Earnings Call: Q4 2016

Mar 9, 2017

Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the fourth quarter full year results 2016. As a reminder, all participants will be in a listen-only mode. May I now hand you over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir. Many thanks, Vera. A warm welcome from my side here in Darmstadt to this full year 2016 Merck conference call. My name is Constantin Fest. I am Head of Investor Relations at Merck, and I am delighted to have with me here today, Stefan Oschmann, our Group CEO, as well as Marcus Kuhnert, our CFO. In the next half hour, we would like to run you through the key slides of the presentation, then we would be happy to take all of your questions as always. Please also keep in mind that we have roughly about one hour for this call, as some of us will have to catch a plane for the upcoming road shows. With this, and without any further delay, I would like to directly hand over to Stefan to kick off this presentation. Thank you, Constantin, and good afternoon or good morning to all of you, and welcome everyone to our full-year earnings call. 2016 was a very dynamic year for Merck overall. We began to integrate our biggest ever acquisition, Sigma-Aldrich, and we did that very successfully and very fast. At the same time, we delivered diligently on our tasks, be it the growth ambition, Life Science, and Healthcare, or be it the rapid de-leveraging or the development of our pipeline. Merck has now turned into a EUR 15 billion revenue powerhouse, and I can promise you we have a very full agenda to build on this and to develop Merck into an even stronger and more agile company. For this year, for 2017 specifically, we expect to see growing sales and ongoing progress in our pharma R&D pipeline. Therefore, EBITDA pre should be about stable, but we will certainly look into this more closely later during this call. In 2016, and I am now on chart number six. In 2016, we reached sales of EUR 15 billion, which is 17% above last year, and which corresponds to 3% organic sales growth. EBITDA pre came in at around EUR 4.5 billion, some 24% above the prior year, and EPS pre of EUR 6.21 are 46% higher. Clearly a key driver of this strong EBITDA pre-growth was the acquisition integration of Sigma-Aldrich at the end of 2015 and the end of our commission payments for the co-promotion of Rebif in the U.S. But also the sound operational execution in all of our businesses contributed and mitigated the quite visible rise in our R&D expenses. Marcus will give you a lot more details later in the call. I'm now moving to slide number seven. When you look at Merck from a regional perspective, you will see that our three major regions are fairly evenly balanced. North America accounts for 26% of our sales and Europe and Asia Pacific for roughly one-third each. This distribution is not so much different compared to 2015, with the exception of North America, which has become more important to us due to the Sigma acquisition and the solid performance of Rebif in our fertility business. You will also note that our sales in Asia Pacific rose only slightly over 2015, and that has nothing to do with the overall economic environment but reflects the de-stocking in the display industry during the year. In fact, our healthcare and Life Science business, and the organic growth of these businesses were in a very healthy single-digit percentage. Moving on to slide number eight. At the AGM on April 28th, we will propose a dividend of EUR 1.20 per share. This is a fairly significant increase of 14% year-over-year, and it translates into a payout ratio of around 19% of EPS pre. The increase has to be seen on the one hand in the context of our notably higher earnings, but following the Sigma acquisition, on the other hand, in the light of our resulting strong commitment to deleverage as quickly as possible. Also, in future, dividends will develop in line with our sustainable earnings. Moving on to slide number 10, and I give you highlights of each one of our businesses. Healthcare delivered very well on its two major targets. On the one hand, it now posted organic sales growth for the 22nd consecutive quarter. On the other hand, our pipeline has steadily progressed in 2016. In fact, we have the first compounds in registration with the regulatory agencies, Avelumab in Merkel cell carcinoma and now also for metastatic urothelial carcinoma and Cladribine tablets in Europe. We have seen numerous phase transitions in 2016, and the Pfizer alliance is well on track. For Avelumab, we have nine phase III trials by now. What may be interesting too, we have 57 investigator-initiated studies. But also when it comes to the compounds in the earlier phases, 2017 will be a highly interesting year. Chart 11. For Life Science, the key challenge in 2016 was obviously, on the one hand, to manage our customers' buying demand and maintain the ongoing renewal and innovation process for our product offering. On the other hand, we could integrate our biggest acquisition in our history. I think that our 2016 numbers speak for themselves and indicate that this was done successfully. In 2017, we will build on this track record. Chart 12. For Performance Materials, the year 2016 turned out to be rather challenging as a result of the environment in the display industry. In fact, while the de-stocking situation in Display Materials itself was very well managed by the team, Pigments and Integrated Circuit Materials performed very strongly in 2016 and mitigated the sales and earnings decline in Liquid Crystals. Therefore, PM's overall very decent performance in 2016 is certainly a good proof point for its four-pillar business model and the resulting increased robustness of its sales and earnings. With this, I hand over to our CFO, Marcus Kuhnert, who will guide you through the financials. Thank you, Stefan, and good afternoon also from my side. We jump to slide number 14. In 2016, as we have already seen, net sales grew organically by more than 3%, driven by Healthcare and by Life Science, which were able to more than offset the decline in Performance Materials. The currencies developed slightly more favorably in the last quarter of the year than we had expected. The EBITDA pre came in at EUR 4.49 billion for the year, and this 24% increase was primarily driven by the acquisition of Sigma-Aldrich and the realization of the EUR 105 million in cost synergies that we have already pointed to at the Capital Markets Day in October last year. In Healthcare especially, the end of our Rebif commission expenses and several positive effects during the year. You may remember the disposal gain in the second quarter and the release of R&D termination provisions, as well as our new royalty income stream since summer 2016, were able to more than offset the notable increase in our R&D costs, especially in the fourth quarter. On slide number 15, we see some selected key financials of the group. As we have just seen, sales are rising by 17%. We have an over proportionate increase in EBITDA pre by 24%, which brings us basically back almost to the 30% EBITDA pre-margin. The earnings per share pre is at EUR 6.21, which is a 28% rise over prior year. Let me make a short excursus here, about the number, which is a little bit short compared to the market expectation to consensus. You may remember that in the third quarter, when we did our latest guidance upgrade, we notified you that we have, in the course of the finalization of the purchase price allocation, we have had to account mid-double-digit million euro amount of additional depreciation, which is predominantly related to property, plant, and equipment. That actually was also one of the driving factors of our revised EPS guidance for the year 2016. You need to bear in mind that depreciation on property, plant, and equipment, even when it comes from acquisitions, is not adjusted in the EPS pre number. So this has actually brought down a little bit our EPS pre number now to a level that obviously is slightly below consensus. Other than that, earnings per share pre benefited from an improved financial result, and we were able to generate a very healthy operating cash flow of more than EUR 2.5 billion, which we have used predominantly for the reduction of our net financial debt. If we look a little bit on the consumption of cash in 2016, broadly, the equation goes like this. We have generated some EUR 2.5 billion operating cash flow, plus the more than EUR 300 million from the divestiture of Kuvan, which brings us to some EUR 2.9 billion. Out of that, we paid EUR 600 million roughly dividends, some EUR 800 million for CapEx and the EUR 160 million for the BioControl acquisition per December. The remainder of roughly EUR 1.1 billion actually is the reduction in that debt that you see one line below the operating cash flow here on the slide. Working capital and employees increased slightly, but more or less in line with the growth of the business. On slide 16, we see the reconciliation from EBIT to EPS. In the EBIT, the disposal gain for Kuvan from the beginning of 2016 clearly left its mark and more than offset the impact from the higher acquisition and integration related costs. Financial result improved slightly in 2016 versus prior year. For 2017, you can expect our interest result to be in a range between EUR 250 million and EUR 260 million. Our tax rate is within the well-known range, and our guidance for 2017 remains the same, namely a corridor between 23% and 25%. Obviously, we will need to see what impacts, if any, future changes in the U.S. tax system will have on our tax position, but it is too early today to enter into any kind of speculations. Now I would like to enter into a little bit more detailed view on the business sector P&Ls, and here we focus on the most recent developments, namely the fourth quarter. On slide 17, we start with healthcare. Healthcare net sales grew organically by more than 4%, which is in line with the growth rate in prior quarters, and also with our statement that we believe we will be able to fully compensate the Rebif sales erosion with growth from our other franchises. What might have been a little bit out of trend in the fourth quarter, is Rebif itself, which grew almost 1% organically, and also endocrinology was up 20% organically. The explanations are, in the case of Rebif. You may have noticed that we have been able again to increase prices in January 2017 by 5.5% in the U.S., and we have actually seen stocking by pharmacies ahead of this at the end of Q4 2016. Our endocrinology sales that I have just mentioned benefited from the year-end reversal of a larger accrual for potential rebates. EBITDA pre came in slightly lower versus last year, which is largely due to the increase in R&D costs. They picked up quite noticeably in the fourth quarter versus the run rate that you have seen in the first three quarters of 2016. This is due to a certain seasonal uptick that we sometimes see towards the year-end and has strongly to do with rising activity and acceleration of measures towards year-end. In 2000, when we look on the full year R&D number, we see roughly an increase of EUR 186 million in our R&D spending. This is as we have indicated earlier in November, at the lower end of the original projection of our R&D cost development. However, we also need to keep in mind that 2015 benefited also from a reverse of termination provisions. If we would add that back, then we are in a range of some EUR 250 million increase year on year. On slide 18, Life Science finished the year on a slightly softer note with a 3.7% organic sales growth in Q4. As we had expected, the growth rate is somewhat lower due to the tougher comparables on the one hand. On top of that, some customers have delayed their orders late in the year. This shifted some 15 million EUR of sales into 2017, and we are actually expecting that a major part of this will be recovered in the first quarter. Sigma made a good contribution again, and if you look on Life Science full year's organic growth on a pro forma basis, then we can say that the Sigma business grew approximately at a similar rate than the legacy Merck Millipore business which is basically reflected in the organic growth numbers that we have reported this morning. Synergies came in, as we discussed at our Capital Markets Day, at EUR 105 million and with the very solid operating performance and continuously good execution on the synergy side, we made quasi a jump in EBITDA pre profitability from 25% to more than 29%, a very healthy level for the start into 2017. On page number 19, Performance Materials. You all know 2016 was a challenging year. However, on the positive side was a good proof point for our four pillar, highly innovation driven business model and our ability actually to better mitigate sales and earnings fluctuations with a bigger diversity of our portfolio than in the past. Of course, Pigments and Integrated Circuit Materials had a strong contribution here. They continued their strong performance in the first quarter with organic sales up in mid to high single digits. Still, the fourth quarter sales overall declined organically by -5.9%. While the EBITDA pre-margin held up very well as throughout the year at the level between 44% and 45%, the sales development clearly does not yet reflect the recovery in Liquid Crystals that we had expected when we last spoke in November. On top of a bit more sluggish return on volumes, also some customers from our point of view now use the inventory adjustment processes in the last month to recalibrate a little bit the shares between the suppliers and their supply strategies. In Q4 specifically, we saw some signs of a normalization of our very high market shares, and we will keep this topic as a watch out on our radar screen for 2017. Slide number 20 shows the balance sheet. This is not very spectacular in terms of changes versus last year. Noticeably, of course, the reduction in financial debt. Our equity ratio has increased now to a level of 37%. Our gearing from net debt to EBITDA is down from 3.5 end of 2015 to 2.6. Other than that, there were not too many changes. What might be a little bit surprising is the only slight decrease in intangible assets. Here, I can tell you we have written down, on a scheduled basis, more than EUR 1 billion in 2016. However, the uptick in currencies brought up the asset values by the end of the year. Slide number 21 is the cash flow statement, and here you can see the Q4 contribution to the EUR 2.5 billion operating cash flow generation, which is close to EUR 800 million. Strongly supported by the increase in profit after tax and also a very positive contribution from changes in net working capital. The investing cash flow is reflecting the BioControl acquisition on the one hand, and a slightly higher CapEx spend behind Sigma and the growth of our businesses. On the other hand, the minus in financing cash flow indicates that we continue to pay down financial debt. With that, I would like to hand over to Stefan again to guide you through the outlook and guidance. Thank you, Marcus. On page 23, we are coming to the 2017 qualitative guidance, and we will give quantitative guidance with our Q1 results in May. We expect slight to moderate organic net sales growth with currencies and portfolio unchanged. EBITDA pre should be about stable, which comprises a small single-digit percentage variation around the 2016 level. The main drivers for this are well known. Just three things to highlight for your radar screen. Firstly, in Q2 and Q3 2016, we had several one-offs that lifted EBITDA pre by about EUR 19 million but will not recur. Secondly, you may have read in our annual report that we recently entered into an agreement in healthcare to swap a royalty income stream and receive a lump sum payment as compensation for future annual payments. On a net basis, this lifts EBITDA pre this year in the mid to high double-digit euro million. Thirdly, further you may have read in our annual report this morning that we are in advanced discussions through the divestment of our biosimilars activities. Until we see whether or not these succeed, the business remains part of Merck and still, as discussed at our Capital Markets Day in October, regular portfolio reviews are part of our daily business. Moving to page 24. On a per sector guidance for healthcare, we expect to see similar dynamics as in 2016, and hence slight to moderate net sales growth. With declining sales from Rebif despite the recent price increase in the U.S. We have good growth in our Asia-Pacific and LATAM markets, and Erbitux is about sort of stable-ish. In fertility, it seems as if the second competitor in the U.S. will not return to the market in 2017. The takeover of the commercialization rights for Glucophage from BMS in China should add a net about EUR 100 million to EUR 150 million in net sales versus last year. On the EBITDA pre, sales growth and high royalty income based on Avonex and the royalty swap cannot offset the unfavorable business mix effect, as well as higher R&D costs and non-recurrence of 2016 benefits. In Life Science, demand remains healthy throughout our businesses, and we continue to expect net sales growth slightly in excess of market growth, which we assume will be around 4% per annum. This should drive EBITDA pre and the expected Sigma-related synergies of EUR 185 million will add to this. For Performance Materials, we expect slight organic sales and EBITDA pre-growth for 2017, driven by all four business pillars and by an improved environment in the display industry compared to 2016. However, the earthquake in Taiwan in mid-February will dampen Q1 2017 sales. We assume that our market shares remain at their high levels. However, we cannot guarantee that the adjustments seen in Q4 2016 will not continue in 2017, so we keep this topic on our radar screen. Thank you very much. Constantin? With this, we are happy to take your questions. Thank you. Thank you. We will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel your question. If you're using speaker equipment today, please lift the handset before making a selection. One moment, please, for the first question. The first question is from Matthew Weston, Credit Suisse. Thank you very much. A small number of questions, please. Firstly, on the bispecific antibody in development. Can you just give us an update? How many patients do you now have in the phase I cohort expansion study? Can you tell us how many cohorts you've expanded? I guess most importantly, when are we expecting to see significant data on the product? Secondly, on Performance Materials. You've highlighted the market share and the impact of the Taiwan earthquake. I guess you have the advantage of having already seen 10 weeks of 2017 trading. So can you tell us what you have been seeing around market share shifts so far this year? If you can just expand as to why you think you're losing market share, I think that would be very interesting. Then finally, a quick financial one. There seemed to be a significant spike in healthcare underlying SG&A in Q4. What drove that increase in spending? Thank you. Thank you, Matthew. Let me start with the bi-functional fusion protein, which we refer to as, in our own lingo, as TRAP, based on the fact that there are two molecules, which gives you a better trap in that fusion protein. Recruitment is ramping up rapidly. We have about 300 patients involved in the basket trial with about 10 indications. You should expect more data from the phase I dose escalation trial at scientific conferences in mid-year, potentially at ASCO. When it comes to PM and Q1 numbers, we will report this with Q1, Matthew. I take over the third question on the healthcare SG&A uptick in Q4. The reason for that being predominantly increased marketing and selling expenses to prepare for the upcoming launches of Avelumab, MCC, and Cladribine. Okay. Thank you very much. Thank you. The next question is from Peter Verdult, Citi. Thanks. It is Peter Verdult here from Citi. Just a few questions, maybe kicking off with Stefan on the pipeline. Could you talk a little about portfolio prioritization? It seems that after many years, Merck finally seems to be in the position of having a pipeline that has a pulse. When you think about Avelumab, the TRAP, the BTK inhibitors, the DNA damage repair portfolio that you have amassed, do you really have the capacity to fully invest in all these assets? Or should we be thinking more that partnership on at least one of them is definitely on the cards in 2017? Secondly, you have mentioned the data for TRAP at ASCO. Is there any other Avelumab data that we should expect this year? Is it all for next year and a variant? A quick one on Cladribine. Everyone in the market is scratching their heads to working out what sort of revenue opportunity this could be. Are you willing to at least talk about what you think Cladribine could do, assuming approval in Europe? A quick one for Marcus or Walter on Performance Materials. Obviously, you have expressed a degree of conservatism at the start of the year, given some of the impact that you are seeing. Just given the underlying demand trends are positive, the SAVA launch coming, and your recent comments about OLED turning profitable in this year, I just wanted to get a sense of your confidence of maintaining profitability at current levels for the year. Thank you. Yeah. Thank you, Peter. I will start with the portfolio prioritization question. Obviously, the biosimilars divestiture should be seen in that context. We initiated the biosimilars program at a time when our pipeline looked much less attractive than it is now, where we also were facing a situation where we had a major bio fab that was running far below capacity. In a way, us getting into biosimilars was a plan B. The fact that we are now focusing on our innovative pipeline, we ourselves interpret this as a sign of confidence. Prioritization, you have seen that we are willing to partner. We did that with Avelumab, and that was a deal that was broadly noted. I think at that time, it was the biggest ever deal in the industry for a phase I compound. We have been talking about the rationale for that. I personally, I've studied a couple of other companies, for instance, Boehringer Ingelheim in the 1990s, when they had a very good pipeline, and where they clearly came to the conclusion that they could not launch a first physical develop and commercialize all these compounds on their own. They did a lot of partnering, and that was very successful. We indicated that we would be willing to entertain discussions about partnering of BTK. However, we have initiated two phase II trials, and we believe that we will optimize the value of the compound after proof of concept. To answer your question, yes, we are willing to entertain partnering discussions, but we also feel in a position of strength to commercially commercialize some of the compounds ourselves. You've also seen that we've done the Vertex deal recently that fits very well with our internal pipeline. So you will see a mixture of partnering in and partnering out going forward, too. The second question was regarding Avelumab data and TGF-beta trap data at ASCO. I had just indicated that you should expect data on the dose escalation trial for the PD-L1 TGF-beta compound. We assume that there will be exciting data on Avelumab 2 presented at ASCO, but given the mechanics of scientific congresses such as ASCO, I hope you understand that I cannot go into detail at this stage. Okay. Peter, then I would take your PM question. So when looking on the outlook for 2017, what we are currently seeing is that the macroeconomics have somewhat returned back to normal. That means specifically that the inventory levels have normalized. We see higher utilization rates at the panel producers, basically back to pre-crisis levels. We see also that the panel prices have come up significantly since, I would say, Q2, Q3 last year. That all in all translates to our assumption that we should be able to return on the growth path with PM in 2017. What we have seen in 2016 is that we were able to keep margins stable and the sales decline basically translated then also now to a corresponding absolute EBITDA decline, but at relatively constant margins. So that means that when we are able to return on the growth path again, that will definitely de-burden our EBITDA pre-development. It will help to keep our profitability at the high level. Moreover, you have made also some points by yourself. So we think we continue to grow with OLED materials. We'll introduce a new technology mode, SAVA, from the second half of 2017 onwards, but we should not expect or should not be too bullish in terms of incremental sales related to SAVA in 2017. Last but not least, we should also not forget that we have at the moment, a very nice momentum track record in our pigments and integrated circuits businesses. 2016 was a record year for both of these businesses in terms of growth and margin. Actually, we see no reason at the moment that there would a break in this track record. This will also help us to keep profitability on a high level. Let me add some information. I didn't answer your Cladribine tablets related question yet. You know that as a matter of policy, we don't disclose our peak sales assumptions. External observers mentioned this. This is between EUR 200 million and EUR 400 million for the EU. We expect an EMA decision in Q3, and obviously peak sales depend very much on the label structure. We hope that this is going to be an attractive option for patients. You're familiar with the efficacy data. We should note that the treatment regime is quite attractive. That means that patients take something like 10 tablets now, take something like 10 tablets a year later, and that is a four-year treatment, and you compare that to other treatment options. We at least internally assume that this is something that could be highly attractive to patients. Thank you. Thank you. The next question is from Sachin Jain, Bank of America. Hi, thanks for taking my questions. A couple of product ones, then one big picture. Just to follow up on the TGF-beta, can you specify how many patients you have in the dose escalation portion of that study that we will see at ASCO? And then could you remind us whether you still remain confident in a potential filing on phase I data in certain populations? I think you have spoken before about Optiva Refractory as a potential quick route to market. Secondly, on Avelumab, the first-line lung cancer study, you have added a higher dosage, a third arm to that study. Could you comment on what data has driven that so late after study start, and whether you believe Avelumab is underdosed in other indications too? Thirdly, on Cladribine, where are you with ex-European filings? I think the prior comment should be potentially looking at filings once you have had initial review from European regulators, which you obviously have. And then the final question is just the big picture on the Pfizer collaboration. Just given the various news in the media, could you outline what break clauses you have in the contract around immuno-oncology? On the flip side, have you had any discussions regarding expanding that collaboration, for example, the TGF-beta or other earlier-stage assets? Thank you. Thank you, Sachin. This is quite a few questions. I am trying to work through them and please chime in if there is anything that I did not address. On Avelumab, the non-small cell lung cancer first-line amendment, we observed a correlation in the JAVELIN solid tumor basket trial phase II. Sorry, phase I, obviously. And we have subsequently added this arm in the first-line trial, where we will test this hypothesis. I was asked a question by media representatives this morning in terms of what that means for timing. You are very well aware that there has been, after the BMS data, there has been this discussion about how can we define a study design that both captures PFS and OS, and we think that with this new timing, that we are not disadvantaged. Then you have the question about TGF-beta trap. That is a theoretical question that is data-driven. If we see data as we hope that we will get, we will entertain such thoughts and such discussions with the regulatory agency, but I cannot make any valid statement right now on a TGF-beta trap filing based on phase I data or not. Cladribine, there was your question regarding Cladribine filing in the U.S. We have started in Europe. That was our internal focus, and that was driven by academic experts and patient groups who approached us, and it is also driven by the specifics of the EU regulatory environment. But we always said that we may eventually also look into other potential jurisdictions, such as the U.S., which is obviously the largest MS market as of today. And there are other markets such as Australia, Russia, Canada, and so on. We will go step by step. Pfizer collaboration. This question about breakaway clause, that is a question we have obviously considered when we designed the contract. We are not going to disclose any specifics of the contract, but it is very safe to assume that we were cognizant of this issue or the potential for this issue when we designed the contract. The TGF-β trap compound, the PD-L1 TGF-β trap compound, is outside of the Pfizer agreement, and we will discuss whether we will further develop this fully internally or whether we will partner this at the right point in time. That is too early right now. You can imagine that if this works according to our hopes, I would not say expectations, our hopes, this could be something very big, and all sorts of other scenarios are possible, too. Again, too early to discuss. Thank you very much. Thank you. The next question is from Simon Baker, Exane. Thanks so much for taking my questions. Three quick ones, if I may. Firstly, on Rebif, the list price rise that you took in January 2017 is slightly higher than the 5% in January 2016. I just wonder if you could comment on trends on the level of rebate there. I am not expecting you to give us the net price rise, but if you could give us a qualitative feel for how the market is evolving from a rebate perspective. Secondly, on atacicept, I wonder if you could give us a little bit more color on the, if you pardon the pun, on the discoloration issues you are having with manufacturing of that drug. How long that will take to resolve, and any potential delays that that could create for the development program. And thirdly, on CapEx, you are guiding to EUR 850 million to EUR 900 million this year. That's a little bit higher than 2016. I was wondering if that's a good guide for steady state CapEx going forward. Thanks so much. Thank you. On Rebif, thank you, Simon, for pointing out that you don't have the expectations that we disclose net price effects. The price increase was, if I remember correctly, 5.5% growth. This is in line with the competitive landscape. Impossible for us to predict right now how price levels in these markets are going to be going forward. We have no idea yet what the new administration is going to do. I think it would be unprofessional to make any predictions at this stage. There are external observers who think that the market is becoming somewhat more volatile through the introduction of ocrelizumab, some patient warehousing, I don't know what. Again, very difficult to speculate on this. On atacicept, I give you the full story. We have the 24-week data from the ADDRESS-2 phase IIB study that confirmed the potential of atacicept as a candidate therapy for SLE. We were encouraged by the data in the high disease activity patients, noting that the primary endpoint was formally not met. We are aiming at discussions with the FDA regarding a potential phase III study. That should be around June this year. We currently also have a shortage of study drug supply, which is not related to any of the clinical findings, and we are focusing on adjusting the manufacturing process to bridge to the approved specifications. You're aware that the manufacturing adjustments aim to address this out of spec coloration issue with the current supplies of atacicept. I would suggest that Marcus address the CapEx question. Yes. Your question on CapEx, the EUR 900 million. Let me first elaborate very briefly on the increase versus 2015. One point is that we have now 12 months of Sigma-Aldrich included, and there are some CapEx investments that will come on top from that. Moreover, we discovered that Sigma was a little bit under-invested in the past. That means there were some effects where we had to catch up on CapEx on the Sigma side. Moreover, we see also investments in the ONE Global Headquarters project here at the Darmstadt site. These were the main drivers behind the 2016 numbers. In 2017, we will see predominantly investments behind the further growth of the business. We will have some investments in China, in healthcare, and in Life Science for new productions. We are opening up new growth opportunities. So for example, with the investments in the liquid crystal windows production site. This you can also expect when we look a little bit more forward. I would think beyond 2017, the CapEx spend can go even a little bit higher, but the major driver would then be actually capacity investments. That means it would be supported by the respective growth momentum of the businesses. Great. Thanks so much. Thank you. The next question is from Vincent Meunier, Morgan Stanley. Hello. Thank you for taking my questions. The first one is on the biosimilars. Can you elaborate on the costs allocated to that business unit and the potential impact of the divestment on your targets for this year, if any? The second question on the royalty swap. Based on your guidance, if we assume EUR 60 million or EUR 80 million of lump sum, that will represent what, 1.5% maybe of the group EBITDA pre in 2017. Does it mean that excluding this item, the EBITDA pre would have been slightly down? Also, what will be roughly the size of the royalty stream in the future and the products? I have also a question on fertility. Gonal-f was down 1% organically in Q4. Is it a good proxy for the trend in 2017? Do you confirm that now competitors are fully back on track? Thank you. Thank you, Vincent. I start with the biosimilars question. In 2016, we spent about EUR 130 million on biosimilars, and that was mostly on R&D, but also some early manufacturing work and a little bit of money on preparation of commercialization. I carry on with Gonal-f, and then we'll then hand over to Marcus Kuhnert. Q4 Gonal-f was lower in the E.U. due to biosimilars and competition. I was mentioning that the U.S. situation has somewhat stabilized with one competitor coming back on the market. The other competitor not coming back, and we still continue to see strong growth of fertility in China. If we take all of this together, we should see definitely growth in 2017 being more muted than the high base in 2016. Your question regarding the swap of the royalty stream. Let me give you a little bit background on that. On February 6, 2017, we have entered into a contractual agreement, according to which we will receive one-time payment for royalties as compensation for future royalty and license payment. The economic consequences are that we will receive a one-time cash inflow of EUR 114 million in the exchange of three years licensing stream. With that you can, let's say, make your own calculations basically, what will be the net effect for or this actually translates to the net effect that we have given you for 2017. Then you can also make up your mind what would be the net effect in 2018 and 2019. The remaining two years where we don't have the royalties then. On your question for the outlook in 2017. At this point of time, we do not give a specific royalty outlook, but you can actually check in the annual report where we have basically revealed all of our royalty sources. For example, the Avonex case, which you should be well aware of. This gives you, I think, a very good guidance, where 2017 may land. Thank you very much. Thank you. The next question is from Gunnar Romer, Deutsche Bank. Gunnar from Deutsche Bank. Thanks for taking my questions. Just a quick follow-up on the market share normalization Performance Materials. I was wondering whether you can comment on what you have baked into your guidance for the current year. My second question would be on corporate costs. I think if I strip out the hedging effects you had, it is about stable year-over-year in 2017, what you are guiding for. Just wondering on the longer-term trends, we have seen a significant step up in this line over the past two years. Just help us understand how we should think about that line going forward, whether at all at some point this line may come down. Lastly, on Rebif and the stocking effect in the fourth quarter, I was wondering whether you can potentially quantify how much that has been roughly according to your estimates. Thank you. Thank you. I would start with the Performance Materials assumptions. We have also heard from a couple of observers. We heard questions about how come you expect to segue from a negative growth situation in 2016 into a slight organic growth pattern in 2017. What we should note, first of all, and that is something that often gets forgotten, is that our DM, our display business, is only, so to say, about 50% of our Performance Materials business, and not all of our Display Materials is Liquid Crystal business. That is important to know. We see positive macro trends in the display business compared to prior year. We see that the number of panels sold increases, and we see that panel pricing increases, too, and that should filter through to us. We also see that new modes such as SAVA are being introduced and put into mass production as we speak. We hope that this will have a small but measurable effect toward the end of 2017. We should also be in a situation where we have more easy comparables compared to prior year. Our other businesses, Pigments and Integrated Circuits, continue to grow very solid as they did. We expect them to grow as solidly as they did in 2016. When it comes to market shares, you know that we have high market shares. We expect these market shares to continue to be high, us being by far the market leader. But we had among certain customers, we had over the past. Actually not in 2016, but maybe early in 2016 and in 2015 for specific competitive reasons, we had extremely high market shares, and we now assume that this will go back to a sort of more natural level. Hedging. Marcus will take over hedging. Gunnar, your second question on corporate costs. You will have noticed that the 2017 guidance from the corporate cost segment is a little bit lower, so in a positive sense, than the number that you have seen for 2016. Indeed, the current FX environment indicates even higher negative hedging effects in 2017 than what we had in 2016. That means on a like for like basis, we really see a marked decline in the Corporate costs in 2017. If we look further down the road, it is difficult to make already concrete predictions. What we said here internally, and that is basically also what we said in 2016 already, that under no circumstances ever the corporate costs should crack the EUR 400 million bar. We believe that looking forward, so 2018, 2019, we should have this cost segment well under control. I would also not expect actually a further increase over the 2017 year level. However, I would like to make one comment here. You know that next year we have our 350-year anniversary, and we need to see. We are in the planning, and we cannot yet say what will be the impact here. So might be that something of that will also be visible in segment corporate. But be sure we have a close look on that cost position. The last question, Rebif stocking effect. You have seen in the numbers that the North America organic sales growth was 11% for Rebif in the fourth quarter. We have had two price increases in 2016, which add up to a total of around 9%, roughly. When we grow 11% in the fourth quarter, that would mean that the volume was slightly positive in North America. If we compare this with the run rate of the prior quarters, we always had the picture, let's say by and large, 10% price up, volume minus, so that we are more or less flat. Then you can make your own math. What was the stocking effect in Q4, which lifted us on a 10, 11% base? Okay. Thank you. That's helpful. Maybe if I can, just a quick follow-up on the lump sum. Shall we expect that you book that, so I'm talking about the royalty here. Shall we expect that you book that on a pro rata temporary basis or would you see that impacting just one quarter? How should we be thinking about it also then in terms of the delta to the cash flow statement, what you factored in here? The cash in, of course, goes immediately into the cash flow statement. You will see the impact as other operating income in Q1 2017. Okay. And the delta between the P&L impact and the cash flow impact, is that just conservative planning or how should we think about the delta here? The EUR 114 million. The delta is going to, you remember, we swapped. We got a one-time payment, and we swapped three years of license payments, and year one was 2017. All right. Obviously, the one third of the license payments we will not see as regular license payment but instead as a one-time cash in. Okay. Got it. Have your questions been answered? Thank you very much. Yes, thanks. Thank you. The next question is from Richard Vosser, JP Morgan. Hi. Richard Vosser, JP Morgan. A couple of questions, please. Just on the R&D spend development in healthcare, perhaps you could give us a little bit more color on the magnitude of the increase you are thinking about in 2017. Then on the Glucophage sales in China that you are now bringing in from Bristol Myers. You mentioned the amount of EUR 100 million-EUR 150 million. Just what sort of growth have we seen in that area in terms of the sales in the past in China, and what we might think going forward. Just thinking about the profitability impact of those sales, is there anything you can do similarly to when you took over the Rebif marketing that might make that more profitable that we should think about this year? Thanks very much. Yeah, Richard, on the R&D spend, if you look back in 2016, we had actually expected to spend more in 2016 already if you look back at the guidance that we gave. We had talked about the reasons why this spend would occur later on. If I look into consensus, I read that market expectations for us is to be spending about EUR 150 million-EUR 200 million more compared to prior year, and what I would say is that does not seem entirely, totally illogical to make such an assumption. I hope that answers your question. On Glucophage, plenty of positive events. Late last year, we have opened a factory in Nantong in China that makes Glucophage, and so this is a local product right now with all the advantages and also essential medicines list. So we generally do not disclose individual country sales numbers. You can get the in-market data out of IMS. We expect until 2018, mid to high single-digit growth for our general medicine portfolio, in this indication on a global basis. So it does have a significant impact on our overall revenue development. Richard, I take over your question on Glucophage sales in China. The past growth of that business, we can derive as an approximation from the delta of the license income, of the commission income that we have reported. The growth of 2016 was around 20%. That, however, does not mean that we will continue exactly on that path going forward, but this gives you maybe a little bit a ballpark. We actually would not see a big impact on the bottom line from that, because what we are effectively doing is that we are switching basically license income, so commission income into a full P&L. Of course, we will see, let's say absolute sales that will be increasing. We will see absolute EBITDA pre coming now. But no big impact on the pure bottom line. However, please keep in mind, this will have a slightly negative effect on the margin. Simply due to the fact that when you have just licensing income, you do not have any denominator, so sales were zero. You have just licensing income. Now we have a full P&L. That means the profitability in terms of margin, the relative number is slightly diluted. However, we believe, and that was a strategic rationale why we did it, that under our own roof, the long-term prospects of that business will be better. I would like to hand over to Stefan now also for a comment. Richard, also you referred to the Rebif Pfizer example. Yeah. I would say that we are facing a very different situation here. The co-promotion deal that we had with Pfizer on Rebif in the U.S. was characterized by the fact that there had been early on, and that was prior to us acquiring Serono, there had been a very high upfront payment being made by Pfizer to Serono. Then the characteristics of the deal, of the co-promotion deal, were less favorable to us. The ending of the co-promotion deal was a net positive for us. In this case, here, we had simply licensed out the compound to BMS, and we have now repatriated it, which means that we had to build up a sales force locally, which has happened. That means that you also see higher SG&A in this area. Thank you. Thank you. The next question is from Florent Cespedes, Société Générale. Good afternoon, gentlemen. Thank you very much for taking my question. Three quick ones. First, on Healthcare, just a quick one on Erbitux. How do you see the performance going forward, and is the Q4 a good proxy for the quarters to come, for years to come? Then two questions on Life Science. First, could you elaborate a bit on the dynamic of the subdivisions? Is there any change of dynamic that you have observed recently? The last one on Process Solution on the delayed order. Could you explain why the customer order delay occurred this year and not last year? Is it really something that was kind of one-off, or should we see this pretty much every year? Thank you. Yes. On Erbitux and Q4, Erbitux is obviously a mature product, and midterm it will be stable-ish at best because we are seeing IO competition in the midterm and possibly always a further narrowing of the patient base. Dynamics in the Life Science sector overall, we must say that 2016 has been a particularly good year for the Life Science business. If we look at our assumptions, the assumptions that we formulated when we acquired Sigma-Aldrich, market growth was significantly faster, mostly driven by Process Solutions, but also by Applied Solutions. For those of you who are not so familiar with our business, again, we have three business units within Life Science. One is Process Solutions, that is Bioprocess. The second one is Research Solutions. That is a research lab in academia or in pharma. The third one is Applied Solutions, which is regulated analytics, mostly quality control in pharma, but also in the food industry. The two main growth drivers were Process Solutions and Applied Solutions. Also, there were some factors, launches that impact performance, for instance, our new next generation lab water equipment, which we are rolling out as we are speaking now. We aim to continue to be the profitability champion of this sector. We see it in Process Solutions. We assume high single-digit growth. We have seen extreme growth in some areas in Process Solutions over the last year. That was an outlier. In Applied Solutions, we assume mid-single digit growth, and in Research Solutions, we assume low single-digit growth. Again, we do not really know what the policy of the Trump administration is going to be when it comes to NIH funding, which is very important for us. We have to watch that very closely. That is about growth dynamics within the Life Science sector. All in all, if you look at value generation of the Sigma-Aldrich acquisition, again, the higher than expected market growth, the continued performance of our organization above market currency developments, and the speed with which we have achieved synergies and us also somewhat overachieving of synergies. All of that taken together means that we have really accelerated value creation versus our base case. Your remaining question on the order delay. It just happened in 2016. I would not make a trend out of it. Okay. Thank you very much. With this, I'd like to jump in here. I think we're well over one hour now. As I said earlier, we need to catch a plane. With this, I'd like to hand over to Stefan for the closing words. Again, thank you very much for dialing in. 2016 was a really good year for Merck. You have heard about our basic assumptions for 2017. Yes, we do invest into pharma, into healthcare R&D. We believe that this is a sign of strength, and I'm looking forward to meeting many of you during the upcoming roadshows. Thank you very much. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.