Earnings Call: Q4 2015

Mar 8, 2016

Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on fourth quarter full year results 2015. 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. Thank you, Catherine, and a very warm welcome to the full year 2015 Merck conference call. My name is Constantin Fest, Head of Investor Relations at Merck, and I am delighted to have with me here today Karl-Ludwig Kley, our Group CEO, who during his tenure since the year 2007, guided the company through its biggest transformation in its almost 350-year history. As you know, Mr. Kley will retire end of April. I would like to sincerely thank you for the internal and external support you gave us in communicating with the capital markets, and I am honored to have you support us here once more today in presenting the company's achievements of 2015. I am also pleased to have Marcus Kuhnert, our CFO, with us on the call. As always, we would like to run you through a few of the slides of the presentation, and then we would be happy to take all of your questions. Also note that we have about one hour for this call. With this, and without any further delay, I would like to directly hand over to Karl. Good afternoon, everybody. I was surprised to hear these nice words. I would like to correct one statement. I did not support anyone. It is my duty as a CEO to report to all of you. I take the opportunity to say bye-bye, not before I present, but this is my last call. Thank you for following Merck so closely, for analyzing us with fairness and objectivity, and I would like to ask you to extend all of the support, but also the critical approach you had towards us, also towards my successor, who will take over in a few weeks. With that, I have a little cold. I start on chart. Numbers are too small. When you get old, your eyes start deteriorating. Now I have it. It is five. We have the highlights for the year 2015. The first one, obviously, is SIGMA acquisition is closed. So far, we are on track with the integration. The first piece of synergies was realized, and we are confident that we will deliver on the integration what was promised to the markets. Avelumab, we moved on. The clinical program has started well. We are on track with time, with budget. It is the largest clinical program we ever did at Merck, and I really like what the organization is doing. The organization changes and the personnel changes we did over the last years now are paying off. Quite rightly, you would say, let's wait for the launch and then we see what is going. But on a work in progress observations, I can tell you that I am satisfied how we move. Performance Materials as always, innovation leader, technology leader, and market leader. The UB-FFS technology is going well, and we have seen for the first time this year remarkable OLED figures, which underline and support our strong belief that OLED will have a future in the display market and that Merck will be a market leader in this segment as well. We launched the new Merck brand, which was extremely important to us to give testimony to the transformation and to position us in the environment which we belong to. We see a lot of attention by our customers, which was one of the main reasons to do that, and we also see a strong increase in our employer brand rating. The first returns on the new branding pay off as well. On the financials, we delivered. I do not have to go to the numbers. You are well aware of them. What makes me happy that we could also start already based on our strong cash flow with the de-leveraging. I move on to page 6, which just compares the numbers. As I know all of you know them by heart. I will immediately move to page 7. That is for me, again, important because in the last years we spent a lot of time and energy to bring the necessary resources to what we called earlier, the emerging markets. When you look at the share Asia Pacific, Middle East, and Latin America now have within the company, particularly Asia Pacific, is remarkable. It has overtaken Europe, and this trend will continue. The investments in emerging markets are justified. We will continue to invest. Temporary hiccups do not change our strategy, and we also remain committed to China in this context. Our business model and our products work well in those markets, including China. There is no need for us to adjust our strategies. On page 8, you see the growth rates, which basically underline what I said. The growth stems practically completely from the Asian Pacific when we look at the organic numbers. Of course, the picture changes dramatically when we look at the nominal amounts due to the acquisition and currency effect. I will move on to page 9, where you have the dividends and our proposal for this year. We are moving within the corridor which we have given ourselves, and we are in line with the formulated dividend policy. Of course, this year we also had to take into account the rating situation and the debt, which we want to deliver quickly. The dividend is reflecting the overall financial situation as well. I move on to chart number 11, which again lists up all the changes and activities we did over the last year. I think to understand where we are and where we stand, it's good from time on time to reflect on where we came from and what we have done. You have it all on the chart. You know it by heart, I can quietly and quickly move on to page 12, where you have our three pillars. What is key for me that in all areas, we have not only increased size, enlarged business models, penetrates more markets, but we also added technology in whatever we did. The opportunities which we'll have from our technology base and transferring it in innovation and then to product and sales have increased manifold over the last years. I'm sure Stefan will allude to that as in the years to come. Page 13 goes briefly through the healthcare business, basically in line what we have been reporting to you throughout the years. So defending Rebif to the extent which we are able to, market extension life cycle management. Pipeline went well, and we are on track with Avelumab. On the life science part, old news compared to our last part, aside from the integration update, where we are on plan, which I explained in my very first charts. Performance Materials on page 15 also went through the major items already in my first chart, I can come to page 16 where I summarized the year in organic growth about all businesses. Significant progress in pipeline development, Sigma closing, and facilitation of integration and delivery in financial targets. I believe it was a good year. Now it's history. Marcus Kuhnert will now move into the details for the financial stuff as well as giving you the outlook. I'm happy to answer any questions at the end if you might have anything which I can answer. Thank you. Thank you very much, Karl-Ludwig. Let's jump into the financials. I am now on slide number 18. So we were able to conclude a financially successful year of 2015. We have seen nominal top-line growth of 13%, and all of our three business units contributed organically. On top, we had tailwind from currencies with the most prominent effect in Performance Materials. Of course, as you are well aware, the positive portfolio effects from acquisitions, +10% in life science coming from 43 days of Sigma-Aldrich consolidation and another 10% in Performance Materials consisting of the smaller part, Sigma. So the Sigma high-tech business and the majority from four incremental months of AZ, which was closed on May 2, 2014. The EBITDA bridge shows an increase from EUR 3.388 billion to EUR 3.63 billion and is consisting of contributions basically from all business sectors. While healthcare is flat on the high level of prior year, the remarkable thing is that we have been able to compensate for the decline in Rebif and for the loss of royalty income, which you are well aware of. Despite that, we have kept the EBITDA level stable. On the other hand, we have seen significant positive contributions from life science behind strong organic performance, moderate tailwind from FX in the bottom line, as well as the already mentioned acquisition effects and a very strong effect from Performance Materials. A little bit a lower organic contribution though, but on the other hand, very positive FX effects and also here, acquisitions contributing to the strong increase. The segment corporate is declining by EUR 194 million. The major part is FX driven, so hedging losses we need to keep in mind. We were in 2014 in a very adverse FX environment and subsequently were able to realize significant hedging gains. The picture looks exactly vice versa in 2015 and the delta between 2 years is a three digit million EUR amount. On top, we have started some corporate initiatives in the second half of 2015, which also has led to somewhat higher costs. Just to name one example, which is our new branding, the One Merck brand, which we have introduced in October, and where we are currently, or we have started the process in Q4 for a rebranding, so to say, of the company. On the next slide number 19, we see the overview on some key financials. While I have already alluded to the net sales development, just a word on EBITDA pre. We have seen an increase of 7.1%, slightly or under proportionate, because of the higher corporate costs that I have just mentioned, the negative mix effect from the Rebif decline, and the royalty loss. Earnings per share before exceptional items is up by EUR 0.27 or 5.9%. Very importantly, we have seen another year of very healthy cash flow generation, so operating cash flow is at EUR 2.2 billion, which is extremely important with regard to the high financial leverage that you see one line below, EUR 12.7 million, in order to reduce quickly and sustainably the net financial debt level now over the next couple of years. The prior year operating cash flow was obviously positively influenced by the one time payment from Pfizer in December 2014. Working capital and employee changes that you can see here from 2015 to 2014 are predominantly attributable to the first time consolidation of Sigma. The next slide is a reconciliation from EBIT to earnings per share. Here we see an under proportionate EBIT increase when we compare the EBIT number to the EBITDA pre number, amid higher exceptionals, higher depreciation and amortization from the acquisitions. The financial result has significantly increased by 74%, reflecting the additional interest expenses from the purchase price financing for Sigma-Aldrich. The income tax rate is within the corridor that we aimed to achieve for 2015, which we said would be between 23% and 25%, so this is quite precise lending and all the effects add up to the net income and earnings per share numbers that you can see here, which are slightly below prior year level, amid the, as I said, higher depreciation, amortization, exceptionals and interest expenses compared to prior year. Just to make you aware of one point, we have divested in 2015 for strategic reasons our Kuvan business. We have returned this to BioMarin. The cash proceeds entered our cash flow statement in January 2016 and we will also see a sizable book gain in the exceptionals in the first quarter. The amount you can easily figure out, as I said, EUR 340 million purchase price and we have had some EUR 45 million as assets held for sale, recognized in our balance sheet by the end of 2015. That should give you, I think, a quite good guidance and understanding on the one time gain that we are expecting in the first quarter. I would have now a closer look briefly on the Q4 numbers of the three business units. I am on slide number 21 now. Healthcare, I would say, had a solid last quarter. We have seen positive top line growth driven, like in the prior quarters, by general medicine, fertility and consumer health. Rebif showing the continuous volume decline in Europe while in the U.S., successful price increases, which we were able to realize twice in the course of 2015 mitigated the erosion in North America. Erbitux had a quite good last quarter of 2015. You all remember very well that we started a little bit lackluster into the year with a -6% organic sales growth in Q1. The picture then improved somewhat over Q2 and Q3, but was still remaining in negative territory in terms of top line growth. However, the first quarter now is stronger with a +3.3%, but not enough to turn the full year into the positive, so we are slightly negative in 2015. Marketing and selling costs are up in healthcare, reflecting the repatriation activities, the ramp up of infrastructure, especially behind oncology in the U.S. to prepare for the upcoming Avelumab launches. Also, and this is more a technical effect, the amortization of Xalkori right that we have capitalized end of 2014 and where the amortization are shown in marketing and selling. R&D spend is lower than prior year Q4. Here are a couple of effects that needs to be mentioned. First of all, it is a phasing effect for the Avelumab trials. We are late in the year with some of the pivotal registration studies, so this has contributed a little bit to some lower costs. Secondly, also for biosimilars, the phase III trials have been shifted to 2016 now. You have just read it in the press that we have started a phase III trial for Avelumab. Last but not least, I would also like to inform you that in the second half of the year, especially in the first quarter, we have basically put R&D activities for the evofosfamide trials on hold. As you are aware, we also had some phase II trials on top of the soft tissue sarcoma and pancreatic cancer phase III. We put them on hold and wanted to wait for the phase III results. Unfortunately, as you know, both studies missed to meet their primary endpoints, but at least we were able to incur lower R&D costs from the stop of all other activities quite early in the year. So that all together led to an EBITDA pre of €524 million, and again, an EBITDA pre-margin of 30% plus. Life science, and I am jumping to slide number 22, had a very strong year 2015, and also, again, a strong quarter in Q4. Top-line growth was 8.1% organically, and that was after Q3, the second quarter in a row with more than 8% organic sales growth. Main growth driver was process solutions with a very strong organic sales growth of 16%. There we are in line basically with the best-performing competitors in our industry. We have also seen moderate organic sales growth for lab solutions led by the U.S. pharma demand for biomonitoring and lab water consumables, and also bio science have grown again. The EBIT is declining versus prior year level, but it is containing the first integration costs and one-time effects from the first-time consolidation of Sigma. The EBITDA pre reflects actually the first Sigma contribution and shows a margin progression of 2 percentage points year on year from 23% to 25%. Just a few words on Sigma-Aldrich. Sigma is consolidated for 43 calendar days, 31 working days in 2015, and is fully in line or has delivered fully in line with the expectations that we had. When we look on their fourth quarter, we can say that this quarter reflects in terms of top line and also in terms of profitability, basically the quarterly run rate that you have seen over the quarters in 2015. We are well on track with the integration, and we have fully delivered on the synergies that we have forecasted at the Capital Markets Day for 2015. Coming to Performance Materials on slide number 23. Also, Performance Materials had a good year and a solid last quarter. The organic sales growth is, however, slightly declining in the last quarter behind strong prior year numbers on the one hand, but also behind lower demand and market shrinkage in the older, so to say, liquid crystals technology, TN-TFT. All the other, I would say, newer and flagship technologies have developed well, and so have also our innovative UB-FFS technology and especially also OLED, which both turn to be meanwhile significant growth drivers of the group. Let me have a few words on the inventory situation, so on liquid crystal channel inventories. These actually remained at the elevated levels of now slightly more than four weeks. In the last weeks of, let's say, while we have not seen any corrections in the fourth quarter, we have seen in the last weeks a small reduction here, and it needs to be now closely observed and figured out whether this is just a seasonal effect or whether this is basically the start of the anticipated correction. However, I would like to give you the indication when you are going to model our Q1 top line, I would advise you to factor this somewhat in for the Q1 sales numbers. Other than that, when we look on the cost development on the slide term, the costs are very well under control. EBIT, EBITDA, and EBITDA pre are increasing and are, as we said at the Capital Markets Day, in the corridor between 40%-45%. We are, however, a little bit below Q4 2014. The reasons are twofold. First of all, we have seen a strong quarter in OLED, with OLED sales basically doubling in the quarterly comparison. OLED has still, compared to liquid crystals, a lower margin simply due to the missing economies of scale at the moment. The second effect is that we have built up or increased further a legal provision that we have for a patent litigation case, which is by the way, not new, but where we have taken some provisions. With that, I would like to jump to page 24, a short glance on the balance sheet. The balance sheet actually reflects the impact from the first-time consolidation of Sigma-Aldrich, going up from EUR 26 billion to EUR 38 billion. The most prominent changes we can see in the intangible assets. Here, the biggest single items are EUR 8.6 billion goodwill, EUR 4.7 billion customer relations, and roughly EUR 1 billion trademarks. At the same time, on the asset side, we have obviously reduced the cash and marketable securities position. The EUR 1.1 billion is quite high at year-end, but it is just a snapshot. Meanwhile, until the end of February, we have used another approximately EUR 400 million for further deleveraging. On the liability side, we have seen the expected increase in financial debt on the one hand, but also net equity has risen by more than EUR 1 billion behind the net earnings number and also behind positive FX effects from the translation. The increase in other liabilities reflect basically the deferred tax liability of EUR 2 billion from the purchase price allocation of Sigma. The next slide shows the reconciliation from the purchase price at closing, which is $140 per share times number of shares, and converted by the euro/dollar FX rate at the 18th of November last year. We deduct from that the EUR 1.4 billion hedging gains and come to the purchase price post-hedging. It is important to note that these EUR 1.4 billion are ultimately reducing the goodwill and thus diminishing our impairment risk for the next couple of years. We have taken over from Sigma equity of EUR 2.2 billion, thereof EUR 1.2 billion in cash. PPE and inventories, customer relations, and trademarks reflect the step-up values from the purchase price allocation. These numbers are a little bit different from what you have seen in the balance sheet because Sigma also has brought some original customer relations and trademarks with them. Plus a step up then comes to the balance sheet values, and the deferred tax liability leads to the residual goodwill amount of EUR 8.6 billion. An important point to note is that with this purchase price allocation, we stick to the forecast that we have made last year, namely that we will have intangibles amortization from Sigma in the range between EUR 250 million and EUR 300 million going forward. Last slide from the financial deep dive is the cash flow statement. I think we do not need to spend too much time here. Operating cash flow is the most important line, as I already mentioned earlier, very healthy level of EUR 2.2 billion and a good starting point for a quick deleveraging, which has started immediately after the closing of the acquisition. The investing cash flow is actually reflecting the acquisition of Sigma, and so does the financing cash flow, where the source of the funds are shown. With that, we come to the outlook and guidance. I would like to jump now to slide number 28. With Sigma-Aldrich now in our balance sheet, we have, by the end of 2015, now a net debt to EBITDA ratio of 3.5. One of our key priorities going forward is now the quick and decisive deleveraging over the next couple of years. That means no significant acquisitions for the next 2-3 years, and we would like to achieve a net debt to EBITDA ratio by 2018, which is significantly below two. In terms of guidance for the financial items for 2016, we said that the interest results, which forms the major part of the financial result, will be in a range between EUR 270 million and EUR 300 million. I have heard from Constantin that there were some questions in the morning, why do we guide interest result and how does it play into the financial result? The interest result is by far the biggest amount and the driving factor of the financial result, and we have guided interest result because it is more predictable in terms of cash flow generation, in terms of repayment schedules and maturities. There are obviously some other factors in the financial items that we have not specifically guided. The biggest part is the interest allocated to pension provisions, but also some topics like, for example, results from intragroup hedging, the original hedging costs, so the interest differentials between currencies, interest rate swaps, and obviously last but not least, the LTI contribution. But this is quite volatile somewhat, and that is why we have guided the interest results. Slide number 29 shows a little bit, or gives you a little bit flesh to the bone, how we see the EBITDA pre-development in 2016. You are, I think, well aware of that slide because we have shown this already at the Capital Markets Day. It is just a reiteration that since December, basically, not much has changed. This is our view on the most important driving factors on EBITDA pre for 2016, and this, and now the next slide is new, slide number 30. This has translated to a qualitative guidance that we would like to give as follows. For healthcare, we believe that we will have a slight organic sales growth in 2016 with, however, a continued organic decline for Rebif. While on the other hand, the other franchises, especially general medicine, fertility, and endo, should be growing. In terms of EBITDA pre, we will significantly invest behind our pipeline projects, what we have told you, and that leads to a projection of a high single digit to mid-teens decline. On top, we have the negative mix effect from Rebif and a double digit million euro amount, less EBITDA from the sale of Kuvan. In the life science sector, we expect to see moderate organic sales growth with continued, or based on continued, strong, robust biopharma demand. As in the last quarters, with the main growth driver process solutions, including Sigma, we believe that we will come to a high double-digit contribution in net sales but also in EBITDA pre. Last but not least, Performance Materials. We expect to see slight organic sales growth. Also the typical scheme that you know from that business unit, positive volume growth in basically all businesses except for the TN-TFT technology, and also the typical price declines that we are used to when we're looking on that business. What I just told you, that means that Q1 may show a slight. De-stocking is obviously included in the forecast that you can see here. So also all kind of ex effects we can currently think of are included in the forecast. In EBITDA pre, we expect to see a slight organic increase, but at least at prior year level. You may wonder why have we guided organically for EBITDA pre here. We believe that the currency effect on EBITDA pre will not be so significant in 2016, and we will see a slight positive effect also from the acquisition of Sigma-Aldrich, although it will be small. One question that I've also got from various conversations over the morning, whether this guidance's outlook is basically covering the current consensus, and the answer is yes. The low double-digit increase, what we mean by that low double digit, in my interpretation, it starts with 10% and ends at the latest with 20%. So in this range, I expect our EBITDA to be, and this is, from our point of view, covered or is covering the current consensus. With that being said, we are happy to take your questions. 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 is 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 your selection. One moment please for the first question. The first question comes from the line of Matthew Weston from Credit Suisse. Please go ahead. Good afternoon, and thank you for taking my questions. Two, if I can, please, both relatively specific. I see with respect to the pipeline, you've announced that you've moved the BTK inhibitor into phase I. I see that you've chosen lupus as the first indication, which is, I guess a little bit unusual relative to other people's focus on oncology. Can you update us in terms of the out-licensing and partnership program and the negotiations you were having and discussed at the Capital Markets Day around your BTK inhibitor program, and whether or not you've made any strategic decisions, oncology versus immunology, as to what to keep in-house or partner? Then secondly, Marcus, around commission income in healthcare for 2016. As I understand it, we'll start to see the first time contribution from Xalkori and continue to see Glucophage China for one final year. Can you confirm those assumptions are correct? If possible, can you give us some idea of where total commission income is likely to go to relative to the EUR 113 million in 2015? Thank you. I will start briefly with the BTK. You are right, we have started with the lupus and the immunology. It is more than 20 patients in it, and we expect data for the end of 2016. Also plan to start a phase II-A in rheumatoid arthritis in 2016. The move into oncology will also take place in 2016. Summarizing that during the course of 2016, you should see more clarity on the study forward from there. This is also true for the partnership discussion. We are evaluating all partnering options, be it phase I, but it could also be later stage options. Until we will announce such a partnership, we continue developing, as I mentioned to you right now. Hope this answers your question. Pass on to Marcus. Yeah, thank you. Your second question, Matthew, was around commission income. As we have changed our sales definition in 2015 will be or will have been the last year where we are guiding commission income specifically, because now it is a part of the top line, so part of sales. But you have mentioned two topics in special. So, the BMS topic and Xalkori. So for Xalkori, we believe that 2016 should show a mid-double digit million euro amount, and BMS China should be in the range between mid and high double digit million euros. Many thanks indeed, Marcus. Can I just confirm 2016 will be the last year that you receive Glucophage China income and then you repatriate the rights in 2017? Oh, that is correct, Matthew. Sorry, I forgot to mention. That is correct. Yep. Thank you very much. The next question comes from the line of Gunnar Rohmer of Deutsche Bank. Please go ahead. Gunnar Rohmer, Deutsche Bank. Thanks for taking my question. The first one would be with regard to healthcare and whether you could share your updated thoughts around biosimilar competition for Gonal-f. Secondly, on the Humira biosimilar phase III trial you started, I was wondering whether you can give us a potential readout date for that trial. Also, whether you are planning to add additional indications or potentially additional molecules in your biosimilar pipeline. Then also one question regarding life science, an update regarding the Sigma integration. I hear it is on track. I was just wondering whether so far you have been surprised, either positive or negative, in any regard. If so, any color on that would be much appreciated. Also, if you could please remind us of what will be the main levers of the targeted cost synergies in the current year and how we should be thinking about the phasing of those. Then last question, just quickly on Performance Materials. You have indicated that you may see some inventory correction already starting in the first quarter. Can you provide any additional color as to the expected impact also maybe on a full year basis what you have factored into your numbers, both top line as well as earnings wise? Thank you. I take first the healthcare questions. As far as biosimilars, as Gonal-f are concerned, at the moment, we have nothing to report. I think in Q3 we talked about that, and there is no news following that. Certainly, Teva at some stage will launch, and then we will monitor the situation very closely. But for the time being, they have not launched. We go on as before. On the Humira biosimilar update, there is not too much I can add other than that you said. Humira is known to you very well, so I do not have to tell you anything about the potential. I also do not have to tell you anything about the competitive setup of biosimilars. Certainly, it is a place where we have a number of competitors. We are still looking at our profile and what we do. I think we have a place in the market for that. We do not plan to go with this protein into other indications. On additional molecules or proteins we move into, we would like to inform you once we get to that. Thanks. On your questions on life science. First of all, any surprises in the integration? I would say no bad ones. What is for me at least a little bit a surprise is how well both organizations fit together culturally. The integration is running very smoothly. Plus that, Sigma is actually also continuing on the very strong and healthy financial performance that we have seen throughout 2015. But as I need to say, basically this is nice, but not really a surprise because obviously that was our expectation. The main levers of synergies going forward. First of all, I would like to reiterate, we have delivered against the number that we have announced to be achieved for 2015. For 2016, we aim to achieve at least EUR 90 million. And the main levers behind are predominantly the admin related costs. We need to take some more time for realizing the synergies in the operations area, and we are also very careful in going forward on the commercial side because mission critical in the integration is not to disturb the top line momentum and to have basically or to really minimize the impact that we have or that we generate for our customers. That means, the early levers for synergy realization are more in the area of infrastructure and admin. Lastly, your question on the PM inventory correction. It's really difficult at that early point of time to give you more color because, as I said during the presentation, we see some first signs. But it is too early to judge whether this is indeed, let's say, starting now, a trend that would bring inventory levels back from the more than four weeks to normal levels or whether this is just a small seasonal effect. We need to observe this further over the next couple of weeks. And in order to give you a little bit more confidence, as we said, everything what we would expect or could expect from the current point of view, from today's point of view, is reflected in the forecast that we have given for Performance Materials. Thank you. Maybe if I can just follow up on the PM inventory correction. Would it be fair to assume something like a mid to high single-digit earnings track from a potential inventory correction, obviously on a full year basis? Well, as I said, we don't know yet. Okay. Had to give it a try. Thank you anyway. Yeah. The next question is from Florent Cespedes of Societe Generale. Please go ahead. Good afternoon, gentlemen. Thank you very much for taking my questions. Three quick ones if I may. First on Life Science, could we have more comments on the lab solutions, as it was a bit softer than expected? How do you see the dynamic going forward? My second question is on Healthcare, on pharma, on cladribine. Could we have a quick update on the next step if there is anything new on this front, and if you could share with us some of your discussions with the authorities or with the key opinion leaders? Regarding the EBITDA guidance for the Healthcare segment for next year. As the lower bound of the guidance, the mid-teens decline is a bit conservative or below consensus. Could you share with us what could be the moving parts that could drive such performance on the R&D costs or marketing or whatever? More color on that would be highly appreciated. Thank you. I start with your question on cladribine. As you know, we are preparing the registration, and we are on track to file in the later part of the first half of this year. Or let's say also mid-year in the European Union. We analyze in which other territories we could go. The submission plan is under evaluation. We are currently preparing all kinds of documents what is necessary. Maybe to reiterate briefly because there has been some discussion on the strategic rationale for resubmission. The recent data we have and the analysis give much more information on the benefit risk profile, so we feel confident with that. The extensions which we had in phase III and phase III-B helped us in getting the right registration dossier for regulatory approval. We also have substantial new safety characterization by using data from the long-term follow-up. It's more than 10,000 patient years which we have now in the database. So we feel confident as soon as we submit the data and the dossier to the European authorities. For the other two questions, I'll pass on to Marcus. Thank you. Your question on lab solutions, let me elaborate as follows. We have seen for lab solutions an organic growth in the first quarter of 2.6%, which is basically not so much below the run rate of the first three quarters in 2015. For example, it is higher than the Q1 number, but admittedly a little bit lower than Q2 and Q3. But it is in a way following the normal seasonality of the business. I would say no special sales decline, organic sales decline in Q4. However, to give you a little bit more flavor, one level deeper in terms of detail, when we look on the single businesses and lab solutions, we have seen a very strong quarter already, not only in Q4 but already since a while in biomonitoring and in lab water. While we have been struggling at the beginning of the year a little bit in advanced analytics, this has now also, especially in Q4, turned again into the positive. I would say overall a quite decent, quite good fourth quarter and nothing special to mention here that we see somewhat a decline in the sales growth dynamics. I think you have asked another question on the Healthcare EBITDA guidance. Yes. My question was, when we look at the, let's say, mid-teens decline, which is, of course, the lower part of the boundary of your guidance, I would like to know what could drive such performance. What could be the moving parts? Could it be the R&D marketing or anything else? If you could give a little bit more color on that front, please. Yeah. The driving factors, these are basically exhibited in the negative EBITDA or the burdening factors for EBITDA that I've shown in my presentation. First and foremost, it is higher R&D spend. We expect some incremental EUR 300 million in 2016 over 2015, predominantly behind the further pipeline development of Avelumab, but also, as we are not only an Avelumab company behind the further development of earlier pipeline projects in the other areas on oncology and immunology as well. We see some first marketing and pre-launch costs to prepare for first launches cladribine and also Avelumab. Here, Merkel cell is the most advanced indication. We will have a negative EBITDA pre effect from the continued decline of Rebif. You need to know Rebif is one of our most profitable products in the group. While we are able to compensate the sales decline, this is more difficult on the EBITDA basis. Also to mention is the effect of the divestment of Kuvan, where we are missing a double digit million EUR amount in terms of EBITDA pre, simply because this business is gone now. These are the major driving factors that led to our forecast high single digit to mid-teens decline in EBITDA pre for healthcare. Okay. Thank you very much, Eric. The next question is from Holger Bloom of DZ Bank. Please go ahead. Holger Bloom, DZ Bank. All the best for Dr. Kley for your life after Merck CEO. I wonder what are the key pipeline events that you monitor closely which maybe cannot make you sleep at night before the data comes out over the next 12 months? Second question, more technically speaking, we have seen a big increase in corporate costs. I think part of it of one time nature because of the branding strategy. Could you give us a hint what would be the longer term targeted corporate cost level spend, leaving hedging and all the other stuff aside? Thank you. The key products, the key milestones in the development are the various studies which we publish in phase I, II, or III on Avelumab for the various indications. It is the BTK, certainly, Abituzumab, and it is TGF beta trap, and they are mainly the expansion cohorts. I personally, looking from the outside, will watch closely with what happens with cladribine because I still believe it is a wonderful product, which can make a difference in the treatment patterns for some aspects of MS. On the corporate costs, I will pass for more detailed information to Marcus, but let me say one word on branding, because there also have been questions whether this was necessary at this time or not. The answer is clearly yes, and I think I have alluded to in my introductory words, that we needed a strong brand for a number of reasons. One, really entering now into pharma on a competitive scale in indications where we have not been present in the past, and we cannot do this by having brand confusion out with the doctors. Second, we are now really a different company. We need to show it to our employee base. We track very closely employer branding and paybacks on that, and we are having huge differences already since October and working on that. There are other aspects, but these are maybe the two most important ones. On the branding cost as such, we are very flexible going forward. We do not plan huge, fully commissioned and already reserved branding campaigns or things like. We are flexibly, we work opportunistically, and we decide on spending when we can afford it, and when we do not afford it, we let the brand blossom on its own. Yeah. If I may add to the corporate cost question. If we take into consideration that the major driving currency, and I would spend just a very short period of time on the hedging losses. The major driving currency for us is the US dollar, and here we project a US dollar in the range between 107 and 112 for 2016. That means that we would incur roughly the same hedging result in 2016 as we had in 2015. If we eliminate the currency effects from both years, then we will see that we will have a delta between the two years between, let's say, EUR 50 million to EUR 60 million. This is actually indeed attributable to the corporate initiatives that we are currently running, and Karl-Ludwig has mentioned it. One of the most important is for sure the new branding approach, where we have started some initiatives in the second half or in the last quarter even of 2015. But we will see here the full year impact in 2016, because we need to keep in mind, although we do it in a disciplined and flexible way, but ultimately at the end of the day, we would also have to think about the product relabeling and product rebranding. This will still cause some efforts in 2016. Moreover, we have the One Merck global headquarter project here in Darmstadt at our headquarters and also some IT projects. So that is driving the increase in corporate costs. I cannot make a forecast or a projection now for the next couple of years, but for 2016, it will be in that range, but we will handle it in a disciplined way. Okay, thank you. The last question comes from the line of Michael Leuchten of Barclays. Please go ahead. Oh, thank you. Mike Leuchten from Barclays. Three questions, please. Just come back to biosimilar adalimumab. As you mentioned, that will be quite a competitive asset in the world of biosimilars. Just wondering why you picked that one as your first large program. Quick question. Erbitux. Europe, you did refer to that being a continuously competitive market. You did kick off some initiatives to address that, but so far they don't seem to gain any tractions. Any updates there, please? Then lastly, on OLED, the ramp-up in demand that you have referred to, just wondering if you could give a bit more color. What is behind that? Where you see the demand coming from, and any color around that would be helpful. Thank you. I start with biosimilar. We have seen many biosimilar studies underway, and suddenly one after the other dropped out. When today there is somewhere between 5 and 10 players in the market, who would tell you that the 5 to 10 players make it throughout the program? Important it what comes to the market and not what is under development. We feel we have a strong product and we have a strong base. Looking at the market and our marketing capabilities, we have seen enough space for us which merits an increase in that. I believe when you show what we do with our CMC portfolio, obviously, we don't have to be shy of any competitor out there. On the Erbitux question, I believe that the first quarter has seen a reasonably good development. Certainly, the environment doesn't become easier view of the competitive situation for Erbitux. But the measures we have started to introduce in the course of last years have shown effect in the last quarter, and I do hope that they continue. Your last question was OLED? Maybe one point to add for Abituzumab. We have seen actually four effects in 2015, which were pulling top-line growth a little bit down. Out of the four, we expect actually two to persist, which is, as Karl-Ludwig mentioned, the higher competitive pressure and also pricing pressure in Europe. This will accompany us for the next months and years. Two other effects which we have seen, we do not expect to see again, which is phasing, negative phasing, and slight overstocking. This actually should be solved more or less. For Abituzumab going forward, we believe that 2016 will show a stable to slightly growing franchise. On OLED demand, I can tell you that the cooperation with Seiko Epson on the printing technology is working well. We have seen also at the recent Consumer Electronics Show in Las Vegas in January that the OLED applications are rising. That means we see the market growing and the overall demand is going up, and that is actually reflected in our sales development. As I already pointed out, Q4 2015 showed a growth rate of more than 100%, so doubling of sales compared to Q4 for last year. Karl-Ludwig said it this morning already when being asked about OLED, that we are, at the moment, among the top three players worldwide, and we clearly want to maintain this position and even extend it further. Thank you. This ends our Q&A session, and I hand back to Mr. Fest for the closing comments. I am very happy to hand over to Marcus for his final words. So thank you very much for joining us in our Q4 call. Personally, I would like to take the opportunity to thank Karl-Ludwig Kley for the great guidance and leadership for the company over the last 10 years. I think he has brought us in the position we are today and in a position that gives us really a good starting point to move into the next decade. I hope that we will be close as successful as under his leadership. I would also like to take and say it on the personal note, that I would like to thank you for your support and advice during my starting time here at Merck. You made my life easier and enabled me a good start. Thank you very much for that. Thank you very much. Thank you. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.