Merck KGaA

Constantin Fest - Head of IR Marcus Kuhnert - CFO Udit Batra - CEO, Life Science

Michael Leuchten - UBS Sachin Jain - Bank of America Daniel Wendorff - Commerzbank Simon Baker - Exane BNP Paribas Gunnar Romer - Deutsche Bank Vincent Meunier - Morgan Stanley Peter Spengler - DZ Bank David Evans - Kepler Cheuvreux

Many thanks Jasmine and a warm welcome from my side here in Darmstadt to this Merck Q3 2017 conference call. My name is Constantin Fest, Head of Investor Relations here at Merck.

And joining us today on this call is Marcus Kuhnert, the Group CFO; as well as Udit Batra, CEO of Life Science. In the next hour we will run you briefly through the key slides of the presentation and discuss your questions.

With this, I would like to directly hand over to Marcus to start with his presentation.

Thank you, Constantin, and welcome everyone to this quarter earnings call. Before we dig into the details of the quarter, let me briefly give you a couple of highlights from the third quarter.

Healthcare had overall a good third quarter and we had positive news from our pipeline. We received approvals for Bavencio in Europe and Japan to treat metastatic Merkel cell carcinoma and also Mavenclad approved by EMA in multiple sclerosis.

The launch so far has been smooth. Similar to the second quarter, Life Science saw a pickup in growth in Q3 and Udit will give later much more details in the call.

In PM, the quarter turned out to be pretty okay given the circumstances that we have highlighted for you in August. Q3 basically confirmed to key trends that we have already discussed.

First of all, non-Liquid Crystal businesses remain on the strong growth path. And secondly, the market share normalization in Liquid Crystals continued.

As we seen the same so far, the situation has not become worse than what we have anticipated and it is equally clear that the development will continue still over the next couple of quarters. You will remember that the recalibration of expectations that we’ve given in August at a time horizon by the end of 2018.

If you look Q3 overall, it was a quarter for us in a clearly very challenging environment not only because of the situation in liquid crystals, but also with regard to currency where we had significant headwinds that we had to manage. Still we confirmed the guidance for August or by actually most likely will remain at the lower end of the given ranges, which are in a range from EUR 15.3 billion to EUR 15.7 billion EBITDA pre of EUR 4.4 billion to EUR 4.6 billion and earnings per share before exceptionals between EUR 6.15 and EUR 6.50.

On the next slide, I would like to shed a little bit light on the decomposition of growth. Net sales grew organically by 4.2%, driven by Healthcare and by Life Science.

Performance Materials saw a moderate decline of 1.5% organically compared with an already flattish prior year. As already said and as you can see also take from the slide, the currencies were visibly negative for us in the third quarter and especially the strength of the euro from the beginning of the quarter at faster throughput the quarter.

The EBITDA pre declined by roughly 8% quarter-on-quarter and this is driven, on the one hand, by adverse effects as already mentioned then by the situation in display materials and PM. And last but not least by the amounted higher expenses in research and development and healthcare to further invest in our pipeline and also emit higher marketing and selling costs in Healthcare due to the launch preparations for Bavencio and Mavenclad.

On the next slide, we see the organic growth distribution in the region. The picture actually has not really changed compared to the last quarters.

Asia Pacific remains to be our biggest single biggest region with roughly one third of our sales followed by Europe as a significantly strengthened length of North America post Sigma acquisition, and the strength, our growth strength in the mature markets is driven by life science, the good performance across the board in the emerging markets is very nice except of course for P and display materials in Asia. We jump now to slide number 9 for financial overview.

The EBITDA pre in Q3 was €1.076 billion and this is roughly €100 million below last year and more or less in line with the numbers of the second quarter. A notable share of this decline is a little bit artificial as it also relates to effects from last year.

In health care you may remember that in the third quarter we had seen a fairly slow uptick in our R&D cost line which was flattened by €40 million provision release from our [indiscernible] project. In contrast obviously, obviously this year R&D cost risen, first of all as our pipeline progresses but also due to this special effect as the comparables from prior year are relatively low.

As already discussed the Performance Materials EBITDA pre remains affected by the ongoing market share corrections in our Liquid Crystals business and earnings per share are reflecting the declines in EBITDA pre and we are seeing only moderate contribution from financial items from the financial result because we are predominantly paying back the low interest carrying pieces of our debt capital. You may remember that the Sigma acquisition is signed predominantly with fixed interest rates.

The volatile piece, the variable pieces, they are -- they have shorter times of maturity and we are paying them back these days. So that means you can expect more visible impact from our financial result in the coming quarters and years.

We have made nice progress in bringing back net financial debt. As we compare to the level of December 1, 2016 we have produced this number by more than a 1 billion and at the same time working capital and employees have gone up partly behind growth initiatives but also partly in terms of employees we have converted temporary works into permanent employees.

And we have some inventories in the Life Science which we will bring back further until end of this year. Slide number 10 shows reconciliation from EBIT to earnings per share.

EBIT is positively impacted by the divestment gain from the Biosimilars business. You will remember that we have closed this transaction on beginning of September.

We have recognized €321 million divestment gain. So, without transaction cost of €315 million, this number is actually benefiting the EBIT but of course has been adjusted in EBITDA pre.

The financial result is already mentioned with no material changes and we have also from the Biosimilars divestment slightly positive effect in our effective tax rate which is 22.4% so slightly below the corridor that we have envisaged for the full year. And you can expect that for year-end we would land an effective tax rate also here rather at the bottom of the corridor for around 23%.

Net income and earnings per share are reflecting the development in EBIT financial items and tax that I just outlined so far. A short glance on the P&Ls of the three business sectors, Healthcare had operationally a good quarter in Q3.

The base business was on track with organic net sales of 5.8% or a plus of almost EUR 100 million. Of this, around 40% attributable to the change in our Glucophage business model in China.

You will recognize a recall that we have repatriated this business at the beginning of the year. So, we have it now included in our numbers for nine months.

That means from Jan 1st 2018 onwards it will be annualized. But even if we just from Healthcare grew by approximately 3% year-on-year and posted a 25th consecutive quarter of organic sales growth.

Rebif sales declined organically by around upon 7% in the third quarter. We have seen continued volume losses in Europe mainly due to competition from oral therapies and the trends not much different in North America and a little bit contrary to Q2 volumes where we were positively affected by inventory affects.

So, we have seen some restocking in the second quarter, which gave us even a positive organic sales development for Rebif in the U.S. And this has now switched back a little bit so this is the explanation for the somewhat, let’s say GAAP, not as good as maybe expected volume development of Rebif in North America.

This is little bit of a fading effect and we have earned the benefits actually one quarter before and the second quarter. Erbitux saw same store minus 1.6 organic sales decline, pretty much for the same reason as the previous quarters specifically tougher competitive environment in Europe and negative pricing.

And our fertility business is actually back to growth for Q3 was positive still [indiscernible] decline driven by high comparables in the U.S. and also of course, ongoing biosimilars competition in Europe.

Our R&D costs exceeded prior year considerably. We have an increase in the run rate of course, but also keep in mind the EUR 40 million provision termination effect that have just outlined.

For the full year, for 2017, we see the R&D costs rising by – still by EUR 150 million to EUR 200 million. But however due to the weak U.S.

dollar and the slightly earlier than expected divestment of biosimilars, we will also hear the most likely at the lower end of this range. With that, I would like to hand over now to Udit, our last time CEO to shed more light on the development of this important business.

Thank you, Marcus. And it’s great to be here today to decide the Life Science business.

And now I’m on slide number 12. As you can see from this chart, about EUR 1.4 billion in sales, given by an organic growth of roughly 4.8%, so slightly shy of 5%, a significant impact from FX that you can see at the bottom of the chart.

What is really good to see this quarter as all three business units showed more than contributed to growth, let’s start with Process Solutions. And this one we will talk a little bit more about in the upcoming charts.

Process Solutions grew mid-single-digits this quarter despite a continuing headwind from our large accounts. Our business is quite nicely diversified, so we were able to offset the decline in large accounts by growth of smaller accounts globally, and also a very nice development of our active formulations small molecules business which is still I will remind you 30% of our Process Solutions business.

From a portfolio perspective, you’ll continue to see growth in single-use, very, very dynamic segment and also our services business. So, this sheer breadth of our Process Solutions customer base and the portfolio help us offset the continuing challenges that we have seen with the large global accounts and we posted a mid-single-digit growth there.

Applied Solutions also grew very nicely in this quarter largely driven by Biomonitoring and our Lab Water business. In Lab Water we launched our next generation of our platforms and the update is going extremely well.

So that business is developing nicely. And Research Solutions which is most endearing showed an almost mid-single-digit growth really driven by continued good performance of our e-commerce platform and a nice recovery in Western Europe and dynamic development in China.

So, from a sales perspective mid-single digit growth a bit of impact of FX. On profitability you see this organic growth and delivery of synergies being shown on the bottom-line but we do see as I mentioned a headwind from FX and a small impact of the mix as well, where single-use is growing faster than the rest of the portfolio as well.

So that said, the EBITDA margin is still north of 30% which as you know is quite nice in terms of the industry benchmarks. Let move on to the next chart and discuss a little bit more about our Process Solutions business.

There has been a lot of discussion on the slowdown of bioprocessing across the industry and on this chart, I will try to explain to you how we see the development of this segment for the future. A bit on the chart, on the Y axis you’ll see the volume of monoclonal antibodies produce or expected to be produced over the next five years, in 2016 this number is about 12.5 kilotons and it is expected according to EvaluatePharma to grow from a volume perspective by about 12% CAGR over the next five years reaching in excess of 20,000 tons.

So, the market itself is expected to remain quite dynamic even if there are short-term challenges. What is even more interesting is as you look at the colors on the chart and you see the legend at the bottom, the blue is top 10 mAbs and green is new mAbs and the pink is biosimilars.

Top 10 mAbs is 2016 would be the mAbs that are constituting about 80% of the volume in the market in 2016. You’ll see a completely sea change over the next five years.

While the growth is dynamic the constitution and the composition of the growth changes quite dramatically. 80% of the volume in 2016 is constituted of this 10 mAbs.

In 2021 we expect 90% of the volume to be constituted of 35 different monoclonal antibodies. So, this is a completed democratization of the market and that should diversify the presence.

And then you also see a small share of biosimilars and we think roughly 10% or so of the market will be biosimilars volume and this number has the highest uncertainty. But the key takeaway from this chart are, while we see short-term challenges as you are seeing in our business and many other businesses as well across the industry.

Long term, this market has very good tailwinds with the volume of mass slowing. And what is even more positive is that it is going to be diversified across many, many different molecules are not concentrated as it is today.

No discussion of Life Science is complete without talking about the integration and I’ll try to describe this in the next two charts. So now I’m on Page 14.

We have, since the integration, and in fact, since the announcement of the integration towards the end of 2014, and you see this on the top of the chart, since the announcement of the acquisition in 2014, we have posted growth in excess of the industry average. And you can see in green legacy Merck and in blue legacy Sigma, and of course in 2017, we reported it all together.

If the market growth is up in [4-ish] percent, we’ve always been in excess of that. And that’s a nice performance over the last three years versus the market.

What is even more in endearing is that the margin development has remained positive partially because of where we started, but also due to strong delivery of synergies. And here at the bottom of the chart, you see our EBITDA margins compared to other integrated peers.

Even if you take out the corporate costs, we are 3% to 4% higher than what other integrated peers would be. So, during the integration timeframe, I don’t think, you could have asked for more from our teams, and I’m very, very thankful to the hard work that goes behind delivering these kinds of results.

Going deeper into the synergies and the source of the integration, and the synergies are progressing really well. On the left-hand side of the chart you see the cost side and the right-hand side you see the top line synergies.

And this is just confirming the numbers you’ve seen before by the end of 2018, we had originally said EUR 260 million. This is mostly cost, we add in at the last Capital Markets Day, another EUR 20 million owing to the revenue development that we were seeing and the positive revenue synergies.

The cost synergies are now, I would say, definitely in the second phase. In the early part, we were very quickly able to remove all the overlaps in the headquarter functions and we managed to do that without any defocus on the customers.

And you recall, we said we will backload the activities that would potentially impact customer experiences and manufacturing distribution and customer services. And that is what we're now tackling.

And you see those listed at the bottom of this chart. We’ve consolidated about 10 or so manufacturing and distribution sites, announced another five that we plan to consolidate over the next two years.

So, this is progressing very, very well. And in addition, we have consolidated the large customer service centers that we had and we've started to offshore transactional task.

And that has improved efficiency, but also effectiveness in how we deal with our customers, great positive impact of that you see in the business as well. And on the right-hand side, we will see the top line synergies.

And we have talked about the sources of these also in the past. To that, I’ve highlighted are right here, continued development of our full portfolio on sigmaaldrich.com the industry dealing e-commerce site.

80% of the relevant products in U.S. and Europe are already on the platform.

In fact, every third order includes both legacy Merck and legacy Sigma products. And this is quite nice because about a year ago none of these products were available to the customers on this e-commerce site.

This reflects the intense marketing that the teams have been doing and how many people go to this site. And then, in Process Solutions, we’ve talked in the past also about the complete offering.

I mean we have the end-to-end portfolios starting with cell culture media, cell line development, upstream systems, downstream systems, and this is quite an advantage for us and especially in Asia which helped us immediately regain share in this market. So, synergies are very much on track and I hope that gives you some color on what are types of things we are doing.

I want to end with this chart number 16 which gives you a bit of color on how we are thinking about strategic direction of the business. And here I will highlight three different initiatives that we have.

The first one is called the end-to-end bioprocessing initiative. As I mentioned we now have a complete offering for any customer who wants to develop their processes using our consumables and our equipment.

While this is -- while large customers purchase each individual unit operation and each individual consumable, individually from individual vendors and compared across vendors, smaller customers especially emerging biotechs, really are looking for a one-stop shop, especially for process development. And with that ambition we started this business about -- we started to focus on this business about a year and a half ago with our site in Mariac France where we do process development.

The ambition was to get to the three customers in the first year, we ended up with 15. The demand is so high that we opened up a similar center in Shanghai and another one is due to open in Boston towards the first part of next year.

So really, we’re taking the portfolio -- the end-to-end portfolio and taking it to the emerging biotech customers who really have at this point 75% of the early stage pipeline in pharma. The second initiative is one that you’ve heard us talk about a lot.

This is the single-use portfolio in bioprocessing. And the tragedy of this business is that it grew so fast that it did not get industrialized fast enough and there was a lack of standardization as customers were all doing individualized products and that put pressure of course on our deliveries and the quality of the product and timing.

We took it upon ourselves to have three initiatives along that direction and support the continued volume growth. Number one, we standardized the offering across single-use portfolio, so customers who ordered standardized portfolio could get the product within 24 to 48 hours and if you had semi-customized you would need six to 10 days, and if you had completely customized you needed a month, so that gives an incentive to customers who purchase more standardized portfolios, thus helping us become more efficient in scaling up this really important part of our portfolio.

Second, we expanded the capacity. The demand is quite high, so we expanded our capacity in our Denver site near Boston.

And finally, we have been on to look out for interesting technology when we announced the purchase of Natrix Solutions to augment our single-use chromatography portfolio. Happy to talk about that if you have more questions in the Q&A.

So very happy with the development there and investments going in that direction to build that portfolio. And then finally, no conversation these days is complete about our portfolio without talking about our portfolio in gene editing and cell therapy, we are now a leader in the technique called CRISPR-Cas9 for gene editing.

We have some of foundational patents which we expect license to many different customers who are quite excited about that. And then secondly, we are a leader in viral vector manufacturing for cell therapy, in fact nine out of the 10 top producers of cell therapy work with us to develop their viral vectors.

Our site in Carlsbad, California is the one where we produce these viral vectors, we doubled the capacity there since the acquisition of Sigma-Aldrich. Still the demand outstrips the supply and most recently we had the FDA and an EMA inspection of the site.

In fact, we recently got approval for the cell therapy producers, the viral vectors at our site. So, we’re extremely proud of our role in improving patient care and getting this important therapy to many, many patients.

So, as you can see not only the delivery in the short term quite nicely, we are really racing ourselves to develop our strategy in a meaningful way for the future. With that let me hand it back to Marcus to talk about Performance Materials.

Thank you, Udit. And to speed up now the rest of the presentation Performance Materials, actually there is not much news to share.

The situation remains basically unchanged compared to what we have expected and also communicated to you. In August, that means we see the benefits from strong performing treatments, integrated circuits and also still a nice development from OLED compensating the decline in Display Materials due to the ongoing market share normalization.

We see somewhat an overproportionate EBITDA pre decline compared to the top line, which is also not a big surprise in terms of margin declines quarter-on-quarter by roughly 3 percentage points, but still in the late level range of 40%. And, yes, with that I would turn to the balance sheet on the next slide.

Here also yet nothing spectacular when we compared to the status year-end 2016, the only notable changes in the intangible assets and in the financial debts lines, financial debt due to deleveraging, plus currency effect, intangible assets due to scheduled amortization and currency. The currency also has heat up in net equity but still we were able to increase our equity ratio to some 38%.

And last but not least cash flow statement. Here I would like to convey three messages.

First of all, healthy operating cash flow which was used predominantly for deleveraging in Q3. Secondly, the divestment proceeds from the biosimilars sales [indiscernible].

They are not included in the operating cash flow but they are the part of the investing cash flow. And we have said, as already mentioned EUR 321 million gain from the sale.

The cash impact was lower. It was just EUR 156 million and this is included in the cash flow statement.

And last but not least, CapEx on property, plant and equipment is somewhat a little bit higher than last year, but we will stick or we will be within the guidance that we have given between EUR 850 million and EUR 900 million for the full year. So, we will definitely not go out of this corridor.

With that I turn to the last chapter of the presentation. The guidance and also, yes, I think, we can be relatively quick because the message is that no change compared to what we have communicated to you in August.

And those of you who have dialed in three months ago will remember that I had given back then a little bit of a disclaimer where I said, okay, we need to be careful with our guidance. We are very much committed despite the challenges that we have in Performance Materials to land within the original guidance for the group.

However, we need to have an eye on currencies. Unfortunately, the currencies have not developed our favorites since then, just the opposite happened.

Still we confirm the guidance today for the year end. However due to this even intensified pressure we will lend only at lower end of the guidance in all of the three metrics around sales, around 15.3 in EBITDA, around 4.4 and EPS also on the lower range of the guidance.

And we have actually no changes on the business specific levels and outlook. With that being said, thank you for listening.

Yes, now it is time for interaction and we would be happy to answer all of your remaining questions. Thank you.

Thank you it’s Michael Leuchten at UBS. Two questions please for Udit.

Firstly, you were talking about the split of your customer base sort of regional versus global. I was wondering if you could add a little bit more color as to what exactly that means in terms of how you qualify and what the trends are beyond the inventory work that received at the global accounts that you previously have spoken to.

And then secondly when you look at your order books for the market going forward and talked about a little bit of the capital markets there. On your slide 13 the EvaluatePharma derived data which suggests that we are going to see double-digit growth in the tonnage of monoclonal antibody manufacturing.

Is that consistent with what you are seeing because one way to interpret that chart as well it maybe the market is a little bit optimistic in terms of what volumes really coming through over the next five years with these new antibodies coming to market.

Michael thank you for the questions, both are very, very good questions. The way we classify global strategic accounts are the top 15 pharma accounts that necessarily require not just a sales person but a very high touch cross functional team and this is historically how we have described large global accounts.

Over time as you observe the industry a lot of the pipeline and lot of the launches are coming from smaller companies as well and those are what we classify as regional accounts. And over the last few quarters what we have seen is the global strategic accounts have come under pressure because of large pharma.

The smaller accounts have not been affected by it and they have maintained a very nice double-digit growth. On the large accounts just to give you a little bit more color I think this was on slide 13, 80% of the volume comes from the top 10 molecules, six out of these 10 have lost or will lose patent protection, rather shortly, three out of the six are concentrated with one large company.

So, you can how concentrated the market is and if one customer decides to do something it impacts that highly concentrated set of molecules. Over time you will see that this gets democratized so it’s not that concentrated anymore which is a good sign.

And you also see that the overall tonnage is higher. Now to your second question on the double-digit tonnage and how we see that developing over the next two years.

Over the long term it is clear that the molecules are coming to market and there is demand. This is clear.

What is not clear in the kinetics, what is not clear is how fast the inventory rebalancing is occurring as people are thinking about biosimilars coming in and changing their forecasts, getting more stood about their working capital. It is not clear how long how fast that happens, but over the mid to long term you can expect this market to be growing dynamically.

From an order book standpoint, we see a very robust development.

Thank you. I'm afraid I am going to return to the same topic here.

Is it that when we look at the growth of these monoclonal antibodies going forward, so mainly from smaller companies so they will be made by contract manufacturers rather than doing it themselves. Is that a less profitable root for you?

So, for example let’s say use [indiscernible] as an example if we were selling to [Ross] you are making it to sell, you'd x, but if you sell to a really big contract manufacturer, you make a lower amount. Is that how we should see this because if the trend is more towards small molecules being made by CMOs, I'm not sure that that's necessarily positive for your margins?

And I wonder if you could also talk a bit more about your long-term margin objectives. You’re over 30% but you’ve highlighted that a good few points more than your competitor.

I think consensus expectations are that margins will rise still further adding another three percentage points over the next few years. I wonder how realistic that is?

So, let me take your second question first and then come back to your question on [maths]. On the margins, if your question is being the synergies going to show up in the bottom line, I think, you can just look at our track record since we announced the integration.

They will show up in the bottom line and it is a significant FX impact at least to-date. And that we cannot predict.

So, I cannot predict EBITDA margin if the FX impact on the EBITDA margin, but I can’t tell you that the synergies will be updated to show up in the bottom line. So, to your first question on contract manufactures versus originators, not something we have seen to date that there is more pressure or less pressure than one or the other because the production landscape is still quite democratized.

It is not that it is highly concentrated in one or the other contract manufacturers. For instance, if you take a large pharma player, they have internal manufacturing and they give overflow capacity to Lonza or Boehringer Ingelheim or Samsung, but they will continue to maintain internal capacity as well.

And we very often have a broader deal that if you’re manufacturing a molecule, as an originator you might get the same deal as if you get more volume even if it’s the manufacturer, the contract manufacturing site. So, you don’t necessarily see different type of deals.

In fact, the deals are more dependent upon the total volume and the total commitment and the total -- the breadth of the portfolio somebody purchases. Hope that gives you a bit of color on how we currently perceive it.

Hi. Sachin Jain, Banka of America.

Kick off Udit as well again if I could on the business grow large customers with the destock. And do you see any spec of that annualizing through 4Q.

I think your destock is being on for a roughly year now. And then to sort of reframe the margin question, as your business make shift, independent synergies moving from single large customers to diversified smaller customers to that business mix shift conducive with increasing margins over time?

Second question is on the TGF-beta data. The new investigator was quoted on Bloomberg as saying that the data might not support a large trial as a standalone therapy.

I wonder if you could just comment on that and your excitement around the data? And then finally on BTK, are you in active debate on partnering as we sit and could you just remind us of the timing of the next data?

Thank you.

Sachin the question on smaller customers and margin development, look I commented on the single-use development and clearly the penetration of single-use is increasing. This particular portfolio has gone from a hobby to one that is used quite extensively in the industry and that has forced us to become much more efficient.

So, I do expect why the margins today are dilutive to the overall process solutions business and overall life science business. It was margin that was over time just to get better and better.

We are standardizing it as the volume increases and so I expect the margin contribution to be positive. And in terms of large customers and what is the base versus what’s the analyzation impact, look it is a kinetics problem.

It’s the market is quite concentrated. It is the few customers who are adjusting their inventory and as I mentioned earlier it is six molecules, three out of six molecules we have been with one large player, another one -- with another one, so it’s two to three large customers who are impacting the whole market.

And you see nothing different from -- we see nothing different in many of our other competitors. It is very different from what you see in performance materials.

It’s not something that is limited to a single quarter. They are adjusting their inventory over time and we don’t have full visibility on exactly what their working capital targets are at least not today.

But as you can see over the long-term this market is quite dynamic. So, it’s a transient impact to the best of our understanding.

Sachin, I will start with your question on BTK. So first of all, for RA we expect the 2B data readout now in March 2019 for MS the original plan was that we have the data readout in February 2019 but as the recruitment of the data and the patients is progressing very nicely it could potentially be accelerated into the later phases for 2018.

And last but not least on SLE, we expect the data readout of Phase 2B in December 2019. On your question on partnering, as we already outlined at the Capital Markets Day we basically consider partnering as a window of opportunity that means in sometime between now and then how comprehensive Phase 2B clinical program readouts and as I just said the latest will be SLE December 2019, and of course at that time potentially a different new term different potential superior Phase 2B data eventually also across all of the three indications.

There are different options under consideration also depending on partner, complementary expertise, profile, financials objectives, et cetera of course what we will have in mind new picture would be some kind of a [appraisal] like deal and depending on the results and the ongoing progress it could also lead to a partnering the selected indications, but it is too early to speculate about this today. And they are also -- this is just a recap from my point of view to what we have said at the Capital Markets Day.

So, there is no news to share today. On TTS, I would first like to refer briefly to the Kai comment that just mentioned.

And here, I think that his comment is for this particular every pretreated patient population scientifically reasonable. But of course, at this point in time we will not announce our development strategy or future development strategy today based on initial data for very, very first indication.

Let me just summarize on how we see the current situation at TTS. Overall, we are encouraged by the initial clinical activity that was demonstrated in this challenging patient population and just to remind you severely limited treatment.

We are talking about a patient population that was severely pretreated. And supporting our plan for continued development of the TTS better check and refer the trial.

The results that we have published so far, our initial data from the early ongoing clinical development in the patient population was as I said limited treatment options, and we will present updated data in an oral presentation on Friday.

Thanks for taking my questions. Daniel Venlo from Commerzbank.

Also a few questions for Udit. I would like to refer to your slide 16 in the presentation where you talk about strategic growth initiatives.

And if you reach your ambition by 2022 of $1 billion in product sales, that would mean alone a CAGR for your Process Solutions business of around 10% if I calculated that right. So, is that how we should think of the development of the Process Solutions business going forward?

And second question would be on you’re the very nice Research Solutions growth in third quarter. Given the explanations you have given us on that one, on slide number 12, is it a fair assumption to conclude that the fueling by e-commerce that this would be an ongoing positive factor for that business with last time’s research education going forward?

Thank you.

Daniel, thank you. And to make things interesting, I will start with Research Solutions because I’m very seems to be focused on Process.

I’m very happy to focus a little bit on Research Solutions. We are extremely happy Daniel with the e-commerce progress and that is a strong, strong contributor.

But what you also see is the nice development of our chemicals portfolio in that business that is fueling the growth. What you see in addition from a regional perspective that Western Europe is starting to recover nicely and China continues to fuel the sets its e-commerce but also regional growth and some portfolios that are starting to recover nicely for us in that business.

On the strategic initiatives, I would say it’s a nice try. The EUR 1 billion is not coming on top.

So, don’t do that math. And these are great initiatives.

And it is anybody’s guess if it is a bit less or a bit more, I mean, it’s quite far away. I am happy that these strategic initiatives are in our mix, I mean it would be silly not to pursue them.

But I would not add them on top of any of your models today.

If I may add, Udit that, by the way the same logic that we have also applied for all of the two other business sectors especially in the healthcare where we said you can also not just take the 2 billion that we have announced and just add them on top so we have some movements but of course the numbers are valid for new and innovative products that’s for sure.

I just thought, I am not here at different number so for the next year. But I had to ask it anyway.

Thank you.

Thanks for taking my questions. Two for me please.

Just guys going back to the issue of the volume projections within process solutions. So, returning Joe's question on its head a little bit, if democratization of the monoclonal antibody market effectively means if you like a reduction manufacturing efficiency because there are more players selling or making more antibodies.

So, if the volume CAGR over 2016 to 2021 is 12% according to your slide, would it be reasonable to assume that the potential demand growth for process solutions was higher than that over the period. And then moving on to consumer, pretty difficult quarter for almost every one of your competitors, and you’ve produced by far the highest organic growth than anybody, 11%.

I was wondering if you can give us a little bit more color into the nature and sustainability of that performance within the consumer business? Thanks so much.

I will start Simon on your question on volume projection of process solutions. The democratization across the monoclonal antibodies does not mean that it is democratized across many, many different players.

And I would not assume that the manufacturing efficiency is going down by any means because of that, because we have a highly concentrated set of producers especially in the contract manufacturing side as was pointed out earlier. So, the efficiency will not go down.

In terms of demand, it is proportional to the volume, so we scale with the volume consumed, yet you will have to assume that over time that the consumables have become more efficient and the volume growth in the consumables might be just close to 12% but not necessarily exactly at 12% in bioproduction. Hope that gives you a bit of color on the numbers.

Marcus?

Yes, your question on the CH, first and foremost we just have to note we had just simply a good quarter and of course I mean we keep our teams running and there is a lot of pressure on performance throughout the whole company because as you not have outlined this in a broader context of NaAc we are facing some difficulties in performance materials. We have currency headwind and that means all units in the group has to perform to get up actually to make up for the shortfalls in other leaderships and -- so that’s my also CH colleagues will have to contribute.

And if we go a little bit more into the details on what happened or how the 11% organic sales in CH are composed, I can tell you that first and foremost we have seen very strong performance in our strategic trends which is on [indiscernible] had a good quarter and here we had some, I will say, I don’t want to call it one-time effect but a very spike in sales in EMEA region where we had a very good very strong uptick. And when we look also across the regions and we have seen a pretty balanced good performance across the regions with nice growth, especially in APAC and in Latin America but also positive moments in Europe, EMEA as I said driven by 10 of 7 seats that I’ve just mentioned.

Gunnar Romer, Deutsche Bank. Thanks for taking my questions.

The first would be on Life Science again and Process Solutions. So, I totally appreciate the exciting longer-term growth prospects here, but I would like to come back again on your effective visibility in near term, especially in the context of one of your competitors signaling that the fourth quarter should see better momentum again also adjusted for comp effect.

So, I was wondering whether you shared the view that the worst is behind in terms of destocking and what your effective visibility is on that. Second question would be on Performance Materials sequential development, same sales as in the third quarter, but a significant difference in terms of margin, 200 basis points almost.

Just curious what has driven that and what is the more or the better indicator also for the quarters to come? Thank you.

Gunnar, thank you for the question and thanks for also referring to what the competition you’re seeing right. So, let's just return back to what we are seeing overall.

Mid singles digit growth where global strategic accounts are gone soft on us, but we see a good recovery from regional accounts as well as our active formulations business. You're seeing many competitors talk about the slowdown probably much more significantly than it would be have.

We are admitting those. I’ll show we paid attention to that and seeing some growing negative.

And much weaker than what we have reported especially those who have high bio production exposure. So year-to-date it is a salient feature across the industry and if anything, we have regained or gain market share during that timeframe.

So, I feel very good about the relative performance, the visibility on the destocking or the working capital changes is not as robust as that you mentioned. I don't think we have a clear idea exactly what date which quarter, this next quarter or the quarter after that that this will be finished.

Forecast accuracy is not as robust as I think one would like to see. So that’s said I come back to my main points.

No market share loss. Mid-term it's a super market.

We expect volume growth to be robust, but it’s kinetics problem. And I think it would be too much to try and predict exactly when this impact is behind us.

I think that’s that I could tell you today.

Gunnar, on your question on PM, the small sequential margin improvement that we can see in Q3 over Q2 2017 is predominantly related to some temporary mix effect, the businesses, customers, products and of course also conscious cost management. For PM basically the same is valid what I just said in the context of consumer health, everybody has to contribute and, of course, I mean that PM colleagues are under specific pressure as we have to somewhat compensate the weaknesses that we see in top line from or within our cost structures having, of course, in mind that due to the high profitability of the Display Materials business, leads us to have more efficiency in the cost lines are somewhat limited and I would strongly advise that in light of the ongoing adjustment process, I would not recommend that you extrapolate this level going forward.

Thank you for taking my question. I mean two questions please.

The first one is a follow-up on consumer health. Can the strength of the business unit has an impact on the strategic review I mean would you consider potentially keeping the unit as an option amongst other options?

The second question is on Sprifermin and Phase II forward readout. What are the next steps for the product, I mean when should we expect Phase III to start, what kind of comparator would you choose and the timing for the completion of the Phase III?

Thank you.

Let me start with your first question. On CH the point is we Vincent we never said we are considering strategic options because of good or bad performance of the business.

The point is much, much more strategic as we said, we have made a strategic choice that we say we have prioritized innovative medicines, investments into the healthcare pipeline and we will not have enough funds also given the circumstances that we have high leverage Aldrich Sigma acquisition, in order to invest in CH in a way that we would be able to leverage its full business potential so that is why we currently have the hypothesis better strategic owners and that is why we are exploring these strategic options. Of course, it is nice and the business is now performing well but it actually does not change at all our strategic intent to explore these strategic options for the business.

On Sprifermin so first of all we are happy to see that the product study met its primary endpoint and significantly demonstrating close to kind of increase in joint cartilage thickness. When we look forward it is actually too early to make now detailed comments.

The regulatory pathways at the moment under discussion with the authorities and we cannot yet speculate on potential timelines. What I can tell you however today is that a filing based on the available Phase II data is not being explored.

Yes, good afternoon. Peter Spengler with DZ Bank.

Thank you for taking my questions. First is on MAVENCLAD is it correct that the sales were in the range of 3 to 4 million in the third quarter?

And then also on MAVENCLAD you received the approval for the UK, could you elaborate on the launch and pricing process in Europe? And as well on the decision-making process about filing in the United States, do you have a [indiscernible] sales number and on the milestone payment for Merkel cell approval in Japan and Europe, can you give us a number there as well?

Thank you.

A lot of questions, so I will work through. For Mavenclad, the numbers you have outlined are correct on the U.S.

So, the situation has not much changed. So, we are in consultations with the FDA.

And we expect the decision around the end of this year whether we are going to file in the U.S. For Bavencio, the Phase development is smooth.

We see first contributions in the P&L and we expect a sales number around EUR 20 million by the end of 2017, in our P&L. On the milestones you can assume we have realized around EUR 50 million from the two milestones, two recent milestones that had achieved for Bavencio in Europe and in Japan suppose together around EUR 50 million.

And your last question was a launch pricing EU.

Yes.

Yes. So, I mean we have launched already in Germany.

And we have received a nice recommendation, positive nice recommendation in the UK, which is a pretty unique thing, and so upon the nice final guidance and NHS must provide funding within 90 days. In England, Wales and Northern Ireland, however complimentarily the NHS has approved a commercial agreement allowing immediate access to England ahead of anticipated final nice guidance in early 2018.

Does it answer your question?

Thanks for taking my questions. Steve on Healthcare, please.

Firstly, on TGF-beta trap. I was wondering if your plans are forming up for timeline for next presentations of data, as I understand is it likely to be one arm at your conference in January or further date in February maybe.

And then secondly on Rebif I believe you said there was destocking effect on U.S. sales.

Is that correct? And can you quantify that for us Steve.

Thank you.

So, on TGF, so we will have on TGF, as I said, I said earlier to a question, so we will be presenting the abstract that we have already -- we are already submitted a couple of months ago at the upcoming conference, but we will have an oral update on Friday. Furthermore, this data, along with promising emerging data and PDx naive NSCLC second line.

We are pursuing support our plans for the continued development [TGF benefit] in further trials in patients with NSCLC. So, in total, it’s important to note, we talk about four different indications.

And, so on -- at the FITC, we have shown data for heavy pretreated NFCLC resistance refractory patients and putting this data into context we also mentioned that we plan to present data for PDx NSCLC second line at the scientific congress in 2018. Additionally, also as mentioned at the Capital Markets Day we plan to present initial data for two more calls which we have not yet disclosed what that will be, at a scientific congress beginning of 2018.

Question on rabies. So, let me first make clear that we have not seeing a destock or not an exclusive destocking effect in the third quarter.

It was more a build-up of inventories on the wholesaler side in the second quarter of 2017 and we now see this a little bit flowing back, the adverse effect coming in on the volume effect. I mean you can make your math.

You know the price increases that we have done and yes, the volume for this quarter was somewhat more negative than we were used to in the past.

This was the last question. And with this I will hand over to Marcus for the closing words of this conference call today.

Yes, so thanks, thank you very much for dialing in. And can assure we are full steam ahead towards the end of the year to deliver what we have promised and we are following our guidance policy that you are well familiar with, that means in February and March when we leave the Q4 numbers you will get first qualitative claims on 2018 which will be then followed by detailed financial numbers and our guidance for the year with our Q1 release in May.

Thank you very much and yes see you soon and meeting you. Thank you.