to the devaluation of the Brazilian real, and it is simply a factor of the fact that we trade and we treat Brazil as a U.S. dollar country. If some of our competitors do this a little bit differently and look at Brazil from a local currency point of view, there, of course, you book tremendous price increases like we have done. We had a 32% price increase in local currency terms, and we would have had for the whole year on globally a 9% price increase if we booked the Brazilian price increases in local currency terms. We do not do that because we do not think it makes much sense to then show margins that are not also increasing in a similar manner. We think this is the more transparent way of reporting. I hope that gives you a little bit of flavor of what happened there. All the price lists are now completely up to date with basically the Brazilian real 4 real to $1 rate. Going forward, we do not have this issue that we had in Q4. Perfect. Thanks. Next question, please. Next question comes from line of Vincent Monier. Please state your name, company name, followed by your question. Good afternoon. Thank you for taking my questions. The first one is on the contrast agents and the Medical Care business. Can you please give us an update on that part of your activity? Do you consider that this is still a core asset? The second question is on Crop Science again. Can you give more color on the drivers which should support the performance in Europe in 2016? The last question is on Animal Health. Can you update on your strategic intentions for that unit? Notably in the context of the continued consolidation in the vet market. Thank you. Okay. Werner, you want to take the contrast agent? Yeah. The contrast agent business actually has performed well in 2015. We have seen low single-digit growth in a market that is actually not really growing a lot in value. It is growing in volume, but not in value. We have two pieces inside of that radiology business. One is the contrast media business, the other one is the devices part that runs under the net brand name of MEDRAD. We think it makes sense now with the change of the company set up To take this business, it is about EUR 1.5 billion in top line and bring it essentially back to where it used to be a number of years ago, and that is back into Pharmaceuticals. That is the change we have made. It is a highly cash generative, attractive business. We continue to run and invest into its value position also in terms of its recognition in the marketplace, and that is just about it, that I can say. Okay. Crop Europe drivers. Yes. Drivers maybe from, again, an indication point of view, what we have seen so far is strong pre-season sales, particularly for insecticides and herbicides. This gives us strong confidence going into the season when we have such strong pre-season demand. What we are seeing from a country point of view is that our biggest countries like Germany, France, have continuously solid growth. The major growth drivers from growth rate point of view are clearly coming from Eastern Europe, Ukraine, and Russian Federation. We expect Europe, again, along these lines to again, have a very solid performance this year. Vincent, on Animal Health, there is no change in our strategy here, or our strategic considerations. We think Animal Health is a very good business to be in. It is a nice fit with our life science portfolio. Actually, in 2015, Animal Health had one of its best growth years it has had in a while. We introduced two new active ingredients, and we also had very good progress with the sales of Seresto, which is a collar for flea and tick for dogs in particular. So, no change. Thank you very much. Thank you. The next question comes from the line of Richard Vosser. Please state your name, company name, followed by your question. Hi. Thanks for taking my questions. It's Richard Vosser from J.P. Morgan. Just to come back on Consumer, just more long-term, just thinking about the level of marketing investments that you need to make to maintain a mid-single digit or higher sales growth. Just if you could talk about the diversity of your portfolio, both geographically and in terms of the areas you have, just whether that means you need to sustain higher levels of spend to deliver that growth. Second question, if you could talk about the price pressure. You talked about it on Consumer, but the price pressure effect on some of the Pharmaceuticals business products particularly in emerging markets, please. And then also on Pharmaceuticals, EYLEA continues to be very strong. Just your thoughts of where we are relative to the market shares and penetrations of AMD, DME, and RVO. Just what, I suppose, growth is left there. Then maybe one final question, just on the legal provisions. Of course, we have got the legal provisions booked, but could you talk maybe about some of the future cash impacts that might come to in 2016 or maybe even 2017? Thanks very much. Okay. You take the first three. Yeah Werner, then you take the legal. Okay. Hi, Richard. Very quickly on Consumer. There is no need to, let us say, structurally increase our marketing and sales investment in the long run. We continue to invest behind our growth opportunities inside of the frame of the existing P&L. It just so happens to be that our OTC business is, anyway, is one of the most profitable OTC businesses in the world. It has been and will continue to deliver margins that are in the mid-20s. So it may be a 24% margin in one year, it could be higher in the next year. But that is the range of a, let us say, mid-20s EBITDA margin that that business is good for. We have seen some margin expansion also on the heels of the Merck acquisition. Again, we do invest where we see further growth and value creation with our brands. The structure of our portfolio is such that we are blessed with what you would call in consumer terms, actually mega brands. So we have a highly concentrated portfolio of very big and global brands that we will continue to further develop. Again, that is going to happen inside of the frame of the P&L that does exist today with, let's say, some further development going forward. In terms of price pressure in pharma, our underlying growth in terms of volume growth, actually significantly better than what you see in terms of our nominal, let's say, value-based, sales-based guidance. That is due to the fact that we see a not insignificant impact of pricing in 2016. The drivers for that are a number of things that continue to happen every other year in Japan, where we see the biannual price cut that is going to be implemented now in April. In terms of other effects in emerging markets, the most prominent one I would call out that affects the entire industry is that we see a change in pricing and then also, let's say, the setting of the pricing of reimbursement in China, which is then followed by regional, and then even further down to hospital billings, that is actually going to take a toll on our prices in China. Beyond that, we do have select markets. One of them specifically is Australia. We hit certain volumes that were agreed upon for some of our drugs, in this case, Eylea, that will trigger a renegotiation, and that is actually also going to lead not necessarily into price increases typically, but the opposite thereof. Staying on Eylea for a second, we have seen really fantastic growth of close to 60% in 2015. We see a growth of at least 20% in 2016. If you look at the indications and where it's coming from, the majority of the growth continues to be driven by wet AMD. That is roughly two-thirds of all prescriptions. But the other indications, driven by DME, BRVO, and mCNV, do contribute as well. What helps the development of our sales also is that we do have very good real-life evidence that really differentiates Eylea and drives further momentum. In terms of market shares, we have been able to further expand our market shares. I am just going to give you a few. Our market share actually across all indications in Japan is, as of the end of the year, somewhere in the area of 67%, 68%. In Switzerland, which makes us particularly proud, looking at the competitive environment, our market share is 54%, coming from 41% in 2014. Germany, we have seen roughly six percentage points in market share growth from 37% in December 2014 to somewhere in the area of 43% at the end of 2015. Maybe last but not least, France also moving from 35% to close to 40% market share in a year's time. So things are going well. Okay. Legal provisions. The legal provisions, the major effect for cash out was the Yasmin/YAZ case, where we made our payment already on the settlement for VTE cases, 10,300 as of mid of January. There is still the settlement for the ATE cases in the magnitude of $57 million, small amount. We had set up accounting measures for defense costs, also a small amount with Mirena and with Xarelto, which are being spent on a monthly basis. One major item, however, relates to the settlement in the patent issue, where we recorded roughly EUR 411 million as income in our P&L statement. This cash has not yet been received and is to be expected then in 2016. Ladies and gentlemen, we have just seen that we have still a number of people asking us questions, so we would like to ask you to limit your question to one per questioner. Thanks. Next question comes from the line of Michael Leuchten. Please state your name, company name, followed by your question. Thank you. It's Michael Leuchten from Barclays. Just a question on the Pharma R&D. It looks like that stepped up by a healthy amount in the fourth quarter. Just wondered if that's normal seasonality or if there's any particular reason why that has stepped up. Related to that, the FINESSE-HF trial for finerenone doesn't seem to be listed on clinicaltrials.gov yet. Has that trial started? If not, would that be a reason why there'd be incremental R&D increases in Pharmaceuticals? Is that within the Q4 annualized number? Thank you. I understand that that is one and a half questions, Michael. Pharma R&D, quarter 4 was an increase of roughly EUR 120 million. That's actually driven by activity and the start of new trials. There's also a little bit of seasonality as we have every year that some of the cost is being wrapped up. That's why it's maybe slightly higher than the increase in prior quarters. On FINESSE, there are two phase III trials going on. These are the FIGARO trials in DKD, the FINESSE- Finasteride. On finerenone, sorry. The FINESSE-HF trial has not started as of yet. That's why you don't see it logged. Okay, thanks, Michael. Next question, please. Your next question comes from the line of Peter Verdult. Please state your name, company name, followed by your question. Yes. Afternoon, everyone. It's Pete here from Citi. One question on Crop Science for Liam. Could you just share some additional thoughts on implications of the recently announced industry consolidation as well as potential opportunities for Bayer to accelerate your seeds business expansion plans inorganically? Thanks. Yeah. Thanks, Peter, for the question there. Hot topic, a lot of interest around this topic. I hope you'll understand that we don't comment very specifically on this, and particularly we don't comment on what competitors are doing. You've seen from our strategy over the past years, we've been gaining share. We are a big proponent also of basically smart combinations of products and services for farmers to basically enhance yield and ensure sustainability. For us, moving forward, we've always said we want to increase, basically bulk up rather on the seed side, because we're already a very significant player on the Crop Protection side, and we've been doing that very specifically through bolt-on acquisitions in the area of soy and also in wheat, in specific to bolster the other seed businesses where we already have leading positions. So you can, I'd say, expect us to continue on that path and to continue to implement our strategy and strengthen our business as we go forward. Thank you, Liam. Thanks, Peter. Next question comes from line of Marietta Miemietz. Please go ahead. Yes, good afternoon. Thanks for taking my question. Given it's only one, I'll ask a product question. On the Riociguat decision process, it's still listed as being in phase IIb in heart failure, but the data became available quite some time ago, and the only ongoing study I can find on ClinicalTrials.gov is a nitroglycerin combo safety study. I was just wondering what data points you still need to decide whether to terminate it or to proceed to phase III despite the weak phase II headline data. I'm just really trying to push my luck. I was just wondering if you can give a little bit of a disaggregation on the dyssynergies in terms of the actual cost items. That'd be really helpful. Thank you. Okay. Thank you, Marietta. On Riociguat, the only thing I can say here is that we are this is a partner asset. We are in discussion with our partner, Merck. Secondly, we have a lot of data on the dyssynergies, and that is a very long list here, so I hope you understand that I'm not going to read it out now. But the 130 is the 130. Okay, thank you very much. Thank you. Your next question comes from line of Damien Conover. Please state your name, company name, followed by your question. Yes, hello. This is Damien Conover with Morningstar. I just wanted to ask a bigger picture question related to some of the comments at the end of the release, talking about Europe needing to become more innovative. I was just wondering if you could highlight some of the key things and key challenges you're seeing in Europe that are hindering innovation, and what Bayer's really doing to overcome some of those headwinds. Thank you. Well, thank you for that question. How much time do we have left, Jürgen? 20 seconds. Okay. I think the approach towards innovation, particularly in the life science area in Europe, is really insufficient. There is an approach among politicians and other organizations that is very much driven by the precautionary principle, which is, no matter what scientific evidence there is that technologies are safe, if it doesn't feel good in our stomach, we're still not going to approve it and legislate against it. This is not the case in other geographies, particularly not in the U.S., but also not in other geographies. In the long term, this will be disadvantageous to Europe's competitiveness in new technologies. I would say, of course, I particularly talk about the life science industry. Great. Thank you. Thank you. Final question comes from the line of Emmanuel Papadakis. Please state your name, company name, followed by your question. Hey, it's Emmanuel Papadakis with MidFirst Bank. I'm trying to select my top question. Probably Xarelto, you're still listing the IP as 2020 in the U.S., and I know we've been waiting a while for an update on the term extension. Perhaps you could just give us your latest thinking about when that might extend to and when we might get confirmation of that. To sneak in a, what I won't count as a second one, because I'm sure I've missed it, for which I apologize. Could you just clarify exactly what currency impact is assumed in your 2016, excuse me, EBITDA guidance. Many thanks. Okay. Let me start with the patent question. We have actually filed for an extension. The U.S. Patent Office did accept our terminal disclaimer on that. If granted, that extension in the U.S. will go until mid-2024. There's also pediatric extension that would then get us an additional six months of further exclusivity. So that will bring us then into the end of 2024 to 2024, early 2025. The question on the currency assumption, year-end rates compared to average rates 2015, constant exchange rates will translate in 1% impact on sales and nearly no impact on EBITDA. We are contributing now with the year-end rates nearly on the same level as the average rates for 2015. Maybe one addition, we expect a decision of the U.S. Patent Office in 2016. Many thanks. There are no further questions on the phone line. Ladies and gentlemen, that concludes today's conference call. Thank you and goodbye. Ladies and gentlemen, this concludes the full year and fourth quarter 2015 results investor and analyst conference call of Bayer AG. Thank you for joining, and have a pleasant day. Goodbye.