Merck KGaA

Constantin Fest - IR Stefan Oschmann - Group CEO Marcus Kuhnert - CFO Udit Batra - CEO, Life Science

Matt Weston - Credit Suisse Gunnar Romer - Deutsche Bank Simon Baker - Exane Luke Sergott - Evercore Peter Verdult - Citi Daniel Wendorff - Commerzbank Michael Leuchten - UBS Dennis Berzhanin - Equinet Rushee Jolly - Bernstein Sarita Kapila - JP Morgan Marietta Miemietz - Prima Venue. Florent Cespedes - Societe Generale

Many thanks, Joe, and a warm welcome to this Q2 ‘18 Merck conference call. My name is Constantin Fest, Head of Investor Relations at Merck.

For this call, I’m really pleased to have with me here today, Stefan Oschmann, our Group CEO; Marcus Kuhnert, our Group CFO; as well as Udit Batra, our Life Science business sector CEO. So in the next half hour, we’d like to run you through the key slides of this presentation.

And then, as always, we’d like to take all of your questions. And with this, and without any further delay, I’d like to directly hand over to Stefan to kick off this presentation.

Stefan?

Thank you, Constantin. And welcome everyone to our Q2 earnings call.

You have analyzed our numbers already in great detail this morning, so I will be brief. Just one point, they now exclude our Consumer Health business.

However, our process to sell the business to Procter & Gamble is on track and we expect the closing of the transaction for the end of Q4. And just last week, we received the acceptance of our US filing for Mavenclad from the FDA, which is good news.

Operationally, Q2 was a solid quarter with 5.2% organic sales growth across the Group and the largest contribution from Life Science followed by Healthcare. In terms of EBITDA pre, we recorded a 2.7% organic decline versus Q2 2017, which is largely due to the sales decrease in display materials and the milestone payment for Bavencio in the prior year.

Currencies were again a major burden for us in Q2. Marcus will give you more details later and they reduced our net sales by around €170 million versus last year and our EBITDA pre by €120 million.

However, towards the end of the second quarter, we have seen some relief in this respect, and we expect that the currency burden for the rest of the year will be slightly lower than what we had expected so far. When it comes to the organic development of net sales and EBITDA pre in 2018, we confirm our 2018 guidance.

For net sales, we expect plus 3% to plus 5% organic growth and for EBITDA pre a decline year-over-year in the range of minus 1% to minus 3%, and this should lead to EPS pre of about €5.0 to €5.4. I’m now going to slide 6.

When we look into the details, you will see that Life Science had again a strong quarter driven by good demand across the board and Udit will elaborate in a minute. We also saw a visible pickup in momentum at Healthcare compared to Q1 2018.

Sales of Mavenclad and Bavencio continued to rise and our Fertility and General Medicine Franchise were good growth contributors. Sales at Performance Materials were actually stable compared to Q2 2017.

In particular, the very good double-digit growth of our semiconductor materials business could offset the sales decline in display materials this quarter. The minus 2.7 year-over-year organic EBITDA pre decline is equivalent to a decline of around €28 million and consists of a minus €23 million organic decline at PM and minus €12 million at Healthcare mitigated by plus €13 million growth from Life Science and we will give you more details later in the presentation.

Slide 7, little to say on the regional distribution of our sales. No major shift versus the previous quarters.

You may notice the pick-up in growth in LatAm and Europe compared to the first quarter and this is primarily due to Healthcare where we saw recovery in several products that had been a bit sluggish in Q1 ‘18 e.g. Glucophage.

The recovery in Asia Pacific is related to Display Solutions. However, this is very much a prior year base effect, i.e.

a very weak Q2 2017 and I would recommend to not extrapolate this into the coming quarters. And with this, I’ll hand over to Marcus.

Thank you, Stefan. And welcome also from my side.

I'm now on slide number 9, just a couple of points from my side on the headline figures. Due to the strong organic sales growth we have seen in the quarter, investments in working capital were around 150 million which is the main reason for the lower operating cash flow.

Net financial debt by the end of Q2 has risen versus Q1 by around €700 million. This reflects the lower cash flow in the quarter on the one hand and as usual in the second quarter our dividend payment.

I'm going to Slide 10. As far as our reported figures are concerned, our EBITDA pre for Q2 is a minus €145 million lower for the reasons discussed before.

However, EBIT declined more strongly by minus €225 million compared to last year. The main source was difference compared to the development in EBITDA pre is that last year we had to write up our plant in Vevey.

This benefited our Q2 2017 EBIT by around €70 million. The financial result is about stable compared to last year and we continue to expect the interest result this year in the range of €230 million to €240 million.

Remember that we said that we are paying down predominantly first the variable interest-carrying debt which is close to zero. Later on, when we are going to pay down the fixed interest-carrying debt, then we will see much, much more visible impacts that are not only in the balance sheet but also in the P&L.

Now, we go to our businesses, and I jump to Slide number 11. Healthcare had a good second quarter 2018.

The base business was on track and delivered organic net sales growth of 4.7% year-over-year so that we now achieved the 29th consecutive quarter of organic growth. Our newly launched products Bavencio and Mavenclad continued to grow and contributed a combined 37 million in sales in Q2, nicely up from the €25 million that we have seen in Q1 2018.

Thereof, Bavencio generated €17 million and we expect it to reach mid double-digit sales in 2018 and Mavenclad climbed to €20 million net sales and with this the product is well on track to reach the announced high double-digit million euro sales in ‘18. When you look at our large established products, Rebif and Erbitux, no material changes in trend compared to the previous quarters, whereas Fertility and our General Medicine business were solid growth contributors in Q2.

In terms of EBITDA pre, the €70 million delta year-over-year is due to two main effects. Last year, we received a €36 million milestone payment for Bavencio, which is only partially offset by €17 million income for Egrifta, which is included this year.

And secondly, FX especially emerging market currencies reduced EBITDA pre by €59 million versus last year. Now, I’ll hand over to Udit for a deep dive in Life Science.

Thank you, Marcus. And a very warm welcome to all of you from my end as well.

I’m now on slide number 12 and we will start with the sales. As you can see, we are again near an 8% organic growth for third quarter in a row, Q4 as a reminder was 8.9%, Q1 8.8% and now at 7.7% organic growth versus previous year.

And by this time, you would have also seen that the market in the Life Science business is quite strong and we are again close to the top-end of our peers. Let me give you the perspective from a portfolio customer and geography view.

From a portfolio perspective, Process Solutions again had a very good quarter in excess of 12% organic growth. Bioprocessing, which is about 70% of Process Solutions in fact grew in the mid-teens and you would have seen that some of our peers have reported in the lower teens as well.

And again, the standout performer is single-use and hardware going in excess of 20%. The customers in addition continue to respond extremely positively to our recent launches, especially our large mixers for cell culture media and the Mobius MyWay single-use portfolio.

For Research Solutions, this is also very nice result mid-single-digits, close to 4% organic growth and the strong growth here is coming from our immunoassay platform solution products which include multiplex kits and SMCxPRO instruments for protein detection. And this business in particular benefits the most from the e-commerce platform, where 50% of the sales for Research Solutions go through e-commerce and here we see almost double the sales growth versus the offline business.

And finally, Applied Solutions, the third business unit also had in excess of 5% growth around 5.5%. And here Lab Water was the standout performer growing in high-single-digits with terrific launch for our Milli-Q IQ platform.

So from a portfolio perspective, you can see strong growth across the board. Turning geographically.

Asia Pacific, in particular, is standout performer. And here, Process Solutions grew in the mid-20s.

In fact, if you look at China, in -- specifically, overall in China, we grew in the mid-20s, and Process Solutions was even higher than that with Research and Applied in the mid-teens in China. Turning now to the customer perspective.

The most dynamic segments were pharma and biotech, as well as diagnostics and testing, both in low-double-digit growth, and academia, really nice performance there with mid-single-digit performance. So you can see a dynamic sales growth this quarter and to really continue what you’ve started to see in the last two quarters already.

Let me now turn to the EBITDA pre. This quarter, we saw €452 million in EBITDA pre and that’s a margin of around 29.3%.

While the underlying dynamics of the business are consistently positive, both on sales as well as through careful cost management, we had to digest a negative currency impact of around €16 million. In addition, there are several non-repeating unfavorable impacts in this quarter that reduced the EBITDA pre by about €20 million compared to what we would have seen otherwise.

And let me expand these in a bit more detail on the next slide. Now I’m on Slide 13.

So there are three factors that explain this roughly €20 million swing, and let me take each in turn. First, we have a portfolio mix impact of roughly €5 million and this will not repeat.

As I mentioned earlier, we have seen a strong growth in single-use and hardware in the first half of the year, especially in Asia, with hardware in particular, you plant the hardware and then the consumables follow. A case in point as I mentioned, these power mixers which are uniquely designed for powder and liquid to mix and these are very, very popular with our customers.

Once installed, the bag inserts and consumables follow and this you will see in the third and the fourth quarter. In addition, we saw some other one-time orders.

Usually, we would not comment on these kinds of topics. These are normal in the Life Science business from quarter-to-quarter as orders are quite lumpy.

The second impact is around something that we have spoken in the past. We have been building some attractive niche contract manufacturing businesses and service businesses.

I have spoken about these in the past. We are a leader in viral -- in the manufacturing of viral vectors for cell and gene therapy.

We are also -- we've also established process development on an early-stage clinical manufacturing business that is really taking off nicely with our customers. And both of these businesses as such are doing extremely well but they are contract manufacturing and services businesses and often costs are incurred before the revenues come in and this is what you see, a phase lag in cost and revenue recognition when the batches are released and shipped.

So you should see this impact again reversing in Q3 and Q4. And finally, the third reason.

This is about the €10 million impact. You know that we are in the later stages of Sigma integration.

This also means that we are currently changing the production and logistics infrastructure and this leads to an inventory write-down in the second quarter. So to put it in context, we carry about €1.3 billion in inventory, so €10 million is not a lot.

To be clear, these are just one-time impacts and without these you would add back the €20 million or so and you would reach again the EBITDA pre margins that you are used to seeing about 30.5 -- in excess of 30.5%. And if had not been for convergence of all of these impacts, we would have not really mentioned the one-time impact.

I am moving on to slide number 14. And to bring you back, why we are confident in our full year, let me reiterate two points.

Firstly, our synergies of €280 million would be fully realized in 2018. And second, our guidance of sales growth between 5% and 6% and our organic EBITDA pre growth of 8% is confirmed.

On this slide, you see the underlying dynamics in the markets, and I won't go into much detail. And you can see across the board, there are very nice tailwinds.

So in summary, the momentum in the business is very much intact, and we should be able to compensate these one-time EBITDA pre impacts in the second half to reach guidance. With that, let me hand over back to Marcus.

Thank you, Udit. And I am going now to slide number 15, addressing a little bit the details of Performance Materials.

In PM, net sales were organically about flat this quarter and EBITDA pre is organically down by almost 10%. Our three pillars alongside display developed well in the second quarter and mitigated the ongoing decline in Display Materials.

The development in liquid crystals is as expected and as highlighted in the call on July 1st, not worse, but not better either. Like in the previous quarters, EBITDA pre and margins were affected by the ongoing sales decline in the liquid crystals business and also by the unfavorable FX environment.

In fact, the latter effect reduced our margin in Q2 by 170 basis points. We confirm, however, our guidance for PM’s organic sales and EBITDA pre development in 2018 and we also confirm that EBITDA pre will reach the trough in 2019.

We gave you more details on this topic in our recent call. On slide number 16, the balance sheet, nothing spectacular here.

Our equity ratio now stands at approximately 42%, another slight improvement versus March 2018. Net financial debt rose to €10.7 billion compared to December.

As already said, this is due to the deterioration of our operating cash flow amidst a buildup of working capital from the strong sales development of the Group, as well as the dividend payment in Q2. Our net debt-to-EBITDA pre ratio is at 2.6 times, so deleveraging remains a top priority on our agenda and we are also firm that we will reach the target of a net debt-to-EBITDA ratio below 2 by the end of 2018.

On slide number 17, I had already explained the key drivers of our cash flow, so I’ll be brief here. You see major change in the D&A line compared to last year.

This is due to the mentioned Vevey plant write-up that we discussed a year ago. Working capital investments, I’ve already referred to, and the change in other assets and liabilities, hwere we received the cash inflow for the milestone from the first quarter over -- the overall negative effect comes because of tax payments included here and also very prominent in the second quarter the payout of the bonus accruals which normally means a cash flow burden in this second quarter.

For the guidance, I hand now back to Stefan.

Thank you, Marcus. Please remember that in March, we split our guidance into the organic and the exchange impact at the sales and at the EBITDA pre level.

Further as with our reported results, we have also shifted to the ex-Consumer Health scenario for the guidance, as explained to you back in May. When you compare our guidance to May, you will notice slight changes in our FX assumptions.

However, we confirm our expectations as to the organic development of sales and EBITDA pre. For 2018, we expect net sales to grow organically by plus 3% to plus 5% and EBITDA pre to decline by minus 1% to minus 3%.

And please let me give you a couple of additional details. First we see the average euro-US dollar rate for 2018 now in the range of 1.19 to 1.22.

And here, the developments in the recent weeks indicate that FX headwinds will be a little less negative for us than expected. Secondly, this tends to be beneficial for our businesses’ EBITDA pre, predominantly Life Science and Performance Materials.

Thirdly, given our current hedging levels, this will be entirely offset by higher expected hedging losses. Therefore, corporate/other costs will be in the range of €360 million to €400 million and that is above the previous €320 million to €360 million.

Overall, FX should reduce net sales by around 3% to 5%, slightly less than expected so far and EBITDA pre by an unchanged 5% to 7% for the reasons that we just discussed. And now to your questions.

Three questions if I can, please. Firstly, the current run rate of the Healthcare business, particularly with the increased spending on R&D suggests that your full year divisional guidance is a real stretch.

Now, can you reconcile that difference to us? Are we assuming some change in costs or revenue in the second half, or are you assuming some partnership income from either of the assets that you flagged?

And I guess that leads on to, can you give us an update on how any partnerships are progressing with TGF-beta trap and BTK? Secondly, Udit, you've flagged the increasing demand, particularly in Asia for bioprocess manufacturing hardware.

I think lots people will be interested in your outlook for that demand. Do you think that it is sustainable at the current mid-teens rate going into 2019 and the midterm or do you see a clear bolus that you're working through and expect a modest slowdown over time?

And then finally, just a quick product question. Other and Fertility seems to have had an extremely strong quarter, I think, up 30%, so basically everything ex going left.

Can you just explain what happened? Was there a stocking effect or is that a sustainable level going forward?

Thank you. Marcus is going to start with the Healthcare -- financials for Healthcare.

Yes. Matthew, Marcus here.

Thanks for your questions. So first of all, you are right that looking or comparing the EBITDA pre of the first two quarters with the guidance suggests that we are a little bit backend loaded and shall produce more EBITDA pre in the third and fourth quarter.

This is indeed correct and it will come from strong and ongoing operating performance, which is even expected to become stronger in the third and fourth quarter. And more over, also we expect to recognize a one-time income in the second half of the year which for competitive reasons we cannot disclose now further, but we will communicate once it occurs and that should close the gap that you currently see when you look at the numbers.

For the update on partnering, I would hand back to Stefan.

Yes, Matthew. I will answer the partnering question and the Fertility question.

So on partnering, you heard us say that we are actively pursuing partnering projects for TGF-beta trap and/or evobrutinib, BTK. What I can confirm is that we are actively working on this.

If such partnerships occur, they would be material and they would be communicated on a -- within a respective time frame. When it comes to the Fertility, Fertility franchise -- the Fertility -- rest of the Fertility portfolio shows further increases in particular strong growth in China and in Europe and rest of Fertility is smaller products that grew very strongly.

That's Pergoveris, Ovitrelle and Cetrotide, and we've launched the Pergoveris pen, which is performing particularly well. And on the outlook -- question about the demand in Asia Pacific Life Science goes to Udit now.

Thank you, Stefan. Matthew, thank you for the question.

A couple of facts here, Asia Pacific as a whole group for Process Solutions almost had doubled the rate at which the rest of the business did, so 25-ish mid 20s percent. And in China, it was even higher.

We’ve seen the demand pick up quite dramatically, and you might have seen some press releases on setting up manufacturing and distribution centers, both in Korea as well as in China to support this demand. So we see especially for single-use, for cell culture media, for our mixers, for hardware, no slowdown in demand, especially in China, but also across the rest of Asia.

Thank you very much. If can cheekily just have one quick follow-on to Marcus' answer to the one-time payments.

I understand that you won't disclose what it's about. But can you at least comment that it does not refer to BTK or TGF-beta trap?

And cheekily, is there any way that you will quantify it for us?

Sorry, Matthew. I have said what I wanted to say.

The first one would be on Life Science. Quite impressive organic again.

However, even if I add back the €20 million one-timers, the margin would have been roughly flattish. And I was wondering Udit whether you can comment on that also on the medium-term margin outlook for the business because I believe consensus has the margin expanding also in outer years.

Just curious of your bigger picture thoughts here on the margin development going forward because when you grow the business north of 5%, I would assume you should have some operating leverage and just help us understand whether there is anything going on in terms of mix that could last longer here? And then for Marcus, a question on corporate costs, I realized that, that was up quite significantly quarter-over-quarter even adjusting for the hedging result.

So any specific reasons behind here, any comment around that would be helpful? And then just a housekeeping question, wondering whether you have already agreed on a date for the “meet the management” in the second half?

Thanks.

Udit will address the Life Science margin question and Marcus will take over.

Sure, so let me start. Thank you, Stefan, and thank you Gunnar for the question.

As a principle, we don’t give midterm margin guidance and Gunnar we won’t change that today. But to give you the -- give you some context on the underlying factors, you add back that €20 million you are at 30.5% to 30.6% in EBITDA pre which is exactly where we would expect ourselves to be.

In terms of the midterm outlook and the puts and takes, the organic growth is tremendous as you see, and you’ve seen our track record of generating operating leverage for the last two to three years since the integration was announced, so you should expect nothing different going forward. And finally, the synergies of €280 million will come, I think that, that is a given.

So with those factors, you can do the math and you’d see that the margins are going very nicely in the right direction, this €20 million will actually come back. Marcus?

Yes. Thanks, Udit.

So first of all, your question on the cost development in the segment Corporate. Here, let me let me make one comment in advance.

You referred to the comparison quarter-over-quarter and not quarter-over-quarter prior year, but Q1 ‘18 versus Q2 ‘18. I can tell you that this quarterly development -- so the analysis of this has to be done with some prudence or the conclusions out of that because we see, from quarter-to-quarter, by and then, fluctuations which are balancing out each other over a year.

That means quarter-to-quarter comparison within the same year is not so meaningful. If we just look on a year-by-year comparison, you will note that with the anticipate -- or with the guidance that we have given that the numbers are well below -- are expected to be well below €400 million in total and that despite the fact that in 2018 we will incur most probably significantly negative hedging effects from FX hedging activities, which suggests that we do not have an ongoing or let’s say underlying cost issue because that was also the level that you are used from us over the last, I would say at least one to two years.

And also please keep in mind, just as a short reminder that is no new news because we have communicated this already, I think by the end of -- or when communicating the full year ‘17 numbers that we have also reclassified a department namely Corporate Affairs, now under segment Corporate. So that is shown in 2018 in CO which was in former times allocated to the businesses.

So this is also in here. But all-in-all, I think this is currency and this is not an underlying cost issue.

And secondly, you asked for the date for the Capital Markets Day 2018. It is fixed already.

It is 16th of October and the invites will follow soon in the coming weeks.

Firstly, I’m going back to Healthcare and Matthew’s question. I wonder if you could give us a little bit more color on the outlook for the gross margin, a good performance in Q2, certainly stronger than Q1.

And I was wondering in terms of how we should think about the full year. Should we be thinking about Q2, Q1 or H1 as the best indicator of the full year gross margin in Healthcare?

And then moving on to corporate and the hedging losses, I just wondered if you could give us a recap on the policy and the extent of the policy on hedging. Because we’ve got negative currency effects and we’ve got FX losses.

Now, I’m sure you have a lot of emerging markets exposure in unhedged currency. So perhaps you could give us an update on the extent and coverage of your hedging policy?

Thanks so much.

I’ll start with your second question. So on our hedging strategy and you may remember that we've said, so we are hedging all booked positions at 100%, and we have a dedicated hedging strategy for the planned exposure which is two times a year updated.

We are collecting bottom up estimates for the net currency exposure. And on that basis, we are taking central decisions for hedging for the most important currencies of the Group which has off course forced first and foremost the US dollar but also the important Asian currencies, so Chinese renminbi, Korean won, Japanese yen and Taiwan dollar plus also the Swiss franc.

So these currencies are actively hedged and we are hedging in defined corridors for 12 months between 30% and 70% so for 12 months ahead; for the months 13 to 24 ahead between zero and 50%; and for the months 25 to 36 ahead, so for the third year, we are hedging in a range between zero and 30%. Given the very best currency environment we were experiencing in the first quarter 2018, we have actually increased the 12 months hedge ratios for the first quarter to the upper level of the corridor.

So that means all of the important currencies now are in the range between 50% and 60%. And given now the more benign development of especially the dollar but also the Asian currencies in Q2, that means that all of our hedge is currently produced negative results when we continue to rolling them forward.

Our current average hedging rate in the US dollar is between 1.19 to 1.20, as the current FX spot rates are significantly better and that has caused actually the negative results in CO. Moreover, there was also an effect in the second quarter which can happen and which is due -- it was a transactional FX effect from the steep devaluation of the Argentinean peso.

The Argentinean peso is a currency that is not actively hedged because it would be much top expensive. And in the second quarter, we had due to the steep evaluation a P&L effect in Corporate of around €10 million, something like that, because we have a hard currency liability in Argentina, which then simply depreciated against the other assets which are recorded in local currency and that was some kind of a special effect that we had currency wise in the second quarter.

Other than that, I think we have seen a normal picture in terms of currency behavior and we expect that the currency headwind is going to be milder going forward in Q3 and Q4 simply because the comparables are getting easier.

When it comes to Healthcare gross margin, please remember that we generally don’t give any guidance on gross margin beyond EBITDA pre. The margin is currently in the range of let's say 77% to 78%.

That’s also -- that's no a significant change when compared to prior year just in terms of the factors influencing this, this is a mixed bag of different factors. Rebif is a really high margin product that is declining as we had told you for many years, the products like Glucophage and so that drive our business in China and elsewhere are lower margin.

On the other hand the Fertility products are fairly high margin, they are growing well, the new product introductions, Bavencio, Mavenclad are naturally very high margin. And then you shouldn’t forget the FX impact on gross margin either.

Just a couple quick ones for Udit, so I just want to follow-up on the -- we were talking about on the Process Solutions. So this market has been on fire but a lot of your peers haven’t reported the strong growth that you guys have.

So, kind of where we are you focused that, that your peers aren’t and where do you guys think you’re taking share there? And then I guess more on the China commentary.

It was very helpful but if you just kind go into how that market looks a lot different than the rest of developed markets and where you're seeing the strongest growth there?

Udit go ahead.

Thanks, Stefan. Luke, thank you for the question.

On Process Solutions, I think as a whole you would have seen the market is doing pretty well and we find that there are at least two if not three different dimensions where we have a stronger value proposition. First, we have the broadest portfolio in the industry as you would know starting from cell culture media all the way to our final filtration.

And we’ve invested in each and every unit operation along the way. This has been really valued by many of our smaller customers and biosimilars customers and I’ll come back to that on the China question.

Then second, we've also seen that the consistent and constant launch of new products for each and every process step, each and every unit operation, then I mentioned the mixers. You go down the train, you will see new launches in chromatography.

You see new launches in virus filtration. You see new launches and developments in tangential flow filtration.

We’re leading the charge there and the customers are highly, highly appreciating that. So depth in individual unit operations and the breadth of the portfolio are both really distinguishing us in the market.

Then on your China question, it is indeed a market that really on fire, if I were to use that word. And again our end-to-end portfolio, really going to smaller customers and saying hey guys we can help you do process development and get you into the clinic as fast as possible with our end-to-end service, and you would be familiar with this from the past.

We had this out of Martillac, France. We expanded it into Shanghai and into Boston.

And really this has picked up quite dramatically, especially in China. And before we could finish our facility, we had our facility full and we’re thinking of expanding.

And secondly in China, the way you can gauge demand is by looking at how fast you have to expand our distribution. So we make our single-use assemblies in the United States and in Denver.

Our Chinese customers wanted the delivery to be much faster, so we opened up a distribution center and an assembly center in Shanghai as well to support them. So really all-in-all a broad portfolio, depth in each and every unit operation is helping us globally and in particular the breadth of the portfolio is helping us in China.

Thanks. It’s Pete Verdult of Citi.

Two questions just for Stefan, firstly on the pipeline. I see the abstract titles are up for ESMO.

I realize the dates, there’s embargo. But could you perhaps describe your enthusiasm around the additional trap data that will be showcased?

I believe comments that Merck made at ASCO talked about -- or your presentation at ASCO talked about at least one additional positive data set in a new tumor type. And then just on evobrutinib, your BTK ECTRIMS.

I know the lesion date is coming there. But can you just let us know whether we’ll see any relapse rate reduction data and if not when that’s likely to hit the market?

And then for Udit, the market just seems to be worked up on the lower Life Science margins despite a detailed commentary you’ve provided. Perhaps you could talk to the visibility that you have already now that the consumables pull-through is coming through.

And perhaps also touch on some of the commercial opportunities for gene editing and other new growth opportunities. Any quantification you can give would be appreciated?

Thank you.

So Peter, I’ll start with TGF-beta related ESMO abstract questions. The -- in addition to the previous cohorts that we have presented so far, we will now be reporting on biliary tract on gastric cancer that is a particular update from the ASCO G.I.

abstract. We are in a second line PD-x naive lung.

We have advanced head and neck. We have hepatocellular carcinoma, and we have post-platinum esophageal adenocarcinoma.

Two abstracts, that’s what you should expect, the most notable one of these would be biliary tract and gastric. Udit?

So to the Life Science -- yes. Thanks, Stefan.

To the Life Science question, Peter. Firstly, on the consumables.

You see in Process Solutions just staying with that for a minute, once the mixers are planted, the consumables come right after that. So we are not -- we have some visibility and the order book is quite good.

So, I can’t tell you more than that at this stage, especially on that particular one. But if you look at consumables across the board for the consumption of mabs, this is cell culture media, this is virus filtration.

I mean they’re really going nicely in the higher teens. So I think all-in-all, the fundamental dynamics of the consumables remains intact and if anything we are out going to market there.

So I feel very good about it. On your question on gene editing, especially on viral vectors, we are one of the largest contract manufacturers or viral vectors for cell and gene therapy.

This is out Carlsbad facility in California. We cannot -- we simply cannot fulfill the demand that we have.

We have so much demand that there is not enough capacity to fulfill it. So all I can tell you is that this is looking up.

In terms of quantification, I mean, it is a small startup in so far as business is concerned, but it’s a contract manufacturing business. So the costs are incurred first, and then once the batches are shipped and once they’re finished, the revenue is recognized.

And that’s what you’re seeing in the phasing. So again, I would not be too worried, because the batches have been done, they’re getting released.

And once they get released, we get paid. So from an overall standpoint, you should not see any impact in -- overall this market is growing very well.

And as I mentioned also in the past, there is more demand than capacity that we have. So we are always looking to expand that facility.

So I think there again nothing to be concerned about.

And the evobrutinib question, Stefan, on relapse rate data.

Yes. So as you know we have reported the Phase 2b results that were positive.

0e should note that this was based on the MRI as a primary endpoint. That will be published -- reported towards the end of the year.

That were a lot of questions about the Tecfidera arm, there’s a Tecfidera open-label control arm in this which is to be used for orientation, so therefore it's -- it would not be scientifically correct to draw any direct conclusions. We should note that the secondary endpoint in the study is the annualized relapse rate 48 weeks.

There is a continuous readout and that will be reported when available. Then -- it was a couple of questions about an outlook for this in the context of partnering or not, so we have identified MS for a evobrutinib as a focal area and we will -- irrespective of the partnering time line we will initiate the respective Phase 3 program.

Three questions I have, if I may. First question would be on your organic growth guidance for Life Science.

All three questions are on Life Science, actually. The first question is on the organic growth guidance for the Life Science division.

And given what you have shown on organic growth in the first half and what you guide for the full year, is there any specific factor we should think of in second half why organic growth should only be in the level of 2% to 4% in the Life Science segment? And my second question is a follow-up question to Gunnar's question on the margin actually.

And where are we with regards to the realization of synergies in Life Science? And assuming a benign currency environment and the full realization of synergies, where would the adjusted EBITDA margin potentially have been in that business?

And the last question is to one sentence you said, Udit, on your Research Solutions business. If I got it right, you mentioned that 50% of your Research Solutions sales go -- are generated via the e-commerce platform.

And where do you think is the ceiling to that? Is that 100% at one point in time?

Or what are you currently working with on that side?

Udit, go ahead please.

Thank you, Stefan. Great questions again.

Firstly, on organic growth, you would remember from last year that quarter-on-quarter the growth accelerated from Q1 to Q2 and Q3 to Q4 and in Q4 we ended up with about 8.9% so it's really a phasing impact and a comparable topic where you will see the growth versus last year in Q3 and Q4 as in sales growth slowing down just a little bit because the comps are higher. To your synergy question, two parts.

One as I mentioned these one-time impacts of about €20 million, if you added back we are very much on track with where you are expecting to see -- where you would expect to see ballpark the margin to be at this point in time. That said, I would caution against looking at quarter-on-quarter evolution of the EBITDA pre margin.

I think in this business as you well know it’s a lumpy business, things move from one quarter to the other and I can just completely confirm that the €280 million will be delivered by the end of the year 2018 and we will see this in the P&L. So this is what we’ve said all along and I will confirm it given the visibility that we have today.

So synergies are very much on track. And the reason you see some of this now is we focused first on admin, then marketing and sales.

And finally, as we have said even at the announcement of the integration the third step would be supply chain, so you see some of those impacts coming through now. And then finally on Research Solutions, thank you for that question on e-commerce, I mean e-commerce is super exciting for us.

We have been highly successful in putting some Millipore and old Merck products on sigmaaldrich.com and this has lifted the overall sales growth. I don't look at it as ceiling, or a percentage of sales targets.

I think of these as two different ways of going to the market. Let me explain just a little bit.

In our Research and Applied portfolio, we have products in Lab Water, which are instruments. We have specialty products in Biomonitoring.

These require in face-to-face selling, specialty selling, and that is complemented by e-commerce. So I don’t see -- I don’t envision a world where 100% of our sales will be invoiced through e-commerce, I do expect since it’s growing faster for it to become a larger and larger proportion but I also expect the specialty business to be growing faster.

So I don’t want to give you any guidance on what percentage it will be but you can expect the e-commerce portion to continue to increase as we invest in that area and we leverage our leadership position.

Two questions for Udit please and they're on timing and phasing. Udit, it's -- late machine placements have happened for quite a while.

I know you referred to the mixers -- the powder mix, but single-use fermentors have been in place for a while. So why are seeing -- why are we calling out that effect now, what makes the powder mixers have bigger effect than maybe single-use would been in the past and why is the consumable pull through bigger here, any more color on that would be helpful to just understand the timing here?

And then on the dissolving of the geographic model, in other parts of the Life Sciences industry or Healthcare industry inventory write-ups happen fair early. So I was wondering if you could talk a little bit why the dissolving of the geographic model is something that you’re doing last and is there any other final bigger piece of the puzzle to realize the synergies that are outstanding, that would also result in one-offs that we should expect?

Thank you.

Udit will answer the Life Science question, Marcus will give you details when it comes to the timing of dissolving the write-ups.

Perfect. Let me start and then I’ll hand over to you Marcus for the timing and the inventory question.

Look, it’s a great pick up Michael that -- I mean we usually don’t call -- we usually don’t out these quarter-on-quarter impacts I mean just because we were commenting on the other topics, we mentioned it as a reminder that this business is lumpy. You will not see us calling out hardware and one-time placement of hardware that leads to consumables that often, right?

So this is an exception and you’re right that this is not something that is a change in the underlying dynamics of the business. So as I commented on the three factors.

This is the one that where I would say, this is not even worth mentioning. But we mentioned it given the magnitude of the challenge that we saw in this quarter.

Let me hand over to Marcus for the other two questions.

Thanks, Udit. So yes, I think Michael, this is a fair question.

Let me remember you that the sequence of synergy realization that we have given very, very early in the process, so we have said, we have acquired Sigma-Aldrich and the overall setup is quite complex. So that it will take a while until all of the synergies are realized.

We have started with this end of 2015 and the synergy ramp up is now going ‘16, ‘17. And finally, as Udit has just said, we are ready to deliver the full €280 million in 2018.

We started with the low-hanging fruits, with the easy stuff. That means mostly the admin thing, yes?

So for example, we need only one legal department, only one accounting department and all this kind of stuff. This can be done pretty quickly and this is what we have done.

A little bit more complex is everything what is related to marketing and sales. I think we -- and especially Udit, we have stressed very early on right from the beginning that mission critical in the integration is not to disturb the top-line and not let the customers feel and see that we are in midst of a complex integration.

So we took some time to think it through and I think we have done pretty well so far. And the last and the third piece is actually optimizing supply chain and manufacturing footprint.

And this is consequently the exercise that is running now. We have started this in 2017.

We are, let’s say, on the way to finish it now and as a context of this exercise, so dissolving Sigma-Aldrich supply chains, combining it with legacy Millipore supply chains and manufacturing footprint, et cetera, we have discovered in this process a couple of inventories actually which were built earlier -- some quarters earlier for operative reasons where we have seen we won’t or cannot use them anymore. And so, we have written them down.

This is the explanation to why is it now. Secondly, we believe that we are basically through with this exercise.

So, we do not expect anything more to come in the remainder of the year. And this from our point of view is not directly linked to the integration.

It was discovered in the integration. But the buildup was -- had -- or not really something to do with the integration, it was basically operating.

That is why we have not put it as exceptional, but why it shines up in EBITDA pre.

Hi. This is Dennis Berzhanin from equinet Bank.

Thank you for taking my questions. I just have a couple of questions related to EBITDA and EBITDA margins.

So one on Life Sciences, I know you mentioned there were some one-time effects, particularly startup costs with strategic initiatives related to gene editing and e-to-e Solutions. Just wanted to understand whether there will be any other related startup costs on other initiatives coming in the later quarters for this year, and whether there’ll be any supply chain consolidations as well?

Another question related to corporate EBITDA. I might have missed this.

But could you quantify exactly how much of the negative €106 million of EBITDA was related to the negative currency effects -- from hedging? And then final question on liquid crystals, I was wondering if you are able to provide a little bit more detail on EBITDA pre-margins for liquid crystals and its development year-over-year or any other further details regarding profitability dynamics there?

Thank you.

Udit is going to address the Life Science specfici question first and then Marcus will take over and I will address the liquid crystal question.

Sure. Thanks, Stefan.

Dennis, on the EBITDA pre and the startup costs, look the end-to-end initiative and viral vector manufacturing, it's a phasing question, so you incur the costs. Since these are contract manufacturing and services businesses, very often you incur the cost earlier and then when you ship the batch or you finish the batch you send the invoice and that's just a timing question, and it just happens to be that one fell in one quarter and the other will fall in another quarter.

Not something that we expect to see for the balance of the year given the order book that we have seen. And in terms of any other inventory topics, we don't have, we don't -- I mean you cannot put -- you can never say never but there is a very high degree of probability that we will not see this again for the balance of the year.

I'll hand over to Marcus for the next question.

So your question on corporate EBITDA pre, how much from hedging, in Q2 it was minus €17 million and we have also incorporated into our guidance that obviously when we look so for the full year, we have seen a very positive effect in H2 last year. So this year H2 most probably will be negative.

So the delta will be actually meaningful and that is however reflected in our current guidance where we now believe that corporate will be in the range between €360 million and €400 million minus.

On liquid crystal margins basically can only reiterate what we said on July 3rd and I don’t think I need to really repeat that. Basically we’re expecting margins to approximate 30% level in ‘19, please don’t forget that LC is now less than 50% of our PM business, and in Q2 in particular we've seen exceptionally strong growth in Semiconductor Solutions business within LC.

As you know we have these different modes and they are in very different competitive situation, the strongest performance was delivered by UB-FFS.

Hi. Three questions please.

So firstly on rebates from US. If we look at the split trends over the last quarter, the realized price of rebates looks to have increased considerably.

And so what's the basis for that? Has there been any rebate adjustments?

And then secondly on PM. So we know that 2019 will be a tough year, and you've guided to expectations to the growth post '19.

But I hope you can provide a bit more detail on really the quantum of decline we might be able in '19 and what we can expect for the other sub divisions as well?

Yes, I will start with the ‘19 outlook questions. We had -- generally we don’t give guidance beyond the ongoing year.

We have -- in exceptional situation we’ve given a reassurance to the markets about our ‘19 expectations but we will not split this up on per business unit basis or below that. But please note that we are maintaining that we’re reaffirming our expectations.

And when it comes to your rebate questions, we see that in the US market, market shares within the interferon markets have been stable. That is mostly due to high retention rates and physicians and patients have a -- there is known long-term track record.

And we had a price increase in the first half of year. We have recently announced that we’re not planning any further increases this year.

And overall we expect sales to decline organically in 2018. And Q2 does not indicate an improved run rate, another factor maybe that you should also expect the integration of -- if approved in the US of Mavenclad into the joint multiple sclerosis franchise.

Just a couple of questions on Mavenclad. So could you talk about the uptick that we've seen in the EU to-date?

And where we are in terms of the rollout? And how confident are you in meeting your guidance of the €100 million for full year?

Thank you.

Thank you for the Mavenclad question. First of all, our guidance was high double-digit and we’re maintaining that guidance.

We are -- we have generated revenue of €20 million. So we’re tracking the launch of Mavenclad versus benchmarks and these are oral competitors in the high disease activity space and we’re pretty happy with the performance of Mavenclad.

So far you should note that the Mavenclad performance is influenced by three factors going forward. The big question will be US approval.

That will be -- that’s the biggest swing item but Mavenclad is approved in 38 countries right now, in quite a few countries it is on the market. So it's an amalgamate of us gaining market share where we have launched plus launching in new markets with the products approved but where we haven’t -- where we weren’t done with pricing negotiation -- pricing and reimbursement negotiations.

Yes, good afternoon. Thank you very much for taking my questions.

I think I have a couple please. One is coming back to Life Sciences.

And I apologize to get back on to the hardware issue again, Udit. But just to make sure that I understand this completely correctly.

Are you actually able to quantify the impact that the increased hardware demand had on sales and margins in Q1? And is the following the correct way to look at this.

Is it fair to say that there was a massive increase in the demand for hardware in Q2 2018 versus Q1 2018? And that is the reason why we have this unexpected negative margin impact.

And if so, can you explain why this suddenly -- this demand came on suddenly? And kind of also infer from our earlier comments that you are still expecting the hardware demand going forward to stay at approximately the same level as it was in Q2 but the margin effect is not going to be quite as negative because there is more consumables pull-through coming through relative to that extra hardware demand that you had in the second quarter.

And then I just wanted to ask you quickly Marcus on the Corporate and Other. You said that there are quarterly fluctuations outside of hedging gains and losses.

So is that some sort of a seasonality like the rest of the business where usually a Q4 and Q3 just have a higher cost base in the first half of the year or are there any random fluctuations and is there anything you can point out in that regard? Thank you very much.

Thank you, Marietta. Udit, go ahead please with the Life Science question and Marcus will take over.

Sure. Marietta, thank you for the question.

Let me clarify two points. One, in general, the quarter-on-quarter movements in Life Science are not something especially given the lumpiness of Bioprocessing that we have commented on in the past.

We commented this quarter in the context of the bigger move. In -- specifically to your question on hardware, this is actually good news, right?

I mean having hardware planted means that we are gaining new customers and you saw the explosive growth in China and in Asia Pacific overall, Asia Pacific was around 25% and China was even faster than that. And a lot of that has to do with getting hardware placed, not just the mixers, but other hardware placed and the consumables follow rapidly.

And I think you answered your second question yourself. You’re absolutely right, the consumables follow and the consumables will more than offset any other hardware placements.

But make no mistake, I view hardware placement in general as very, very good news. I mean what we’re benefiting from, just to put it in context, as growth that we see now in Bioprocessing was work that we did two, three, four or five years ago in planting our products into the consumer -- into the customers’ manufacturing process.

So I view this is very, very good news and this will be more than offset. So I hope that clarifies your queries.

Marcus?

Yes. Thanks, Udit.

Your question on CO and the fluctuations quarter-on-quarter, Marietta. I would say the answer is, so if you look on the segment Corporate, I would guess that around 70% of the costs around that is personnel-related and this should be indeed quite stable.

The other 30% is based on projects of all cooler, be it a key project or whatever. And here you have fluctuations which are depending on execution, on progress and it is quite unusual picture that normally you have in terms of cost incurrence, maybe sometimes a little bit slower start into the year than a more rapid ramp-up.

So that is why, I said it depends very strongly on the speed of execution how projects are progressing. The personal cost component normally is relatively stable.

And it goes without saying that the third component hedging gains and losses are also -- came also wildly fluctuating. And so all this adds to the fact that you normally do not see, let's say, an equal distribution of the expenses quarter-by-quarter when you look on the full year numbers.

Florent Cespedes from Societe Generale. Thank you very much for taking my questions.

Three quick ones. First, on Healthcare and EBITDA, could you remind us what is the dynamic on R&D and marketing cost going forward?

Of course you are still launching products and you have quite a broad clinical program ongoing. Second question is on Mavenclad.

Could you tell us from which products the patients are switching when they are initiating the treatment with Mavenclad? And in the US do you expect a specific restriction or some specific civilians program?

Any warnings? Black books?

And if you could share with us some discussions around the process with the FDA, with us, it would be great? And my last question is on Performance Materials.

When you flagged that OLED are growing dynamically, quite strongly, do you see an acceleration of the demand? Do you see any changes in the environment?

It’s a quite a naive question because I’m not familiar with this but any color on that point would be great?

So I'll start with your question on the cost line. I didn’t -- so I'm not sure whether I've fully understood your question.

So I think that your very first topic was D&A and here just to remind you that the D&A in Q2 is higher because last year we had this write up in Vevey. On R&D and marketing and selling, we said at the beginning of the year that we expect higher R&D cost in '18 over '17 due to the fact that we are continuing investing in our pipeline that we have eight Phase 3 programs running and that this will require some R&D investments.

We do expect actually not a big change in the second half of the year in terms of R&D investments but eventually a slight uptick compared to the run rate that we have seen in Q1 and Q2. So that means a slight backend loaded R&D spend in '18 when we compare H2 with H1.

On marketing and selling expenses, actually, we are preparing for potential positive approval results for Mavenclad in the US, that is a main driver of the incremental marketing and selling increase in '18 over '17. Here actually we are seeing not so much effect at this point in time because in this point in time we are also benefiting a little bit from the FX development.

However we expect also in H2 to -- that a little bit is coming on top from that and overall we should see a number for 2018 which is slightly above the number for 2017. That's how we currently see it.

And with that we feel comfortable that we are within the range of expectations that we have given at the beginning of the year for the overall EBITDA drivers in Healthcare.

So coming to Mavenclad, as a source of patients, we primarily see switches from other IDC -- IDCs related agents, Gilenya would be an example. When it comes to Mavenclad, US regulatory process is, obviously -- it would be premature to speculate on the outcome of that or any -- give any specifics on the label in terms of timing.

Just may be expect a standard -- we expect standard timing of the review, that’s why have guide toward a decision in the first half of next year. We also have a -- had several questions about AdCom.

The FDA has not indicated as to whether they wish to have an AdCom or not. What else can I say?

We see very good, very decent performance in the UK given the nice recommendation. We feel that our market access strategy is a good one and that a majority of payers react very positively to this.

When -- coming to OLED, no change versus the expectations that we defined in our call in July. We expect a mid to high single-digit CAGR for OLED.

OLED technology is picking up in display, mostly driven by handheld devices but we -- that also in China, these days we also see a continuation of the trend in large devices. But on the other hand, we do not see OLED technology rapidly replacing liquid crystals.

I believe this was our last question. And to conclude this call I hand over to Marcus for the closing words.

Thank you very much for joining us today. And I look much forward meeting many of you now during the upcoming road shows.

And of course we would be delighted to welcome you to our Capital Market Day on October 16th. Thank you very much and bye, bye.