Earnings Call: Q4 2014

Mar 3, 2015

Dear ladies and gentlemen. Welcome to the Merck Investor and Analyst Conference Call on fourth quarter results 2014. 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. Thanks a lot, Vera, and welcome on the call for our full year 2014 results. My name is Constantin Fest, Head of Investor Relations at Merck, and I am very happy to have our CFO, Marcus Kuhnert, with me here today. Our CEO, Karl-Ludwig Kley, will join the call in a few minutes and then take over from Marcus. Please note that joining this call for the Q&A session is Belén Garijo, also a Member of the Executive Board and CEO of the Healthcare business segment of Merck. As always, we will go briefly through a few slides in the presentation, and then we will be happy to take your questions. With this, I would like to immediately hand over to Marcus. Thanks a lot, Constantin. Good afternoon, everybody. Let's start immediately with the slides. We will go quite briefly through the slides in order to ensure that we have enough time for the Q&A session afterwards, and hopefully then addressing all remaining open questions. 2014 was a very important year for Merck. It was a year of great strategic progress in all of our three business sectors, where we have been able to close and successfully integrate our acquisition of AZ Electronic Materials. On September 22, we announced the Sigma-Aldrich acquisition, and later the year, on November 17, we signed a strategic alliance with Pfizer to leverage our IO pipeline. Not only we made big strategic progress in three different areas of our group, but we also delivered the financial targets that we have guided and forecasted to you at the beginning of the year. Sales are at EUR 11.3 billion, even slightly above the corridor we have given to you, owing to a very operationally strong fourth quarter and slightly more tailwind from currencies than initially expected. The EBITDA is at EUR 3,388, which is on the upper edge of the corridor, and EPS pre-ended at EUR 4.60. What is also nice to note is that all of our four business sectors contributed to the organic growth. We will see this a little bit later in the financial part, that we have been able to demonstrate the strong cash flow generation of the group with a rapid deleveraging since the second half of 2014, after we have paid for the AZ acquisition and have basically reduced the financial debt back to the levels of end of 2013, only six months after the acquisition has taken place. With that, I would like to hand over now to our CEO, Karl-Ludwig Kley. Good afternoon, everybody. Excuse me very much for being late. First time in 20 years of capital market acquisitions that I've been late to a meeting. There was an urgent thing which needed my attention. To put you in very tranquil mode, everything is solved and the problem is resolved. I'm moving on to chart number 5. The sales are known to you from today's publication. We were earnings in the mid-single digit rate. Solid growth throughout the divisions and of course, the contribution from AZ. We more than offset FX headwinds, which were prevalent particularly in the first half of 2014. As I want to reiterate from our former and prior meetings, the loss of royalty income, which we were more than able to offset. Moving on to page number 6. It explains again the growth which we have put on emerging markets. Now, for the first time, emerging markets account for more than Europe, so 38% compared with Europe's 35%. If you look at the underlying growth numbers, the organic growth of 9.1% in the emerging market compares well with the growth in the other regions. This is the last time that we use the term emerging markets. I do not think emerging markets describes very well what is happening there in reality. But also we think given the importance emerging markets in the old term have in today's Merck, we would rather like to split the regions into three: Asia-Pacific, Latin America, and third, Middle East, Africa. From first quarter 2015 onwards, we will report in the adjusted manner. The right-hand side of the chart underlines the continuous growth of a CAGR of 11.6% since 2008, which underlines the strategic investment we have done in that region. Page 7 gives a very brief overview on Copaxone on Consumer Health. Rebif, stable in all the situation around the MS franchise, so I don't have to go too much in the top-down analysis there. I believe looking at the sheer number, of course, take into account pricing, FX, and so on. Keeping the total number of Rebif stable in this environment is still quite an achievement. Good performance of Erbitux, particularly good the performance of fertility. Emerging platform, of course, is for Copaxone, a key driver. From an overall strategic point of view, the most important aspect certainly for us was the pipeline advancing, the prioritization, but most of all, the heavy focus we set in the deal, but also in the setting up and planning our pipeline activities around the anti-PD-L1. We are happy to provide you with additional flavor in the upcoming Q&A session. Consumer Health, very short, good development. Margins softened a bit, but this has to do with marketing investment. Nothing to worry about. We are happy with that. Page number 8, Performance Materials. The liquid crystals market share continues to be well. UB-FFS was launched and is particularly successful. It also fulfills with its energy-saving properties, needs of the market. AZ integration is completed and starting next year and the years after, we look forward to also deliveries on the growth agenda, be it innovation, be it also a recovering semiconductor industry, which could possibly help us. Merck Millipore, another solid year. Biopharma production and EM drove the organic growth and Process Solutions. Everything else there is in line with what we want to achieve. Of course, 2015 will be dominated first by the antitrust procedures, and then hopefully, if everything runs smoothly, by the integration of Sigma, on which we will not answer many more questions as the Q&A session goes on. Dividend. Given the good performance 2014, we decided to raise the dividend another EUR 0.05 to EUR 1 per share. If you see the line since 2009, the picture, I believe, looks good. We consider last year's dividend as a minimum level, and we are aiming at a corridor of 20%-25% EPS pre is the key benchmark for the dividend policy going forward. With that, I would like to briefly move on into the strategic agenda. Page 11, again, says what we have communicated already, that we will report in future in three segments: Health, Life Science, and Performance Materials, which also constitute the three platforms which we are going to strengthen going forward and which are going to deliver as we move into the future. Pages 12 to 14 give you some flavor of the platforms. I will not go into detail here. Page 12 mentions three projects. Two of them are definitely known to you. One is the liquid crystal story. The other is the OLED story, on which I elaborated in one of our earlier meetings quite intensively. The third one is the first flavor form of AZ, that ring to us in terms of possibilities in R&D and innovation. It is by far not everything. There is much more behind. Page 13 goes to Life Science and focus on what I mentioned already before, the strong focus of our work this year of getting the Sigma-Aldrich acquisition approved first and then hopefully closed and implemented. Page 14 gives more flavor on the Pfizer alliance in immuno-oncology, which certainly we can answer questions in the agenda. On page 15, you have a strategic agenda where we are, where we stand, and you see that the current focus is really on innovation. If we flip to page 16, you have some of the aspects which we have outlined on a general headline on page 15. So in the organic picture on page 15, we mentioned the repatriation projects. Examples are Glucophage and Eutirox in Russia, Glucophage in China, and Erbitux in Japan. There would be more to add, such as Eutirox in Italy or others, which I will not elaborate now, but repatriation for us has been an important project and will be also in future. The leverage of the regional platform, we have elaborated extensively some time ago on the Neurobion and Floratil switch, which worked well and which really helped us to make use of our existing regional platforms to strengthen them further. Emerging markets, I mentioned. Portfolio and alliances, topics are known to you. Innovation, there is an example of UB-FFS or OLED. I personally spent a lot of time in getting the innovation center running and going. This is not something which has a direct influence on the report on the year 2014, or on the immediate financial prospects for the year 2015, but is a very important growth driver in a three to five years from period now. I would rather like to switch over, page 17, and to hand over to the man you are really interested to listen to. This is our CFO, Marcus Kuhnert, who is now taking over. Thank you. Thank you, Karl-Ludwig. I am now on slide number 19, and we make a little bit of deep dive into the numbers, but also quite briefly. I think that you are, meanwhile, already very well familiar with our set of numbers and all remaining open topics we will address then afterwards in the Q&A. Sales are up for 5.5% with the organic driver being the most dominating one, was 4%. AZ Electronic Materials contributed with 3.3 percentage points, and we still see a moderate negative FX impact of -1.8%. EBITDA pre is up 4.1%, slightly under proportionate, the main reason being the loss of royalty income from Enbrel, Avonex, and Humira, which make up for almost EUR 200 million in a year-on-year comparison. EPS pre rises from 439 to 460, and the operating cash flow is going up by more than 20%, obviously benefiting from Pfizer's upfront payment in the fourth quarter 2014. Net financial debt is more or less on prior level. I have alluded to that already in the beginning of the presentation, showing the strong cash flow generation capabilities of the group, where we were basically able to digest AZ Electronic Materials within six months after EUR 2.2 billion net financial debt status mid of 2014. The changes in working capital and employees are basically driven by the first time consolidation of AZ. On the next slide, we see a little bit more flavor on the organic growth by business unit and the EBITDA bridge. All business sectors have contributed nicely to the overall organic sales growth of 4%. Merck Serono with 3.6. Very nice growth given that we are under continuous pressure for Rebif, are holding up well, and are able to grow in the emerging markets and in all other franchises. Consumer Health is the strongest growing division of the group, and behind the good performance, especially of the recently switched brands, Neurobion and Floratil, and also Performance Materials and Millipore with a very solid growth quarter of north of 4%. The EBITDA bridge shows a slight decline in Merck Serono and in Consumer Health. The reason for Merck Serono being the already mentioned loss in royalty income, which could not be compensated fully. Consumer Health, we have done some significant investments in marketing and selling to build up structure and to gear up the division for, hopefully, even accelerated growth momentum in the future. The EBITDA increase in Performance Materials is predominantly coming from the AZ acquisition, while the increase in Merck Millipore is organic. The plus EUR 31 million in Corporate and Others is reflecting our hedging gains that we have realized, especially in the first half of 2014, with the US dollar, especially, and the Japanese yen. The reconciliation from EBIT to earnings per share on slide number 21 shows an over proportionate increase in EBIT. That is due to the fact that 2013 was burdened stronger than 2014 by some impairments, the close of Aubonne, and the write-down of Humira to be mentioned here. The financial results are slightly better, have slightly improved. The reason being lower interest expense as we have repaid a bond end of 2013 with a coupon of almost 5%, and the missing interest expenses throughout the whole year 2014 contributed to the improvement. The most significant change in the P&L is the increase in the income tax expenses from EUR 180 million to EUR 392 million. This is nothing to worry about because we are just back to normal levels, so to say. We have an effective tax rate of 25.2%, up from the exceptionally low 13% of last year, which was driven by two one-time effects from favorable tax rulings in the U.S. and in Switzerland. The higher income taxes are the reason for the slight decline in net income and in earnings per share. On the slides 22 to 25, we have a short glance on the Q4 numbers of the four divisions. Please note, we are talking now about Q4. I would be quite brief here because I think Karl-Ludwig has already made the most important headlines here on the divisions. On Merck Serono, I would just like to add that we have seen an increase in R&D expenses behind further focusing on the strategic projects in our pipeline and behind also the termination of some R&D project or project phases in the first quarter 2014. That was compensated, on the other hand, via the release of the provision for the litigation settlement with IBEP that had been finally settled in December 2014, and where we have then released finally the last over accrual of the provision. Consumer Health, as I already said, the strongest growing division in the group. We used the opportunity in 2014 to invest a little bit behind marketing, selling, in order to gear up the division for future accelerated organic growth. The fourth quarter already shown a nice growth rate of 6.5%, but the marketing and selling expenses have risen quite substantially. That is the reason for the decline in margin. We are very confident that we will move the margins in 2015 back to a level of significantly north of 20%. Performance Materials on slide number 24, just a strong quarter. Very good sales performance with almost 7% organic sales growth, driven as in the quarters before, by strong volume growth in liquid crystals and a good performance in our flagship technologies, IPS and PSVA. Also, we have seen some first contributions from the new technology, UB-FFS, which is meanwhile applied in smartphones and tablets. For example, in the new generation of the iPhone 6. The margin decline in Performance Materials is just due to the mix effect from AZ. You can make the math on your own. AZ accounts for 25% meanwhile of the sales of the division. If you think about an EBITDA margin from a little bit north of 30%, you will come basically, or this will fully explain the delta in EBITDA margins. Last but not least, Merck Millipore, a very solid quarter, almost 6% organic sales growth. Also this division with a strong growth performance in the fourth quarter. Also here we have seen some investments in marketing and selling in the fourth quarter, so that we see a temporary drop in margin from 25.7% to 23%. As Karl-Ludwig has outlined at the beginning, also here, no reason to worry. We will bring this back to the old or to the former levels, in the course of the next one to two years. Slide number 26 shows the track record in deleveraging. As I already mentioned, net debt status of EUR 2.2 billion by mid of year 2014 could be reduced to a level below EUR 600 million end of the year, which corresponds to a net debt EBITDA ratio of just 0.2. This gives us confidence that we are well prepared to also digest the upcoming Sigma-Aldrich acquisition, which will boost our net financial debt. But we are very committed to reduce this rapidly with our strong cash flow generation. The balance sheet on slide number 27 shows the effects from strategic M&A moves, not only AZ, but also now we see in the increase, for example, in cash and marketable securities, the hybrid bond, which will be used to finance Sigma-Aldrich. I would like to highlight your attention on three important topics. The first one is the increase in intangible assets, which comes from roughly EUR 1 billion production technologies in the context of the first time consolidation of AZ, plus some EUR 900 million goodwill. On the liability side, we see an increase in net equity driven by the net earnings of the year by positive FX effects from the translation, and last but not least, by the market values of our derivatives that we have used to hedge the purchase price of Sigma-Aldrich. This is counterbalanced by a roughly EUR 700 million effect from the increase in pension liabilities, owing to the lower interest rates in the Eurozone, especially in Germany. That is also reflected in the doubling basically of the pension provisions from EUR 900 million to EUR 1.8 billion. As I said, more than EUR 700 million out of that just due to the interest expenses. The operating cash flow is increasing mainly behind the upfront payment of Pfizer. The investing cash flow is reflecting the payment of the purchase price for AZ, and the financing cash flow is reflecting the cash in from the hybrid bond on one hand, EUR 1.5 billion. On the other hand, the EUR 350 million for the remaining stakes in AZ, so the remaining 18.7%, which is shown in the financing cash flow. Then some EUR 380 million profit transfer to E. Merck KG and some almost EUR 130 million dividend payments. If you take these effects together, you come to the EUR 760 million. With that, I would conclude the financials part and come to the outlook. Slide number 30. We have labeled it Food for Thought on royalty, license, and commission income. Why is that? Because we have changed the guidance compared to what we have told you last time. You will remember that in, I think still in the third quarter, we have guided royalty, license, and commission income for 2015 between EUR 130 million and EUR 150 million. This number now has changed, obviously, with the emergence of Pfizer, the upfront payment, and the Xalkori co-promotion agreement. We have capitalized these two things in the balance sheet. We have built an accrual on the liability side, and this accrual will be released over the next couple of years into our P&L, which leads to the positive effect, which is going to lift EUR 209 million license and royalty income from 2014 to approximately EUR 300 million going forward into 2015. As Karl-Ludwig has informed you about one change on, first of all, the regions, that we will abandon emerging markets and provide you with a more detailed split on the single regions and will report in 2015 only the three business sectors anymore. There is another slight change that we will have from 2015 onwards, only one sales line anymore. So we will not report any more revenues and sales or net sales, but only net sales. This line, royalty and license income, will in 2015 go into the other operating income. For sales, it is basically no change because it was formerly included in revenues, and from this year onwards, we will have it in other operating income. Slide number 31 shows the industry outlook for 2015. I would be quite brief here. The most important messages from my point of view is that we see continuous growth trend for healthcare in the emerging markets and a mid-single digit growth in Consumer Health. In Life Science, we see the growth in 2015 still driven by the biotech production and biopharma production, and the academia research market being still soft. In Performance Materials, an ongoing volume trend driven by larger surfaces of TV screens and hopefully a slight uptick, at least in the wafer production, compared to 2014. The guidance for the group is reflected on page number 32. As you know, we are following our known practice that we are giving today a more qualitative guidance for the group, but also for the business units. We will give you more flesh to the bone and also more quantitative material, especially also on currencies, 10 weeks from now when we are releasing the first quarter. For the group, we expect a slight organic sales growth. In terms of EBITDA, we believe we will close the year 2015 slightly above 2014, at least on 2014 level. Given, let's say, the current FX rates, we believe that we are rather on the slightly higher side compared to prior year. On the slide, you see also some effects that have led us to the guidance, the higher R&D costs from the buy-up of anti-PD-L1, six months further loss of Humira royalties, and the strong competitive pressure for Rebif. On the positive side, four more months AZ currency tailwinds and of course, the contributions from good operational performance. The last slide showing the business sector guidance for Healthcare, we have announced this already during the pharma day, we believe that we will have a stable organic top line where we are able to compensate the pressure on Rebif with our other franchises and good performance or continuously good performance in the Emerging Markets. However, this will have some impacts on profitability as Emerging Markets are not yet on the same profitability level. So together with the effects that I have mentioned, we will see a slight decline in EBITDA. For Life Science, we have moderate organic sales growth translated into a moderate EBITDA pre-increase. With Process Solutions being the key growth contributor also in 2015. Last but not least, Performance Materials, we expect to see a slight organic growth over the year. Taking into account the four additional months of AZ, we will see obviously a stronger top-line growth in total than just slight. Nominal top-line growth and a strong EBITDA increase from the portfolio effect. With that being said, we would now be entering the Q&A session and Karl-Ludwig, Belén, and myself 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 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 are using speaker equipment today, please lift the handset before making your selections. One moment, please, for the first question. The first question comes from Gunnar Romer, Deutsche Bank. Please go ahead, sir. Good afternoon, everyone. Thanks for taking my question. The first one with regard to the Pfizer deal, specifically, can you comment around what you expect in terms of earnings contribution, excluding potential milestone payments? In this context, also, when would be the first milestone triggering event? More generally, on the collaboration with Pfizer, what can we expect in terms of updates on ongoing or future trials in the current year? Second question would be with regard to FX. Can you comment around what you would expect in terms of currency benefits on sales and earnings based on current spot rates? More precisely, would you still be looking for at least stable EBITDA pre, even excluding currency benefits? Thank you. I would start with FX. On the FX front, we believe that 2015, we will see a moderately positive FX impact on sales and EBITDA. What we are seeing currently in the market expectations are positive FX effects between 2% and 4%. Please have in mind, this will not fully translate into EBITDA because we will have some negative effects from the Swiss franc due to a strong cost base in Switzerland. We will have also some quite heavy manufacturing setups in the U.S., so there will be not a one-to-one translation from top to bottom line. Based on the current spot rates, as I already said during the presentation, we would think that we are, in terms of EBITDA, rather higher than 2014 than on 2014 level. But we will give you a little more flavor and more quantitative information, as we already said, 10 weeks from now when we are releasing the Q1 results. Yes. To continue and to build on the second part of the question. Overall, we are progressing on track with what we have communicated end of last year as part of the implementation of the programs that we set for 2015. The next update should be provided at the ASCO meeting, of course, subject to approval and acceptance of the communications that we will send, that will cover most likely our results in lung cancer, ovarian, overall safety update on the whole program, and eventually a third indication as part of the program that we are implementing in 2015. Thank you very much. Thank you. The next question comes from Michael Leuchten, Barclays. Your line is now open. Please go ahead. Thank you. It is Michael Leuchten from Barclays. A couple of accounting questions and a broader question, please. On accounting, just the Xalkori treatment of the asset on the balance sheet and the release of that asset into your P&L, how will you be able to deal with true-ups or changes to the underlying assumptions? How will that be reflected from an accounting perspective, please? Second accounting question. In terms of your treatment of the Pfizer upfront and the release of that into the P&L, will you be able to offset the entire incremental R&D costs that are coming from the collaboration by that release of the upfront payment into the P&L, or will there be a mismatch? On the emerging markets that you mentioned, no more emerging markets, does that also reflect a change to the operational setup of the organization? If so, what are the intention behind that, please? I will start with the last question. At this point in time, there is no change in the setup. We already today have regional platforms in the various divisions, more or less following the structure which we now outline the future, with the notable exception, of course, of liquid crystals. The current change in organization, there is no change in organizational setup planned. Okay. I am going to take over the questions on Xalkori and Pfizer. For Xalkori, we have had in the annual close 2014, an external third party expert included in the evaluation of the Xalkori co-promotion rights so that we have a proper disclosure in the balance sheet. Any true-ups or change in the assumptions obviously would then also alter the value of that co-promotion right and thus the accruals that we will see in the P&L. It will be, let us say, captured. However, at that point of time, we do not see obviously any true-ups and changes in the assumptions, but we will see how this develops. Your second question was on the Pfizer upfront. The Pfizer upfront will not, or the accrual of the Pfizer upfront will not be completely enough to fully offset the additional R&D costs from the buyup of anti-PD-L1. That means the overall net impact on the P&L will be negative. That is pretty important to note in order not to give the impression that the increase from EUR 209 million to EUR 300 million in the royalty and license income that you have seen on the slide represents a complete, let us say, upside on our P&L. This delta, the positive effects from Pfizer/Xalkori, are used to compensate a major part of the R&D costs, but not fully compensate. Thank you. Thank you. The next question comes from Daniel Wendorff of Commerzbank. Thanks for taking my questions. Two on Merck Millipore and one clarification question. On Merck Millipore, the margin in Q4, as far as I understand, was held down a bit due to sales and marketing expenses. How should we think about this going forward? Is that a sort of new margin assumption we should also factor in for 2015, not assuming that you would consolidate Sigma-Aldrich? The second question on the strong Process Solutions performance you observed in 2014. Is that a sort of growth rate one should assume also for 2015, in particular, which region drove that or which product lines? That would be interesting for me to know. Last question on clarification, the minimum dividend you intend to pay, is that the level of 2013 or 2014 when you refer to last year? Thank you. First of all, the marketing expenses for Merck Millipore, we have seen a quite market increase in the first quarter of 2014. We do not believe that this is the running rate for 2015 and onwards, meaning that the margin effect from the marketing and selling expense should somehow be mitigated again in 2015. We also expect, in that area, obviously some synergies, when we talk then later on about potentially about the integration of Sigma-Aldrich. In Process Solutions, we have seen a top-line growth in 2014 of around 9%. That means that this division is basically or has been the major growth driver of Merck Millipore in 2014, while Lab Solutions has grown only 2% and Bioscience have been flat. For 2015, we continue to believe that Process Solutions will be the growth driver in 2015 as well. While we believe that Bioscience will be a little bit higher, Process Solutions will again be at least in the high single digits. Lastly, dividend payments. We always look on the prior year dividend. That means when we say that the prior year dividend constitutes the starting point for this year, it would have been the EUR 0.95. The dividend policy is to follow the development of the EPS pre. That guided our decision actually to increase from EUR 0.95 to EUR 1. Thank you. Thank you. The next question comes from Amy Walker, Morgan Stanley. Please go ahead, madam. Thank you, team. I have three questions, please. The first one is, can you help us to think about the phasing of the upfront payments from Pfizer for 2015 and beyond, and how we should think about how that will move through the P&L relative to what you expect in terms of the increasing costs at Serono? Will you try to match them amount for amount every year, or do you expect that one could exceed the other, one will be linear, the other will be lumpy? Just some color, if you could. Second question. In Q4 at Serono, the COGS ratio on sales excluding royalties was about 180 bps up from what you had at Q3. Was that all due to the mix effect from lower Rebif contribution, and should we see that Q4 COGS ratio as a good basis for looking forward into 2015? The last question on Millipore. Sigma-Aldrich managed underlying growth of 7% in the fourth quarter versus the 4.5% Millipore put forth. But if I recall correctly from the presentation that you gave when the deal was announced, Sigma has a proportionally higher exposure to the relatively slower-growing laboratory and academia market segment. I'd just like you to explain why it was that they did 7% in Q4, and you guys did 4.5%, please, if you could. Thanks. Okay. Amy, your first question, I am jumping into the topic of your first question. The savings from the upfront payment. We have, on the one hand, the upfront payment of Pfizer. On the other hand, we have the co-promotion right of Takeda. Both will be accrued over the next couple of years in the P&L. Let's say the picture that you have seen on slide 30 provides you an idea about the magnitude or the size of the amount that we would expect year on year. As I already said on the question of Michael Leuchten, the accrual will not be enough to fully offset the additional R&D expenses from anti-PD-L1, especially, and from TH-302. This will be valid at least for 2016 and 2017, where we are still in the heavy buy-up. Afterwards, the picture might change a little bit, but for the next three years, so including 2015 as well, we will see a net negative impact on our P&L from the R&D expense, even when we take into account the accruals. Secondly, the cost of goods sold ratio Merck Serono in the fourth quarter. Here we have seen actually, let's put it this way. We have seen a very strong organic sales growth. We have a very strong volume effect in Merck Serono. Secondly, you have already mentioned it correctly, the negative mix effect, because we had a somehow a little bit weaker quarter in Rebif in Q4 2014, with a minus 5% decline. Last but not least, we also had some negative or more negative currency effects compared to the prior year's quarters, because now when the currencies are, let's say, in favor, we are also suffering a little bit on U.S. dollar manufacturing sites, for example, and very importantly, on Swiss manufacturing sites with the appreciation of the Swiss franc. Please bear in mind we have two big Merck Serono production sites in Switzerland with Vevey and Aubonne, which we have also seen. Last point is, we have already informed you in the second and third quarter that we had some production issues in Merck Serono, and that basically completes the picture. On the Merck Millipore one, so the organic growth of Merck Millipore in the last quarter is roughly 6%. That of Sigma-Aldrich is roughly 7%. I would not read too much into these quarterly and seasonal deviations. The underlying business case we presented for the merger is completely intact, and there is no revision to the plan we submitted. Thank you. It's very clear. Thank you. Next question comes from Simon Baker, Exane. Please go ahead, sir. Good afternoon. Thank you for taking my questions. Three, if I may. Firstly, on Merck Serono, I wonder if you could give us an update on the rebate environment in the U.S. And also on Xalkori, could you tell us the likely size of investment for the co-promotion that has firstly taken place already and is likely to take place in 2015? Finally, on Performance Materials, you allude to the collaboration with Epson in OLEDs. I just wonder if you could give us a little bit more of an update on that relationship and also an update on how you're seeing the OLED market as a whole. Thanks so much. Maybe I start with the OLED piece. It is generally too early, as always with new technologies, to give a precise estimate. Sorry. Where we would see the OLED market. At the moment, one of the major players is working very hard on the OLED franchises. Until recently, it was a different player. So it's all still very much in flux. We believe there will be an OLED market in displays. How many players at the end will be actively involved in it remains to be seen, and this requires some further time to evaluate. On the cooperation itself, we are still in the technology transfer phase. That is going well. We also see some investment in the market in the Epson printers that then at some stage should translate into sales for our materials. Up to now, the cooperation has not yet demonstrated any problematic step in the know-how transfer, nor in the building of OLED inks for future years. We have added one new color to our franchise, which is a very vivid green, which will also work well in the printer. So we're making progress, everything in plan. Market size and structure remains uncertain in this point in time. Let me go back to the Xalkori question because, as we communicated late last year, Xalkori will be co-promoted for the time being under the provision of our agreement with Pfizer in the U.S. and some additional major markets. So at this time, we have kicked off conversations for the U.S., increasing the readiness to basically implement on time. We are also ramping up progressively conversations through the Global Alliance Committee that will continue at country level, probably during Q2 2015. As far as the question of rebate environment, I think, as you very well know, we do not disclose anything on rebates due to the competitive situation. Also because the mix of the managed care contract is very different from company to company, and so it is pricing. So, I don't think there is anything that we can compare across the different market players. For us, in 2015, most of the managed care contracts are behind us, and we don't really expect any major differences in the access conditions that we have for Rebif in the U.S. at this time. Thanks so much. Thank you. Next question comes from Odile Rindquist, Helvea Baader Bank. Please go ahead, madam. Yeah, good afternoon. Thank you for taking my question. Starting with the discontinuation of the two projects you announced, the MEK inhibitor and Sym004. Just wondering if you discontinued in the two- Indication for both products for melanoma, ovarian for the MEK inhibitor, and the colorectal and lung cancer for Sym004. How the level of impairment, if everything has been already impaired in the fourth quarter of this year, or should we expect anything in the first quarter next year? A question on the biosimilar. We are, I think, still expecting the disclosure of a collaboration on a biosimilar in emerging markets. A third collaboration, I don't know if you have an update here, as well as the switch into a phase III for two monoclonal antibody in the first half of 2015. I was just wondering if you're still on track with that. Yeah, that's it. Thank you. To the biosimilar question, because that's a similar question in the press conference, I would like to ask you to wait a little bit still. There are many issues, development issues, contractual issues we are discussing, and we will update you as soon as we have more information on that. I take over the question on the impairment. We have impaired by now everything what we have actually terminated, so there are no issues open. You will find more information on that on page number 212 of our annual report. There we will see that the amount is EUR 38 million, that is included in our P&L. That is it for now. When we take new decisions, obviously, these may trigger new P&L effects. But by the end of 2014, we are clean. Thank you. Next question comes from Richard Vosser, JP Morgan. Please go ahead, sir. Hi. Thanks for taking my questions. Just a question on back to the pipeline, and I just, looking at slide 48, it seems that the IL-2 is no longer on that pipeline. I just wondering whether that is gone into the collaboration with Pfizer or what has happened to that. Second question, just on Rebif. Just looking at the prescription trends, the decline in Rebif is certainly moderating quite dramatically in the U.S., and there have been a couple of price rises. I think one in February, just last week. Just wondering how you are thinking about that. It does seem to me that potentially you might actually be able to grow Rebif in U.S. dollar terms this year. So your perspective on that would be very useful. Finally, coming back to the OLED question, but just asking slightly differently, that it seems to me that the liquid crystals seems to be getting better at making things like curved screens and with ultra-bright fringe field switching. It seems to be matching OLEDs sort of punch for punch. Just your perspective on whether OLEDs are getting pushed out by the panel makers as an important technology. Just your thoughts there would be very useful. Thanks very much. I start with the OLED one. As always in new technologies, it's an up and down. You might recall some years ago, there was a strong conviction that OLED would make it quite quickly to the market, and it got indefinitely delayed. I believe also in future that OLED will have a place in the marketplace, in the technology space. The exact need is still to be defined because, and they are completely right, it depends how much can we extract still from liquid crystal in terms of quality and in terms of indirect costs. Mentioning, for example, allowing more light through flows and therefore reducing the needs for backlights and so on. I wouldn't say pushed out. But we need some time altogether to see what the final technological answer on OLED will be. The judgment is still out. Hi, Richard. On IL-2, this was not in the scope of the Pfizer deal. Simply, the reason why we stopped this program, we discontinued this program, was because, as you very well know, the melanoma space has changed significantly, and recruiting on the study was actually becoming pretty challenging. And, well, that was very telling. We decided, as for any other programs, to stop and refocus our efforts on the high-value programs. So no impact on the Pfizer deal. As far as Rebif is concerned, we have seen the data that you are referring to, but I think it's premature to speculate what this means for the future. At this time, as you know, we still have Plegridy launched in a very early phase, and there are several other uncertainties in the competitive environment that actually ask for being quite cautious in extrapolating the dynamics of Q4. We will continue to monitor the progress and we will continue to, of course, defend our franchise very vigorously. Thanks very much. Thank you. The last question comes from Ronny Gal, Sanford Bernstein. Your line is now open. Please go ahead. Good morning, good afternoon, and thank you for taking my question. Just three questions. The first one is just a fact you want on Rebif. In your projections for 2015, are you assuming a generic Copaxone in the U.S. and Europe? The second one is about biosimilar Erbitux, a bunch of companies have been discussing entering the clinic with that product. Can you just discuss a little bit the challenges and the issues associated with making a biosimilar of that product, obviously important to you. Last, during R&D Day, I think it was last year, you mentioned you're beginning to work on flex manufacturing in Millipore. How is this going? Is this part of the growth we're seeing yet, or is that a potentially additional driver for that division in the upcoming years? With Rebif, the question was- Bless you. Assumptions for 2015. Yes. We plan with the assumptions that are available to us. For the U.S., we are assuming that it is likely that we have a biosimilar of Copaxone coming to the market at some point in time late this year, early 2016. A situation which may be a bit different in Europe, but as you very well know, the European multiple sclerosis market is going to go exactly through the same changes that we have seen in the U.S. market. Tecfidera is now launching one country after the other. Gilenya is going to be on the market very shortly. Of course, the new formulation of Copaxone will also come to the market and change the dynamics one way or the other. Those are the assumptions we have taken for our own planning. Can you please remind me of the biosimilar question? The challenges for making biosimilar Erbitux. You guys are working on your own biosimilars. Is making Erbitux somehow harder or more challenging than other drugs? There are multiple companies discussing making this. Should we assume that this product is going to be developed pretty quickly, or are there some specific product challenges that we need to be aware of? Well, yeah, go ahead. One thing is the fact that up to now, we have not seen people moving into Erbitux and Bisque has explanations on this one answer already. Second, you have to remember that two different cell lines, one is in the U.S. and the other one is in Europe. The U.S. Erbitux and the European Erbitux are two different products. When you do a biosimilar, you have either- Yep to target on the U.S. or on Europe and you can't do it both together. The question is the market big enough for that? Yes or no? I believe in addition to technical questions and issues, there's also a market size issue out there, and there might be more interesting targets for biosimilar companies than Erbitux. That leads me to your last question, the flexible manufacturing. Disposable bioreactors is an important issue. It's an issue going forward. We are working in Merck Millipore intensively on that. We have one also center which deals with the issues and is discussing with the pharmaceutical companies of what interest could be. We have to throw the ball a little bit wider now. But if we think of five years from now, I can think that disposable bioreactors will replace part of the products currently produced in the steel cathedrals which exist today. Yes, there's a market, and Merck Millipore will be part of it. But there's no revenue associated with that project just yet. Excuse me? There is no significant revenue associated with that platform just yet. No, not today. Thank you. I think with this, we are happy to hand over to Karl for the closing words of this call. This catches me by surprise. I hope you had a good call. Our investor team is ready to answer any further questions you might have. I wish you a pleasant afternoon and talk to you soon. Bye-bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.