Earnings Call: Q4 2014

Feb 26, 2015

Ladies and gentlemen, thank you for standing by. Welcome to Bayer's Investor and Analyst Conference call on the full year and fourth quarter 2014 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 on your telephone for operator assistance. I would now like to turn the conference over to Mr. Alexander Rosar, Head of Investor Relations at Bayer AG. Please go ahead, sir. Thank you, Cleo. Ladies and gentlemen, good afternoon and welcome, also on behalf of my colleagues, to our fourth quarter conference call. Today, we'd like to review our 2014 numbers with you, and we will also provide you with our 2015 financial outlook. With me on the call are Marijn Dekkers, our CEO, and Johannes Dietsch, our CFO. HealthCare is represented by Olivier Brandicourt, CropScience by Liam Condon, and MaterialScience by Patrick Thomas. Marijn will start off with an overview of the highlights in 2014, give a brief summary of the developments in the fourth quarter, and will then elaborate on our outlook for 2015. We assume you have all received and reviewed the briefing documents and the presentation slides so Marijn can focus his presentation. Marijn, I'd also like to draw your attention to the safe harbor statement. Thank you. Marijn. Yes. Thank you, Alexander. Good afternoon, ladies and gentlemen. It gives us great pleasure to welcome you to our conference call. 2014 was a very successful year for Bayer. What we did this year successfully in 2014 is, first of all, strong operational performance, but also we made significant strategic progress. All our subgroups contributed to our business expansion, allowing us to post new records in terms of sales and earnings. We were particularly pleased that our product innovations showed continued good growth momentum. Operationally, we have exceeded the targets that we have set out for ourselves at the beginning of 2014. Our portfolio transformation into a pure life science company and the integration of our acquired businesses remain on track. Against this background, we are proposing a dividend of EUR 2.25, which represents a 7% increase over the prior year. The resulting payout ratio of 37% falls within our 30%-40% dividend payout target. We remain optimistic about future developments. Our financial outlook for 2015 projects further growth and a significant improvement in earnings. Let me briefly review some of the key figures underlying the performance in Q4. Group sales increased organically by 7% over the prior year to EUR 11 billion, driven by the business expansion in all of our subgroups. Reported EBIT dropped by 14% to EUR 561 million due to special charges in the context of the disposal of goodwill, provision for litigation, and expenses for integrating acquired businesses. Adjusted EBITDA of EUR 1.8 billion was 4% above the previous year, mainly due to higher volumes within all subgroups. Earnings were diminished by higher expenses for marketing and sales as well as research and development. Core earnings per share in the quarter increased by 8% to EUR 1.19. Moving to slide five. Let's take a look at some key fourth quarter figures for the individual businesses. Please, when I am referring to sales growth, note that this is portfolio and currency-adjusted data. Our Pharma segment sales grew 10%, with our recently launched products driving this impressive performance. I will elaborate more on that in a couple of slides. At Pharma, EBITDA before special items increased by 14% to EUR 939 million, primarily due to the strong sales growth of our newer products. This was partially offset by higher expenses for marketing and sales, R&D, and negative currency effects in the order of approximately EUR 50 million. Consumer Health sales advanced by 4% versus the prior year. This performance was driven by our Consumer Care division, which grew 9% in the fourth quarter on the back of strong performance of our key brands. The acquired Merck business contributed EUR 289 million. In Animal Health, sales declined 1% compared to the prior year due to slower tick and flea season and generic pressure from Baytril. In our Medical Care business, sales were overall flat. EBITDA before special items of Consumer Health fell by 5% to EUR 487 million. This was due to declines in earnings at Medical Care and Animal Health. In addition, we invested in new product launches at Consumer Care. CropScience delivered strong growth with sales gains of 8%, contributing EUR 2.2 billion in the quarter. This performance was driven by higher volumes and improved prices. Crop Protection grew 8% with a significant contribution from Latin America. Seeds grew a remarkable 17%, driven by strong developments in vegetables, cotton, and soybeans. EBITDA before special items rose by 16% to EUR 369 million. The contributions stemmed from significantly increased sales volumes at Crop Protection and Seeds, higher selling prices, as well as positive currency effects. This was partially offset by higher selling expenses. MaterialScience sales increased by 5% to EUR 2.9 billion. This increase was due to higher sales volumes in polycarbonates, polyurethanes, and coatings, adhesives, and specialties. The subgroup achieved growth in all major regions except Europe, where volumes were broadly flat in Q4. EBITDA before special items fell 13% to EUR 217 million, mainly due to higher raw material and energy costs, as well as higher fixed costs. Let me now briefly review some of our key figures for the full year 2014 and compare them against our original guide. I am pleased to report that we were able to achieve all targets for the full year, with sales growing by 7% to EUR 42 billion, in line with our raised guidance. We delivered on our earnings promise, with adjusted EBITDA rising 5%, despite a negative EUR 400 million currency effect. We met our mid to high single-digit percent guidance on core EPS, achieving 7% growth in 2014. This success was in particular driven by the strong top-line performance in Pharma and CropScience, both up 11%, and the business expansion at Consumer Care. Let me elaborate on these highlights in some more detail, beginning with the recently launched products in Pharma. Driven by the continued success of our recently launched products, as we said, Pharma sales advanced 11% in 2014, making it one of the fastest-growing Pharma businesses globally. Collectively, these products generated EUR 2.9 billion in sales. Hence, we exceeded our target of EUR 2.8 billion that we set for ourselves at the beginning of 2014. Xarelto ended 2014 with EUR 1.7 billion in sales, firmly establishing Xarelto as the leading novel oral anticoagulant, achieving 32% global market share in the overall anticoagulant market in December. These most recent IMS figures represent an increase of 8 percentage points over the same period in 2013. Since Xarelto's launch, we estimate we have treated more than 10 million patients. Eylea also gained momentum in 2014, and with sales of EUR 759 million for the year, we clearly exceeded our target of EUR 700 million that we set for ourselves at the beginning of 2014. Impressive gains were achieved in important European markets. Moreover, in Japan and Australia, we could defend our close to 50% share of the market. Stivarga finished the year with EUR 224 million in sales, up 17%, driven by successful roll-outs in various geographies, with notable strides in Germany and Japan. Going forward, we believe that we can grow Stivarga in the mid-single digit percentage range, with the possibility of a significant acceleration if and when new indications can be developed. Xofigo ended the year weaker than anticipated, with EUR 157 million in sales due to temporary product shortages during Q4. Since then, this issue has been resolved, and patients are now resuming treatment. Therefore, we expect continued healthy growth in 2015. Adempas is currently the only drug approved for both PAH and CTEPH, and since October 2014, we collaborate with Merck & Company in the development and marketing of Adempas. Sales attributable to Bayer as a result amounted to EUR 89 million in 2014. Now let's turn to Consumer Health. First, Consumer Care. It also performed well in 2014. The integration of the acquired businesses are running on schedule, and impressive progress was achieved in further developing our brands and in building our business in key emerging markets. As you can see on this slide, aspirin sales, including Delapharma, were up 5%. Aleve showed substantial growth, up 10%, mainly due to product line extensions. Bepanthen achieved a remarkable sales growth of 18% for the year. Strong organic growth was achieved in China, Russia, and Brazil, underpinning the successful execution of our emerging market strategy at Consumer Care. CropScience. Driven by the ongoing success of our new commercial strategy, our CropScience business has again shown an exceptional performance. Sales there advanced 11% in 2014, driven by higher volumes, up 9%, as well as strong pricing performance with prices up 2%. We are pleased to report that we are gaining share in 2014. Our new crop protection products nominally grew 23%, lending almost EUR 1.9 billion to sales in 2014. Our seeds business, with strong sales increases in cotton and oil seed, delivered EUR 1.1 billion in sales, which is translating into nearly 20% growth over the prior year. It's also worth mentioning that we could maintain a high EBITDA margin of close to 25% at CropScience. Taken together, I believe we can say that 2014 was a very successful year for our life sciences businesses. Now on the next slide, I'd like to give you an overview of our outlook on 2015. Our group guidance for 2015 is based on December 31, 2014 exchange rates, including a euro-U.S. dollar rate of 1.21. That stated, we plan to grow sales to about EUR 46 billion in 2015. This corresponds to a currency and portfolio-adjusted growth in the low single-digit percentage range. We aim to raise EBITDA before special items in the low to mid-teens percentage range and core earnings per share in the low teens percentage range. During 2015, we will also continue to invest heavily in organic growth for the future. We plan to increase R&D expenditures by about 10% to more than EUR 4 billion, with the largest proportion invested in our pharma division where we expect important pipeline progress during the next year and a half. We are thus committing to an increase of our pharma R&D budget spend from EUR 1.9 billion in 2014 to EUR 2.2 billion in 2015, for a EUR 300 million increase. In addition to R&D, we are continuing to build new production capacity for our products. Fixed asset investments are planned at around EUR 2.3 billion, and investments in intangible assets at EUR 300 million. Now guidance by subgroup. For healthcare, in 2015 we expect revenue of about EUR 23 billion. This translates to a currency and portfolio-adjusted increase in the mid-single digit percentage range. We anticipate EBITDA before special items to increase in the mid-teens percentage range. In the pharmaceutical segment, we expect sales to increase organically in the mid to high single-digit percentage range. We plan to increase in 2015 new product sales towards EUR 4 billion, from EUR 2.9 billion last year, towards EUR 4 billion. To increase adjusted EBITDA in the low teens percentage. We forecast also a slight improvement in the adjusted EBITDA margin. In the consumer health segment, we plan currency and portfolio-adjusted growth in the mid-single digit percentage range, and EBITDA before special items is expected to increase in the mid to high 20s percentage range. CropScience. After having done four consecutive years of around 10% annual sales growth at CropScience, we believe that we will be faced with a more challenging market environment during 2015. This particularly pertains to the first quarter, which also must be viewed against a very strong quarter start in the season of 2014. We plan to continue to grow above market in our CropScience business and anticipate achieving a turnover of about EUR 10 billion. This translates to a currency and portfolio-adjusted increase in the low to mid-single digit percentage for the year. In light of the very tough comparator first quarter 2014, as I already mentioned, it might be that first quarter sales growth this year will come a little below this guidance for the full year. For the full year 2015, we expect EBITDA before special items to increase in the low to mid-single digit percentage points. MaterialScience. In 2015, we actually expect lower sales as volume growth is overcompensated by weaker selling prices. However, we expect to see a significant increase in EBITDA before special items, and we aim to earn the full cost of capital in 2015. As I mentioned, the planned separation of this business is progressing well, allowing us to confirm our original timeline. In summary, we believe 2014 was a very good year. All our subgroups contributed to our growth momentum, and operationally, we have achieved our set targets. We continue to be optimistic that we can also deliver further growth and higher earnings in the future. Alexander, that concludes my remarks. I assume we are now happy to take questions. Exactly. Okay. Cleo, would you mind opening the Q&A session? Thank you very much. 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 the one on your telephone. If you wish to cancel your request, please press the star followed by the 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 Mr. Tim Race. Please state your name, company name, followed also by your question. Hi there. Tim, it's Tim Race here from Deutsche Bank. Just a few questions if I can. First of all, just a very simple housekeeping question just on tax. Can you discuss what the gains were in the fourth quarter? Moving on to more interesting questions. We've got the Meet the Management Day coming up very soon, and I'm expecting new midterm targets. Could you just discuss your thinking about healthcare in particular in terms of, obviously, the top line is growing very strongly and possibly ahead of where consensus is expecting, and what do you expect to do with that sort of extra cash that you're generating? Should we look at this as a margin expansion story, or is it more R&D going forward beyond 2015, or should it be a compromise of both? Just how we should start thinking about that, please. Perhaps just a question on CropScience. Obviously, you're still very optimistic guidance relative to the market. Could you just share whereabouts you expect to be expecting to take share, which segments and why? Okay, thanks. I'll leave it there. Okay. Thank you, Tim. We are going to start with your very interesting question about the tax thing. We actually think that tax is a very interesting topic. Hanno, you want to Yes. Sorry to see you, Tim. About the tax in the fourth quarter, first of all, we need to say that the earnings before taxes were relatively low in the fourth quarter. Secondly, for the full year, we came in with 23.9%, which is a little better than guidance. In the fourth quarter, technically, we had some special items in the tax calculations relating for the full year, both here in Germany as well as in the U.S. And given that we had a very low base, this then translated into tax gains in the fourth quarter. But overall, for the full year, we are pretty much in line with our guidance or a little bit better than the 25% we had originally. Okay. Tim, I will take the second question. It is not really fair to ask Olivier to give projections for Bayer. I will answer it. And I think you said it. We will update midterm targets at the Meet the Management meeting in Berlin very extensively. I do not want to get too much ahead of ourselves there. But just a general comment. I believe that we have really made substantial progress in particularly our pharma business over the last few years. As I mentioned, we are currently one of the fastest-growing pharma companies globally, and we are improving our profits and progressing our product development pipeline really nicely. We are convinced that these factors will, over time, bolster our pharma margins, and we have already reflected that in 2015, where we have also said that we project mid to high single-digit growth, low teens percent improvement in adjusted EBITDA, and also some margin progression. I do not know if you picked it up, but in this guidance for 2015, we have an increase of EUR 300 million R&D investment, as I said, to build on our R&D pipeline and our indications for our products going forward. That is EUR 300 million extra in EBITDA R&D cost. We will see more and more top-line leverage that will translate into further margin improvement beyond 2015, so in 2016, 2017, and 2018. But in the end, this degree of improvement will depend on the progression of our pipeline. The better we do on the pipeline, the more we will spend on R&D, and it will hold back margins. The worse we do on the pipeline, the higher the margins will come out. This is, in that sense, a balance where, yes, we are going to get margin expansion, but how much exactly really depends also on the success of our pipeline and the success of our phase II trials moving into phase III. We will create some more visibility around that in a few weeks in Berlin, if that is okay. Then CropScience, Liam. Yeah. So thanks a lot, Tim. As you say, overall, we are expecting a soft market environment this year. Your question, where do we have the optimism and the confidence to continue to grow? I think you could break it down in general terms on the one side, into geography, on the other, into portfolio. So geographically, in soft years in CropScience, the two geographies that tend to get hit the hardest are commodity impacted geographies. Even in a softer environment for those two geographies, we assume that we can continue to gain market share in a soft environment, but we think there will be particularly soft market developments in those two geographies. Where geographically what is left in Asia Pacific, and we are particularly strong in Europe, so that gives us a good degree of confidence that we can maintain a reasonably robust performance even in a soft year. From a portfolio point of view, the big commodity swings nowadays are particularly in the area of corn and soy, the big broad acre crops. If you look at the breadth of our portfolio, about a quarter of our portfolio sales are actually related to fruit and veg, which does not tend to be impacted by the softening of the market. Another quarter is cereals, which is less impacted. Then we have the whole area of innovation with a lower priced product, then he is going to fall back on innovation to solve his problem and ensure his yield. So that, in a nutshell, gives us the confidence that we can continue to grow solidly in 2015, despite the fact that it will be a soft year. Brilliant. Thank you. The next question comes from the line of Mrs. Walker. Please state your name, company name, followed also by your question. Good afternoon, team. It's Amy Walker at Morgan Stanley. I'll try for three as well, please. On Consumer Health, excluding the EUR 70 million or EUR 73 million contribution from the Merck OTC assets in the pre-exceptional EBITDA line, you saw a decline of 20% in the fourth quarter. Marijn, you mentioned that higher selling expenses and R&D costs contributed, but could you give us a bit more color on that? Exactly how much was the incremental selling costs? Do you think those are going to have to continue through the next several quarters? Did Medical Care decline further sequentially in the fourth quarter versus the third quarter, please? In terms of the pharma pipeline, can you update us on where recruitment is for your phase IIb trial for regorafenib in wet AMD? If you still expect completion in early 2016 for that trial. Also, could you file on those results or do you need to run a phase III for that? Then very last one on CropScience. What would the -8% Q4 growth in Europe have looked like excluding the pull forward of sales into Q3? Would you actually have shown positive growth in Europe? Liam, just to your last point about new product introductions, how many new products will we see launched in CropScience this year versus last year? Thanks very much. Okay. Thank you, Amy. We thought you were going to ask 50 questions, so we're somewhat pleased that it's only three. We'll have Johannes Dietsch start with the OTC question first. Yeah, very good. The first quarter includes the Merck OTC business, where we had the closing as of October 1st. We recorded sales of $289 million in the segment Consumer Health and $73 million in profits. Beyond that, there is additional interest expense of roughly $65 million per quarter, which translates into our financing cost of average 2.6%, which gave you a certain margin increasing in the core EPS already. Beside that, we had one-time expenses from the integration booked of $77 million in the fourth quarter. With the overall performance of Consumer Health, you have to look at the segment Medical Care, especially the diabetes care business, which were substantially below in profitability compared to the quarter before. Animal Health was also lower than the year before because we had recorded a one-time gain in Q4 2013 from a Yeah. Amy, you know that we have plans at phase II study. It's not yet recruiting, but it's actually very close to recruit. Our primary study completion, and we mentioned that last time, is actually during the first quarter or at the end of the first quarter of 2016. So that's the timeline. Regarding the five focus project or our phase II project, we are ahead of our plans with copanlisib, and we aim to start a phase III around mid-year, mid-2015. We plan to present phase II data for finerenone, both in diabetic nephropathy, and that's in March at the World Congress of Nephrology. The second indication, worsening chronic heart failures, that would be at ESC, which as you probably know, is scheduled for August or September this year. Vericiguat phase IIb data are also planned to be presented at the AHA this year. However, our timelines have changed for two of those five assets, vilaprisan and molidustat. We are now planning to see our phase II results by mid-2016. Okay. Liam, do you want to take the CropScience question? Yeah. 9% to 8%? Yeah. Thanks, Amy. As you know, there is sometimes big shifts between quarters in the area of CropScience in the sense that we do not work according to the financial calendar, but unfortunately according to the weather. Sometimes there is more in one quarter and less in the other. As you rightly say, we had a very strong Q3 with 13% growth. I think if you look over the full year with 7% growth for Europe, this was very strong. I could go into individual countries, but I think overall it is a normal trend for us. If we have a very strong quarter, the next quarter tends to be weaker. As this quarter is weak in Europe, what you can expect is the first quarter will then be stronger. We already have indications of that right now. It is nothing alarming. I would say it is totally within a normal pattern for us. We are very happy about the 7% growth for the full year. You asked also about the new products in 2015. We will launch two new products in 2015, Sivanto, an insecticide, and Triafamone, a new rice herbicide. I think what is very important to highlight again here, the big difference with HealthCare is, of course, our life cycles tend to be very long, and we build up sales over a very long time period. What we are really benefiting from now in 2014, 2015, is actually launches that were made in 2010, 2011, 2012. They are really starting to kick in. We have two this year, and we have a nice. We were basically churning out at least two new products every year, apart from seeds, where we have, of course, multiple varieties throughout the year, every year. Two new bigger products where the initial sales will be small, and the bigger impact will come from products that have been launched in the recent years as opposed to within this year. Thanks. That is very helpful. Just one quick follow-up for Olivier. Olivier, that trial in wet AMD with rigosertib, just to clarify, can you file on the phase II, or do you have to run a full phase III as well before you can look to file that product? At this point, I cannot answer that question. Depending on the strength of the data, it may be fileable. Thank you. The next question comes from the line of Mr. Cespedes. Please state your name, company name, followed also by your question. Good afternoon, gentlemen. Florent Cespedes from Société Générale. Three quick product-related questions. First, on Xofigo manufacturing issues. Could this have an impact on the product ramp-up and an impact on the ongoing clinical trials? What is your view on the consensus for this product, which tells us that it should reach a blockbuster status in dollars in 2018? Second question on Xarelto. Do you see more pressure from your competitors, notably from apixaban, on the market? Could you refresh our memory on when we will have the phase IV results for the new indications that will support the product? The last question on Adempas. Could we have more color on the performance in Europe? Do you think that it could be possible to achieve the performance you delivered in Japan and Australia in terms of market share? Thank you very much. Okay. Olivier? All right. Xofigo, yes, you've seen the results for the quarter were very much impacted by the supply situation. You also have seen our guidance for the product, which is reaching EUR 300 million for 2015 in term of sales. Clearly we are expecting to do very well in the coming 12 months. We think that supply situation will not have a long-term impact. We are already working on regaining customer confidence after the drug shortages. We are raising and spending money raising unaided awareness of Xofigo, increasing share of voice among target physician, and reviewing our sales force coverage, especially regarding the urologist. That answers the question for 2015. Long term, we think that Xofigo, with the life cycle we have, which you may remember, look at breast cancer and also eventually prolong treatment up to 12 months versus six, or within six months using higher dosages of 80 kilobecquerel, then we think we can reach the blockbuster status, which we have in our forecast. Xarelto, regarding our results insofar and how well we did, you have seen that we have been able to grow very significantly Xarelto during the quarter, more than 80% year-on-year, FX adjusted for the full year. Clearly, we are continuing to build our leading position in this whole anticoagulant area. For the quarter, we did especially well in the U.S. and in some European countries such as Spain and Poland. For the full year, we grew especially well in France, Germany, and Japan. In the U.S., we basically double our sales. Our royalty, which are booked as sales, as you know, more than double. To answer your question, you need to look at the details of market share. You heard Marijn mentioning the 32% versus Eliquis at 10.5. This is global value as of end of December 2014. When you look more specifically at TRXs and NRXs in the U.S., Xarelto for the whole anticoagulant market is about 16%, and apixaban is about 6%. So we are competing very effectively and maintaining our position here. The good news too is the warfarin stickiness, if you want, is starting to melt, and warfarin was about 60% of the overall TRXs. If you look at February 2013, almost two years ago, that number was 78. So that is clearly we are seeing a lot of switches from warfarin and more maybes than we have been used to. In term of new Rx, Xarelto is at 32%, but here you are talking about only the whole 32%, warfarin at 46, and apixaban at 18. That is just one example. We mentioned in the past the results in the cardiology office. Right there it seems also to be stabilized. Xarelto is at 29 in the Rx's in cardiology, and apixaban at 33. So the difference is not as important. The same thing in Japan and in Germany. Eylea? Eylea, you asked a question regarding the market shares in Europe, and I can share with you that we are doing pretty well in Switzerland at 41%, Germany at 37, U.K. 35, and France at 35. Will we reach the 50%, which you have seen from Australia and Japan? We will probably need the new indication and more specifically, the DME. We are planning to do very well with DME in Europe and hopefully get to that level of market share. Good. Thank you. Thank you very much. Thank you, Florent. The next question comes in line of Mr. Wenner. Please state your name, company name, followed also by your question. Yeah, this is me, Fabian Wenner from Kepler Cheuvreux. I hope you can hear me well. Three questions, please. First one to Werner or Marijn. I think you said in the past there is no straightforward strategic buyer for MaterialScience who would be able to buy the whole division in one go due to antitrust issues. Are there any operational or structural hurdles that would prevent a separate divestitures of polycarbonates and polyurethanes? That is the first question. Then the second one for Patrick, please. When you look at your current contractual obligations for the feedstocks, is it going to be in Q1 already? Is it more towards Q2? How much do you expect the margins to benefit vis-a-vis the declines in selling prices that you mentioned in the press release? That is the second question. Then thirdly, just quickly for Johannes again on the taxes. In the 2015 guidance for exceptional things, maybe in the tax rate, that make the EPS guidance slightly lower than relative to the consensus than what you had on EBITDA, for example. So basically, your EBITDA guidance seems pretty straight in line with expectations while your EPS is very slightly below. Just wanted to make sure there is nothing in there that we do not see. Thank you. Okay, Fabian, I will take the first question. It is not easy to separate polyurethane and polycarbonate businesses in MaterialScience because for a few reasons. All the plans are in shared facilities. There is a high level of integration operationally, and you would actually create, when you try to pull those apart, significant dis-synergies, I would say. So that is not something that is very feasible and in the end will be value creating, in my opinion, not even when you then would be able to sell the individual pieces to a strategic buyer who would then have synergies. But we would have undone some of those synergies already clearly by the dis-synergies of splitting it up. Patrick, feedstocks? Yeah. I think the first point we saw feedstocks starting to fall was towards the end of November, and that starts to roll through our supply chain into Q1 and Q2. Clearly, with that falling raw material price, the margins would increase for a period of the year. The ability to hold onto those margins, of course, depends more on the supply and demand balance, and that is different in each of the different segments. But for example, we have seen strong growth in polycarbonate again last year, which is catching up with the long-term growth aspirations that we have seen in polycarbonate, and therefore the price is intending to hold solid even in Q1. So I am relatively optimistic. Okay. Tax, Hanno. Yeah. Finally, the guidance on the tax rate for 2015 is again 25%. We aspire for this level or of course, the mission is to come in slightly below. But you may not expect any unpleasant surprises that we are above the 25%. Okay. Very clear. Thank you. Thanks, Fabian. The next question comes to the line of Sachin Jain. Please state your name, company name, followed also by your question. Hi, it's Sachin Jain from Bank of America. Thanks for taking my questions. Just a few, please. Firstly, on Pharma. You commented on the wires that you believe that investment is below peer. I wonder if you could just frame what you view as an appropriate level of investment. Obviously, understanding it's dependent on pipeline success. Secondly, a related question. I understand you'll give visibility on the midterm in a couple of weeks, but I wonder if you could just comment as it sits, does the 33% Pharma margin target for 2016 still stand, given it basically implies roughly 200 basis point inflection from the 2015 level? Then the funding needed. Thank you. Sachin, yeah, thank you for your questions. First, I did not say that we were below peers with our percentage of R&D of sales. You just said it, but I did not, just to make sure that. Apologies. A quote on Bloomberg says, "Spend levels below peers." I'm not sure whether that's correct or not. That was the quote on Bloomberg. Okay. I didn't say there either. Why don't I say it? Because it's irrelevant. I don't care what our competitors spend all that much on percentage in sales. The question is, what do you do with the money and how good are you doing it and what comes out of it in the end? I think we have been, if you ask me, relatively modest in our spending with 15%, if you do compare it with peers. But we cannot keep that up because we actually have too much success with our currently introduced products, for which we need to develop new indications and do new trials. Plus, we have this pipeline coming through. So we believe that it's justified to increase this percentage of R&D. As I mentioned before, I don't want to say more about it, we will give guidance on 2016, 2017, and 2018 in, when is it, March 11? Yeah. March 11. Meet management. Meet management in Berlin. But it is the trade-off of yes, of course, we are going to get margin expansions in Pharma. But at the same time, we have to make sure that when the pipeline develops successfully, that we appropriately invest in bringing that all to fruition. On molidustat, yes, I mentioned it was delayed versus our original plan. It's a very complex program. We have three phase IIb going on, plus two phase IIb line extensions, so five studies going on at the same time. We are falling slightly behind in term of recruitment, and that explain mainly the delay. You should see those results coming during the first half of 2016. Okay. Thank you, Olivier. Thanks, Sachin. Thank you. The next question comes to the line of Mr. Verdult. Please state your name, company name, followed also by your question. Yes. Good afternoon, everyone. Pete Verdult, Citi. I would love to ask Olivier about his plans for Sanofi, but realize this is neither the time nor the place. So three Bayer-specific questions. Marijn, number one, just big picture on the future Head of Bayer HealthCare. Should we expect an internal candidate, or are you looking at external options? Just basically trying to get a sense how quickly the situation might get resolved here to minimize potential disruption. Secondly, on the pipeline and the comments you have been making about R&D investment. Vericiguat and finerenone, if the phase II heart failure data is a success, are you planning any changes in the phase III development program in light of the expected launch and strong adoption of LCZ696? Basically, trying to better understand whether you are anticipating issues with respect to the timing of phase III start, patient recruitment in an environment where the standard of care is changing, whether you would seek to maybe target more the preserved segment of the market or seek more data before making what is going to be a very significant phase III go, no-go decision. Then quickly, and lastly, on Animal Health, Marijn, you have always been very candid about the strategic challenges being faced by the business as it currently stands. Any change in view here or nuance since the Meet the Management day in London? Then specifically on chewable formulation of your tick and flea businesses, your competitors are rolling that out. Does Bayer have any plans to do so similarly for Advantage? Thanks. Okay, yeah, thanks. I will try to answer the first question you are saying, "Is there a successor for Olivier?" Yes, we announced that Werner Baumann is going to succeed Olivier in his role as the CEO of HealthCare. But at the same time, internally, we have some time ago, initiated a project to look at our organization structure after the separation with MaterialScience, because we will then have two subgroups left, HealthCare and CropScience, that actually, from a business model, have quite a lot in common. The question is: Are there further synergies and further streamlining possibilities in the organization to make us more effective and efficient? So we are looking sort of completely coincidental, but at the time that Olivier is leaving, we are also looking at, is there an optimized, new organization structure for the life science company that we will be once MaterialScience is separated? What finally is going to happen will also depend on the outcome of that analysis. Now, one thing I would like to say, though, is that it's very unfortunate that Olivier is leaving from a Bayer point of view. But at the same time, if you look at the people who are running the businesses, we have Dieter Weinand running Pharma, we have Erica Mann running Consumer Care, we have Dirk Ehle running Animal Health, and we have Alan Main running Medical Care. These are four very talented, highly experienced people who know these businesses extremely well. So from a continuity point of view, we really feel quite confident that we won't miss a beat in 2015. As much as we will miss Olivier, of course. I didn't know that. No, I was going to leave that to you as well. No, there was a Vericiguat- Yeah. Can I answer that? Okay. Let me breathe a little bit after all that compliment. The Vericiguat question. Then we start with two phase IIb, right? One in reduced ejection fraction, one in preserved ejection fraction. You should see, we have in plan for primary study completion around May 2015. Therefore, your question is a right question. What do we do in light of the LCZ results? We think that there is still room for improvement despite the good results of PARADIGM in CHF, right? So PARADIGM in stable chronic heart failure showed still about 13.3% of mortality in the LCZ arm. So it's definitely a big unmet medical need. We think that with Vericiguat, in addition to two other products, of course, our partial A1 agonist or finerenone, which is closer to us, those products have a very- Okay. Yeah. On Animal Health, there is really no update. Our outlook on Animal Health is the same as what we verbalized in London. Thank you. Next question, please. Thank you. The next question comes to line with Jo Walton. Please state your name, company name, followed also by your question. Thank you. Jo Walton from Credit Suisse. I noticed that your pension liabilities and your balance sheets have risen quite dramatically from $7 billion to $12 billion. I wonder how you feel about having such a high level of pension liabilities on your balance sheet, and whether doing something about that will Where that sits in your priority list for any cash that you might receive on getting rid of MaterialScience. Secondly, on looking at the pharma business, we can see that the ratio of the income that you book for Xarelto from the U.S. and what J&J reports as end-user sales, we have now hit something like an apparent 30% royalty. I wonder if you could confirm whether we have sort of triggered up to the next level and whether this is the level that will be sustainable or whether there is any further increase in royalty rate that we may see. Finally, could you tell us just a little bit more about the diabetes care business and your plans to try and sort this out? Because it seems to be a problem for everybody that someone is doing really badly in this business, while one of the other players is doing no more than okay. Is this still something that you think that you have a role to stay within, and you can see a time where profitability improves? Okay. First pension, Hanno. Yeah. Regarding pension liabilities, we are using discount rates to show the net present value on our balance sheet. The year before, we had a rate of 3.8% in Germany or in Euro land, and at the end of 2014, we used 2.0%, and that increased dramatically the net present value of our future pension liabilities, which are on average 17 years in maturity. So a very long-term liability discounted with a relatively low discount rate brings us up to the level as you described, plus $4.9 billion. We are able to report this in equity. We do not need to run it through the P&L. But of course, it shows up in our balance sheet. And unfortunately, it is also being basis for our calculation with rating agencies because they look at the total debt, not only financial, but also pension debt. I am relatively relaxed about that because our returns on the assets, on the funded part, are substantially higher than the 2.0%. In fact, last year, we had double-digit income from our pension funds. And we have a large portion of unfunded pensions here in Germany, where we use Bayer's balance sheets. And here you saw also that our cash flow return on investment is substantially higher than the 2%. Therefore, we are somehow relaxed on that. Okay. Short answer on Xarelto. Okay. We disclose that we book up to 30%, right, in market sales as royalty. We are not giving any details. You also need to know that, in addition to royalties, we receive cost of goods, co-promotion fees, and potential milestone payments. All of that are booked as Xarelto U.S. sales. Just for you to know. That's the only thing I can say. Yeah. Then, Jo, I will quickly answer on the diabetes care question. You're right that this industry is in quite a lot of flux because prices have come down quite significantly over the last few years. That always gets you to a point that you want to see what is really the significance of this business in the portfolio. We are in the process of that. I don't really want to comment too much about all the different options there. But one thing I would say is that this business is an enormous cash flow generator for Bayer. Also, because we don't do that much self-manufacturing. We do quite a lot of outsourcing of the products. As a result, the margins may not be all the way up to, certainly, I would say cash flow over sales is certainly higher than the average of Bayer. It is actually, from a cash generation point of view, a very attractive business for us. But stay tuned on that. It's hard to give very clear answers on that now because it is a situation in flux. Thank you. Thank you. Excuse me. This is the operator. From now onwards, could everyone registered for a question, please limit themselves to one question per person. Thank you. The next question comes from the line of Ms. Holford. Please state your name, company name, followed also by your question. Thank you. Yes, Kerry Holford from Exane. One question from my list. On KOGENATE, it looked particularly strong in Q4. You mentioned in the press release shifts in order patterns, and I wonder how those really contributed to Q4 and what we should think about for the year ahead. Also an update there on the capacity constraints would be useful. Thank you. Okay. You have seen that we had a strong quarter and specifically coming from the U.S., and that was the result of shifts of active ingredient shipments to CSL. In addition to that, we had also some buy-ins in the U.S. during the last quarter as we introduced in November, December, a price increase, and we have seen some buy-in in advance. So that is mainly the result of what the drivers of the good quarter. Related to the supply constraint, we are planning to see that same situation during 2015, and we should see some easing during our new plasma-free presentation, BAY 81-8973. We would have seen on the marketplace some switches from KOGENATE to this product. But that would happen probably during the second half of 2016. Thank you. Thanks. The next question comes to the line of Mr. Vosser. Please state your name, company name, followed also by your question. Hi, Richard Vosser from JP Morgan. Thanks for taking my question. Just thinking about the, I don't think this has been asked on the FX rates, obviously are considerably lower at the moment on the EUR. Just wondering how that would impact the FX benefit that you're thinking about on your guidance for 2015. Thanks very much. Hold on. Yeah, okay. Yeah, we gave guidance on year-end rates. At that time, the U.S. dollar was at 1.21 and Chinese renminbi at 7.54 and the Japanese yen at 145. We stick to our guidance and to our sensitivity that a 1% change in our currency basket overall will change our EBITDA by EUR 17 million. However, it's not only related to U.S. dollar, which accounts only for 37% of the basket, and you have to take other currencies into account as well. So it's not an easy calculation that just the 1% on the overall currency basket. Thank you. Thank you, Richard. The next question comes to the line of Mr. Rosar. Please state your name, company name, followed also by your question. Daniel Wendorf, Commerzbank. Thanks for taking my question. It is actually related to the performance of the Merck & Co OTC business in the fourth quarter, which came in at EUR 289 million, as you mentioned it. It is slightly below the EUR 300 million to EUR 350 million you gave us at the end of October when you reported Q3 results. I wondered what has changed and if there was any change or was it a special one-off factor which actually drove this below the wide range you gave us at the end of October. Thank you. Okay. Olivier? Yeah, so you are right, the number is lower, as you have seen, it is EUR 289 million for the quarter. We started from a low base after day one, and some of Merck Consumer Care new product launches in the U.S. in 2014 were not successful. Line extension, new products, and more specifically among them, a product called Oxytrol, which is now discontinued. That is the main reason. However, again, we are not changing our long-term prospect because we think we are convinced we are going to deliver both top line and cost synergies in 2017. Okay. Thank you. The next question comes to the line of Mr. Evans. Please state your name, company name, followed also by your question. Hi there, it is Dave Evans from UBS. Just one question on the growth of your pharma R&D budget. Is most of this increase related to new phase III studies, or if not, can you point to other areas of R&D that you are in the process of building up? Related to that, how much clarity do you have by now on how many of your phase II assets will be moving into phase III this current year? Are those numbers fixed, or do you still have some choices to make for this year? Thanks. Olivier? Yeah. The R&D budget will increase because of three buckets. You have a relatively short bucket, which is linked to the different life cycle plan for the currently new launched products, life cycle plans. As you know, they are pretty large and especially if you look at the one behind Xarelto. That is the first one. The second has to do with the end of your question related to the phase II. You have heard earlier that three are actually moving to phase III or be phase III-ready in 2015. 2016 would be the start of those large studies. Cardiovascular, as you know, phase III studies are large and expensive, so that is a key area. The third one has to do with the long term and how much do we invest in discovery, and in large platforms such as, if you want, chemical library, where we are adding a significant investment as we speak. That is roughly I think the answer to your question. Okay. Thanks. Thank you. The last question comes to the line of Mr. Gilbert. Please state your name, company name, followed also by your question. Thomas Gilbert, UBS, chemicals rep. Question on CropScience. What do you think is the marginal cost in USD per bushel of the marginal land in Brazil at the moment? Does everyone make money at the current crop prices or soil price in BRL and USD? Is there a significant or only small risk of downtrading reduction in intensity of use per hectare? Could you, at the current situation, just talk around the risk for the second half year? Thank you. Yeah. Our assumption today is that basically, at current prices, the marginal cost is really at the border, which means if commodity prices were to go down further, there would be no additional expansion of acreage in those marginal areas because it is, of course, much more expensive to farm the marginal areas that have not been farmed yet. Where we are today, from what we have seen and heard, farmers can still make decent, reasonable money today, even at some marginal areas today. But further expansion would be a problem at current commodity prices. It is going to depend heavily now what happens with soybean commodity prices going forward, and that is, of course, a factor now what the yields will be in Latin America, plus how much planting will be done in North America. Clearly too early to make that call right now, but that is what is going to have the biggest influence over time. Downtrading is always, let us say in a soft year, downtrading to lower priced products is always an issue. Here again, if you look at the nature of some of the diseases, the Asian soybean rust and some of the challenges that we are facing, particularly with soybeans in this tropical climate, there is still a strong need for innovation. We can supply those products, so we have reasonable confidence that also in this soft year, that in Brazil, we can continue to grow nicely. Thank you, Liam. Can I just ask you where you think the low cost is? Is that $6, $6.50 a bushel in Brazil? Yeah. We would say $6.50. $6.50, not six, $6.50, yeah. Thank you. All right. Thank you. Cleo, do you have additional questions? Probably not. Excuse me, Mr. Rosar, you may now continue with any other points you wish to raise. Thank you. Okay. Thank you, Cleo. Thank you, ladies and gentlemen. Thank you for being with us on the call. Thanks for your questions, and we all hope to meeting you soon again in Berlin. [Foreign language] Ladies and gentlemen, this concludes the full year and fourth quarter 2014 results investor and analyst conference call of Bayer AG. Thank you for participating. You may now disconnect.