Bayer AG

XETRA:BAYN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Bayer's investor and analysts conference call on the first quarter 2018 results. [Operator Instructions] I would now like to turn the conference over to Mr. Oliver Maier, Head of Investor Relations of Bayer AG. Please go ahead, sir.

[O. Maier, Head of Investor Relations]

Thank you very much, Sherry. I would like to welcome all of you, also on behalf of my colleagues, to our first quarter 2018 conference call. With me on the call are Werner Baumann, our CEO; Johannes Dietsch, our CFO; Wolfgang Nickl, who recently joined the management board, who will succeed Johannes actually post [ DHM ], and the different businesses are represented by the responsible management board members for Pharma; as well as we have Dieter Weinand; for Consumer Health, we have newly joined Heiko Schipper; and for Crop Science/Animal Health we have Liam Condon. Werner will start of today's call with presenting some of the highlights of the first quarter of 2018 for Bayer as a whole and for the divisions before we go into the Q&A session. [Operator Instructions]. Obviously, as always, I would like start the call today by mentioning the cautionary language. That is in our Safe Harbor statement as well as all the materials that we have distributed today. So with that, that's the easy part. I'd like to hand it over to Werner, the floor is yours.

[Werner Baumann, Chairman of the Board of Management & CEO]

All right, Oliver. Thanks and also good afternoon, ladies and gentlemen from my end. Also like to take the opportunity as Oliver already mentioned to give a warm welcome to both Heiko, who is here for Consumer Health for the first time, and Wolfgang Nickl, who will succeed Hanno. And for Hanno, it's actually your last quarterly call before you're going to retire. And with it actually it's going to be a good call and because it's a reasonably good quarter, I think, operationally. So that gets me into our performance for the first quarter. I think if you look at the report, it's really masked by the significant FX impact both on top and bottom line. The underlying looks quite a bit better. We have seen operational growth on a group level of about 2%. And also our earnings that came in at about EUR 2.9 billion was just about 5% below prior year and that is across the FX impact we have seen our group level at about EUR 160 million for the quarter and that has continued to be a theme for remainder of the year based on where currencies are at this point in time. Core earnings per share in the first quarter were almost level with prior year, despite the currency impacts, at about EUR 2.28 per share. Before we move into further financial performance on a divisional basis let me touch on where we stand with the intended acquisition of Monsanto. First of all, quarter 1 was another quarter where we made significant progress with our merger preparations and also on the regulatory front, and by the way also on the financing of Monsanto. Let me start with the regulatory side of this project. We received the conditional approval for the planned acquisition of Monsanto by the European Commission on March 21, 2018. We have also received a number of additional clearances, most notably in Russia, which took quite a while, Brazil and China and with that by now we have obtained 2/3 of the approvals needed with another just about 10 to come. As recent as early this week, the EU also issued their assessment of BASF and the BASF portfolio to be okay from an antitrust perspective, 50 intended acquisitions that we are going to divest to BASF. On the financing side, on the equity side, we signed an agreement with Temasek to subscribe 31 million new shares, which equates to about EUR 3 billion in fresh equity, and is of course totally clear that they are going to take that additional equity injection, which was issued at market into account when sizing the final rights issue that is still to come. We continue to work with the remaining authorities in order to close the Monsanto transaction as also guided in prior calls by quarter 2. So I can tell you and assure you that we remain fully on track. We are confident that we are going to close this transaction within the remaining weeks of the second quarter. And the constructions we entertained with the major remaining regulatory agencies are very constructive. In terms of update on the geometrics, we will give you some updates to the extent that we can at the time of closing. So you shouldn't expect any news on that front during the call today. BASF is going to be the sole outlets for all antitrust divestitures by and large. We signed the first kind of preemptive if you want so deal with them on October 13, 2017 already, which has an overall volume of about EUR 5.9 billion in proceeds. We will on top of the scope of the divestitures at that point in time divest our entire Vegetable Seeds business, our R&D platform for hybrid wheats, the remaining canola business, a number of research projects for non-selective herbicides, our digital farming business and some additional activities in the area of seeds treatment for an overall additional consideration of EUR 1.7 billion. So that totals EUR 7.6 billion for the entire divestiture, and if you look at the sales volume that is going to go to BASF with all of these efforts. It equates to EUR 2.2 billion if you look at the 2017 top line these businesses had. The entire transaction also with BASF is of course still subject to some regulatory approvals and of course the final acquisition, and the clearance of the final acquisition of Monsanto by Bayer. Up and until then, we will of course continue to operate these businesses that will later on be divested to BASF. With that, let me come to the divisional highlights of the quarter and I'd like to start with Pharma. Pharma operational growth totaled above 3% for the first quarter. We mentioned in prior calls that we have a baseline effect for the first half of the year due to the fact that then at that time also in 2017, this still had a normal order pattern of CSL for our recombinant factor VIII. If you adjust for the CSL effect, we would have grown by about 5% in our underlying. As in prior quarters, main growth drivers were yet again our key growth products and those continue with very, very solid and healthy growth dynamics. If you look at that section of our business, growth overall for our growth -- key growth products was about 14% in the quarter, Xarelto with plus 13%, which also led to an upgrading of our full year guidance, and Eylea almost 20%, it's 19% and you see that the growth dynamics of those key products remain solidly intact. We also reiterate our target to achieve the combined sales of our key growth products of -- towards EUR 7 billion in 2018. Adjusted EBITDA in Pharma was sound by about 6% in the first quarter, mainly driven by FX of about EUR 70 million, and there is a small remainder that is explained by higher COGS, higher R&D investments and slightly higher marketing and sales expenses that also contributed. On the FDA warning letter and the impact that we indicated to be around EUR 300 million for full year that remains unchanged for the first quarter. The impact we have seen was however, relatively limited. So the remainder of the majority of that impact is still to come in the remaining quarters of 2018. There's also a few updates and news on the pipeline in the first quarter. First of all, the date of the ALTAIR study, which Eylea demonstrated that injection appointment had an interval of about 12 weeks or more. Feasible and possible and we have submitted these data to EMA for the corresponding label updates. We also received the first approval for Eylea in China for the treatment of DME. We completed the rolling submission of the new drug application in the U.S. for larotrectinib. That's Glaxo compound the in-license for the treatment of TRK fusion cancers and expects approval in the later part of the year. With that, let me come to Crop Science. Crop Science sales came in just about level with 2017, which was a very, very strong comparative quarter. Adjusted EBITDA was down 7% year-over-year, again, to a large extent driven by negative FX of about EUR 44 million and somewhat higher cost of goods. Adjusted for the currency impact EBITDA was down by 3 percentage points. The adjusted EBITDA margin however, was up by 70 basis points to 36.4% in the first quarter, which shows a very strong focus on cost management, despite the fact that overall sales did not grow. Europe, Middle East and Africa showed a declining top line with about 9% reduction to EUR 1.3 billion in the quarter. The reduction in sales affected fungicides, herbicides and vegetable seeds to a large extent to -- actually driven by the still relatively cold weather in Europe and with that the last next half of the planting season. We also had an impact in France, in our Fungicides business where the regulatory environment and some political and regulatory uncertainty as far as the French market is concerned, actually were detrimental to our top line development. In Latin America, we saw sales progress by 5% for the first quarter. It was very much driven by very, very strong quarter in Brazil. That was partially offset by a decline in Argentina, due to the very, very dry weather conditions. We're also happy to report that inventory levels in Brazil are back to normal, totally normal. As a matter of fact, we are somewhat ahead of our inventory targets in Brazil by the end of the quarter. Let me now come to Consumer Health. As already indicated in our full year guidance for 2018, we expect another challenging year for the Consumer Health business, and you also see that clearly reflected in the first quarter. The first quarter shows the impact of the behind the counter position of the Chinese regulatory agencies for Kang Wang and Pi Kang Wang. These are the 2 most important products we do have in China and that led to a significant impact on top line development around 170 basis points. So adjusted for it, we would have been pretty much steady state compared to prior year quarter 1. And that adjustment in China of course also adds its impact on the regional performance with the 12% top line decline in the underlying in Asia Pacific. Adjusting for that China's underlying growth remains actually solidly positive with double-digit growth. We also have temporary supply interruptions at our Leverkusen side that impact our Consumer Health business, which accounted for about 70 basis points of the consumer health growth, and that was very much visible if you go down to product-by-product perspective in Canesten, and that will also continue to be the case for the remainder of the year, most predominantly in the first half. Alka-Seltzer Plus had a very weak performance with minus almost 15% despite relatively strong cough and cold season. And we are let's say a relatively small #3 player in the category, and we also lost some distribution to some delistings in the U.S. Bepanthen continues to perform very well as does Aspirin and also Elevit, which all showed very, very strong positive sales momentum. North America on the other side remained in negative territory with Latin America being on the other side positive in its growth momentum in quarter 1. All of these effects did have its impact on the bottom line, which receded by about 20% in the quarter. The [ SI ] were a number of things that need to be taken into consideration here. First of all, in quarter 1, 2017, we had a number of nonrecurring income items from tail-end divestments of about EUR 34 million, which is a large chunk of debt reduction year-over-year, and then we had another about 11% year-over-year in the comparison that is related to negative FX impact. Yes, so if you look at that, the quarter from an underlying earning's performance, it's actually not that bad also in terms of profile. On a positive note, we saw favorable cost of goods development that was very much driven by low arrivals and a true like-for-like basis, the adjusted EBITDA margin was around 22% in the first quarter, 2018. With that, let move to group guidance and that is also my last slide before we start the Q&A. To cut a long story short, the underlying guidance for all of our divisions will remain unchanged. The compounding effect of negative FX do, however, require a small adjustment, which is purely FX driven for our top line. There, we now expect a low single-digit decline to the sales number below EUR 35 billion for the year. And it also has it's bearing on our bottom line, our adjusted EBITDA that we expect a low single-digit decline as well based on the currencies as of March 31. So at the end of the quarter. Taking account -- into account these exchange rates, we expect again not insignificant effects on our top and bottom line for the remainder of the year, which is appropriately reflected in our guidance. On a core EPS level, we confirm our existing guidance, actually even including the additional Temasek shares to the 31 million shares that are increasing our share counts going forward. We expect core EPS to be just about at prior year level. Before concluding my remarks, I will say that we are quite happy with the first quarter, and we are charged now -- supercharged for the remaining quarters of the year, and we are looking forward to both a good underlying performance for the next quarters and, of course, the conclusion of the acquisition of Monsanto within this running quarter. And with that, I hand it back to Oliver.

[O. Maier, Head of Investor Relations]

Great. Thank you very much, Werner. Thanks for the update, much appreciated. And I think Sherry, we are ready to open for the Q&A session.

[Operator]

[Operator Instructions] The first question is from Sachin Jain of Bank of America.

[Sachin Jain, Managing Director]

It's Sachin Jain from Bank of America. Three if I could. Firstly, regarding Monsanto, I think there's some comments in the Wire this morning there are not around any further new divestments being small. Can I infer that is the remaining topic of discussion with the DOJ and any color on what those new divestments may be? Secondly, on that rights issue. You've previously given some colors to how to think about the size of that given various factors you've outlined before, but the market seems to have worked it's way down post-Temasek, rights issue size of mid-single-digit billions. Any comments on that and does the size of that change your view on an acceleration book bill versus rights issue. And then final question is for Heiko on the consumer business. I know you've only recently started with a new perspective on the business, I'm wondering if you could refresh us with your views on the previously discussed turnaround plan and your confidence in that.

[Werner Baumann, Chairman of the Board of Management & CEO]

All right, thanks Sachin. Let me briefly touch on your first question before Hanno will answer the question on the rights issue and then Heiko will share your -- perspective on Consumer Health. What I said this morning in Bloomberg is that we should be pretty much done with the divestitures scope, but of course we cannot preempt the regulatory decisions that we are still awaiting to be final, and while we don't expect any major things coming out of it, we will have to wait for their final ruling. I cannot tell you whether there is anything that would come. We are -- that we are in terms of the scope of the divestitures, we don't expect anything made -- major at all to be very clear on that but again, we will not preempt the final regulatory decisions. That's not up to us. Yes, it was actually in that context that I answered that question. So with that, Hanno?

[Johannes M. Dietsch, Head of Finance Dept, CFO]

Yes, thank you very much. Sachin, well, in September 2016 when we announced the merger agreement, we mentioned USD 19 billion and the equity portion to be financed, which was at that time EUR 17 billion. Out of that, we executed EUR 4 billion into mandatory convertible notes, another $3 billion now with Temasek, coming down to $10 billion. And since September 2016, we had a couple of events, which will have an influence on the intended remaining financing. Number one is clearly the commercial proceeds, and here we had realized extra proceeds, extra gains of roughly EUR 4 billion to -- with the various transactions they had since beginning of last year. Those extra proceeds of EUR 4 billion will be taken into account when we calculate the final science of the rights issue. But there are certainly more factors too, we take into account like the FX movement, the divestitures and also the question about hybrid bonds. Since we got to divestitures, I would like to mention that they are basically neutral in our rating model because we -- of course, we see proceeds from the sales, but on the other hand, we are also losing cash flows, which have effect on rating KPIs. And contrary to what we intended to do 1.5 years ago, we will not issue hybrid bonds anymore, and we will not be able to take those equity credits from hybrid bonds into equation, and that will all play out once we will finalize the decision on the remaining equity financing with the intention to further optimize, and, of course, at the end to minimize the equity portion, but it's on the other hand also to achieve a solid investment grade rating. With regard to our capital too that our issuance of shares without subscription rights, we are now fully booked with the capital authorization we have from our shareholders, therefore, the remaining portion need to come with the subscription rights issue.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. Thanks, Hanno. Heiko?

[Heiko Schipper]

Yes, Sachin. Thank you for the question and let me first say it's a pleasure to meet all of you through this call, and I'm sure we'll have a chance to connect in person in the future. As you know, I'm 8 weeks on the job so as you will appreciate too early to really come with full conclusions, but let me share some of the first observations that I have on the business. Firstly, when we look at the market, the Consumer Health market, I believe it remains extremely attractive. Growth is good, and margins are healthy. If we look at the trends that we see in the market, I actually see that some of these are comparable to what we see in the larger consumer goods market, where traditional entry barriers like distribution, building up new brands or manufacturing have really come down, and consequently we see that there are many new players entering into this attractive category. This is especially true in less regulated markets like the United States. And the growth, it's growing mostly through these new entrants of the market, often enabled by digital technologies and asset-light models. The existing large players are figuring out how to win in this new reality. If I looked specifically at our Consumer Health business, I see a strong portfolio of brands, very good geographic presence. In fact, we help lead healthier lives around the world with more than 2 billion servings sold every year. So really good spread around the world. And I've already had the chance to meet a lot of outstanding people in the organization. Needless to say, in the short-term, I'm focusing on a couple of immediate challenges that are on my desk. The main one is the United States, as you saw in the quarter, it continues to be a challenging performance there, and it's too early to really conclude, but some of the categories are doing better than others. And therefore, in some we have a bigger job to do than others to get back to our full potential there. As Werner mentioned, we also had a few more one-off challenges I would say. Although, the supply situation will continue to impact the remainder of the year and then regulatory status in China had a significant drag with almost 170 basis points impact from Q1. And it's essential that we get this business back on track. These are our 2 most important products in China and we have now the Rx version of the products in Q1, shipping back into the market, we are still working on getting a reformulated OTC product back in the markets. At the same time, we are undergoing a more in-depth strategic review really to -- to really address the momentum behind the business in this attractive category, and I expect to be able to really to share details of this plan in the Capital Market Day that we have planned in the back half of the year.

[Operator]

The next question is from Richard Vosser of JPMorgan.

[Richard Vosser, Senior Analyst]

It's Richard Vosser from JP Morgan. Yes, 3 questions please. Firstly, on crop, you talked about the impact from the slow or delayed planting in the northern hemisphere, particularly Europe, in Crop Science. Could you talk about your thoughts of whether that can be made up in the second quarter, we're obviously at the beginning of May so we've got a few months of -- or 1 month of the second quarter. So thoughts there would be great. Second question, just going to Pharma, looking at the Xarelto performance. There was some reaccelaration in the Q1 and obviously, we're going to have the COMPASS launch in the second half of '18, which suggests even though you've raised your guidance it might still be a little conservative. So perhaps you could talk about the current trends you're seeing, whether you -- when you expect the European COMPASS approval then and how you see the speed of rollout of that indication given the 2.5 mg doses is already approved. And then finally, back to Consumer, I'm just thinking about the specific problems with the Alka-Seltzer brand seeing competition. How should we think about this brand going forward? And what can you do to turn it around?

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, Richard. So Liam is going to start and then followed by Dieter and Heiko.

[Liam Condon]

Yes. Thanks a lot, Richard. So we've had a bigger impact in Western Europe. Eastern Europe was actually quite strong and this impact has hit us on the herbicide, fungicide and also on the Vegetable Seeds business. We don't -- we can't actually call right now whether we will lose this [ prey ], it really depends on what happens now over the coming weeks. The only thing that I think is certain is that, that the spring -- the spring cereal herbicide business is definitely lost. So that, that part it's relative to cereals and herbicides, and because we're too far into the season now. So the bait is gone. Another part, which is concerning is basically due to the drought in Argentina, possibly the most severe drought they've ever had, and they've had quite a few droughts down there. This is having a huge impact on the overall market, but particularly on the herbicide market, which is by far the biggest market and crop protection side in Argentina. So there for sure, there will be a significant impact that won't bounce back. On the flip side Brazil is doing better than we expected in Latin America. So overall, we were seeing growth in Latin America driven by Brazil and that will overcompensate for whatever losses we have in Argentina. So we'll wait and see what happens now in Europe with the weather, a bit too early to make the call, and we will try our hardest to catch up.

[Werner Baumann, Chairman of the Board of Management & CEO]

Dieter?

[Dieter Weinand]

Yes, Richard, thank you for your question. You are correct, we have continued good momentum with Xarelto and growing again globally 13%, x U.S. we actually grew 15% over the first quarter. That is driven particularly by our emerging markets performance with 27%, particularly, China where you know we got a National Drug Reimbursement listing. Last year we took a significant price decrease to the levels of European pricing and that has been more than compensated with volume gains for 40% growth. Overall, Germany, we also turned that around with 14% growth in the first quarter again. So we have good traction with Xarelto. You are aware that we have in a significant number of markets the 2.5 milligrams tablet available, but we filed for Type II variation in Europe to include the new indication. The timing of that depends on the regulatory reviews. We certainly would expect everything goes positive, approval and launch this year of the indication of -- PAD and CAD and we do consider that a good opportunity for continually growing the momentum overall. Internationally, we have been able to expand our market -- overall market share in main markets such as Germany or Japan is market leader. So good momentum with good prospects I would say.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. Thank you, Dieter. Heiko?

[Heiko Schipper]

Yes. Thank you for the question. So coming to Alka-Seltzer. First of all it's important that when we look at Alka-Seltzer we can basically split this brand into 2 parts. One is playing more in cough and cold, one is playing more in digestive. So the comments that Werner made really -- and it's roughly 50-50 between those two. If we look at the cough and cold piece of it, and that's obviously where I would say the disappointing numbers came. This is mainly the U.S. market. Where we are I would say a relatively small #3, the #1 and #2 have respectively about 20% and 15% share and we are at 5%. So we -- I would say we didn't enjoy most of that good season, and ahead of this season there was some losses of distribution and that's really what impacted the numbers. Nevertheless, I would say we do see that cough and cold is a very important segment to play in, and I already see some interesting launches been planned in the second half, but being #3, I think it's fair to say that we still have quite some work to do there, to really feel that we have a real strategy to win. Some good first steps, but more work to be done.

[Werner Baumann, Chairman of the Board of Management & CEO]

Thank you, Heiko.

[Operator]

The next first question is from Jo Walton of Crédit Suisse.

[Jo Walton, Managing Director]

Jo Walton from Crédit Suisse. My questions related to the Pharma division. I wonder if you could give us a little bit more help on what the opportunity is for Eylea in China. You've obviously got an excellent distribution there and you say this is one of the first products in this category. So what could we see from that please? And on the Pharma side, again looking at Kogenate, I'm just wanting to probe a little further as to whether the decline that we're seeing is all related to the Helixate, sort of, unbundling or whether there is an underlying deterioration. Grifols reported today a significant reduction in their factor VIII demand as patients were moving off to Hemlibra and as they saw higher competition in the tendering. And so I wondered whether you could talk about what you felt the underlying position in your factor VIII franchise was? And just finally on the OTC side, just checking up on Coppertone, which obviously had a good selling in the first quarter of last year and sales were broadly stable this year. Has that brand turned the corner?

[Werner Baumann, Chairman of the Board of Management & CEO]

So Dieter first, followed by Heiko.

[Dieter Weinand]

Yes. So I've just mentioned Eylea China briefly we got the DME indication approved in February of this year. This as you may know a substantial number of patients were suffering from diabetes in China, over 100 million patients. So it's a fairly large indication. But you also know that DME is largely undiagnosed or underdiagnosed, and treatment without National Reimbursement, therefore, is private paying only and that would take a while. Of course, we would like to see a national reimbursement drug listing, but that will still take a while. So it is primarily a private market until we get the larger indication of wet AMD, that is more frequently diagnosed and ultimately, hopefully, also National Reimbursement. So it's a significant epidemiological opportunity, but there are the commercial constraints that we have to work our way through in China as always. But it's a good opportunity going forward. With the hemophilia portfolio, I would say that following -- as you know we -- if you exclude the Helixate impact for a moment, there we grew 11% in the first quarter. Fairly strong performance. But you always have to recognize there is some phasing in KOVALTRY orders. Having said that, we are making good progress with KOVALTRY, our longer-acting factor VIII product in the U.S. and in Europe particularly well -- performing well in Germany. We are also converting Helixate patients -- all Helixate patients being converted. We capture probably half of -- more than half of those patients, and we're progress on that front. We're looking forward for the damoctocog alpha to be launched hopefully this year. As I have said repeatedly that let's wait for the data on Hemlibra. And now as I said, the ethical and efficacy perspective you found were probably indistinguishable. And then it was sounding familiar factor VIII mechanism, with a familiar tolerability and safety profile, where one knows about the potential of PEGylated products who develop PEG antibody versus rare but black pox warning fatal thrombotic events with the new product and now also a more important -- also importantly a neutralizing antibody to the drug Hemlibra recently. So I think as I always said factor VIII will continue to be a significant player in the hemophilia market and we are well-positioned with Kogenate, our long-acting KOVALTRY which continues to do well in our upcoming launch of our once weekly damoctocog alpha. So we are fairly confident about the portfolio.

[Werner Baumann, Chairman of the Board of Management & CEO]

Thanks, Dieter.

[Heiko Schipper]

Yes. On Coppertone, well, let me first remind everyone that the quarter 1 is -- represents roughly 11% of consumption for that category. So it would be premature to make conclusions based on quarter 1 performance. I think we really have to go through the season to see how the brand is performing. Nevertheless, a lot of work has been going on to restate these brands, and I believe that our team is well prepared for the season. But let's revisit this question as we progress through the year.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. Thank you, Heiko.

[Operator]

The next question is from Christian Faitz of Kepler Cheuvreux.

[Christian Faitz, Equity Analyst]

Yes. Christian Faitz, Kepler Cheuvreux. Three ags questions if I may. First of all, you also mentioned in the call the substantial market decline in France in your fungicides business. Can you lose the [indiscernible] a bit? And then related to the earlier question about the delayed season. How in your fewest paternal inventory situation in Western Europe at present, any visibility? And then third final question. Your Crop Science business overall, underwent nice margin increase with adjusted EBITDA falling less than your top line. I would believe this is largely due to the measurements to cut costs. Can you confirm this? And how sustainable are those cost cuts assuming a steady state business x Monsanto.

[Werner Baumann, Chairman of the Board of Management & CEO]

Yes. Thanks, Christian.

[Liam Condon]

So thanks a lot, Christian. Let me give you a bit of flavor on France. I would basically divide this into 3 separate issues that are impacting our business in France. I think it's important to know that France was last year our biggest country in Europe. So really important for us. We had sales of over EUR 230 million in the first quarter last year. We dropped about 30% in the first quarter of this year. So a very, very significant impact. And 3 issues, one is regulatory. We have the neonic ban. So a complete neonic in France effective since the 1st of September 2018. And this, of course, meant that the products were phased out during 2018. So no sales in '18, the sales were made then in '17. Plus same issue with Basta, our glufosinate ammonium where the -- with -- the license was withdrawn. So we have basically 2 regulatory impacts and some of those impacts from a sales point of view in 2017 was over EUR 80 million. So that already gives you a kind of an indication of the size of the impact simply from a regulatory point of view. These are onetime impacts specific to these products and specific to France. And apart from that, we have the same situation as everybody else in Western Europe with weak weather, and as a second topic and as a third topic, and there is an ongoing discussion in France about possibly changing the distribution system, and making changes to potentially separate logistics and promotion. And with that, it's unclear how the incentivization in the channel would work in the future. And with that, there's a hesitancy to order in the channel right now. So a multitude of aspects, some very specific to us, i.e. the neonics and Basta, and which weigh heavily on our performance and the other is, let's say, same issues as for everybody else. So that's just to give you a bit of flavor around what's happening with France. Very significant impact that drags our entire European results down. But largely onetime effects in here on the regulatory side. On the channel inventories in Western Europe, let's say slightly elevated, but not of a concerning degree yet, because we still have possibilities now with remainder of the season to have a healthy development in the market. So there's no alarm bells ringing in Western Europe yet, but depends now just what happens for the rest of the season. And for the EBITDA, I mean, you're right to point out, it's a very relatively -- it's a strong margin and, of course, this is also due to the fact that we simply have a very disciplined approach to cost management. And I think this is just good hygiene in the company like ours that we pay a lot of attention to this and try and manage costs as best as we can. And how -- let's say how that will play out going forward we'll see, but the cost efficiency and discipline around that is going to remain. And our biggest -- bigger concern around EBITDA is actually the impact of currencies because that's what weighs most on us going forward.

[O. Maier, Head of Investor Relations]

Thank you, Liam.

[Operator]

The next question is from Mr. Peter Verdult of Citigroup.

[Peter Verdult, Director]

Peter Verdult with Citi. Just 2 questions. Firstly for Heiko. Thanks for the comments you made earlier on the call. That was mainly addressing, sort of, external challenges the industry is facing in the U.S., and some of the issues they are out of your control in China. Wondering if you would be -- prepared to be a little more candid in the first 8 weeks as you've taken over heading up the division. What you found within the buyer consumer divisions. Any of them in the suboptimal low to -- or simply with your management oversight are there any deviants you could affect during the remainder of 2018 that can improve growth and profitability. And then second question for Dieter. On larotrectinib have your revenue expectations or ramp changed, now we've got CMS reimbursing, next-generation sequencing. It seems to us that, that'll allow the identification of patients harboring these TRK mutations -- fusion mutations to be more easily identified. So I just wanted to get a sense of change of optimism on the peak sales potential for laro?

[Werner Baumann, Chairman of the Board of Management & CEO]

So let's start with -- you were quite difficult to understand Peter. Yes, so we try to answer but I'm not sure whether we fully got your questions.

[Peter Verdult, Director]

Do you want me to repeat it?

[O. Maier, Head of Investor Relations]

Yes, if you could.

[Werner Baumann, Chairman of the Board of Management & CEO]

Maybe somewhat slower.

[Peter Verdult, Director]

Okay, okay. Well not too slow. So Heiko, thank you for your comments earlier on in the call. They were addressing the external challenges facing the industry. Would you be prepared to be a little more candid about what you found within buyers consumer division. Things that are suboptimal or put more simply, actions you can take, easy win to implement, to improve growth and profitability. That's question number one. And then second, for Dieter on larotrectinib. CMS is now reimbursing next-generation sequencing. That seems to us that it will make it easier and quicker to identify patients with TRK fusion mutations. Just wanted to get an update on your expectations for larotrectinib when you get approval in the second half of the year.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay. Thanks, Peter, that was very helpful. So, Heiko?

[Heiko Schipper]

Yes. Thank you for your question. It's not a matter of being candid, it's just a matter of being 8 weeks on the job, and I've just been traveling around to our -- basically to our key market so far and just not having had really the real depth yet to really go into detail on concrete steps. So you just have to bear with me a little bit longer before I can really give you more color. I think what is important if we look at the quarter that's -- it's kind of both on growth if you take that China effect and also to some extent the supply effect. It's kind of flattish. And on the margins if you look at the -- sort of, the large sale of tail brands that obviously, will continue, but not maybe to the extent that we had in quarter 1 last year. It's also kind of flattish. So I think important that we start really to put some of these elements a bit behind us. I think in H1, it will still -- some of them still will be there. H2 is going to give us already some opportunities, particularly in China to really come back with better numbers. And that's kind of the first need that I see. Other things are more detailed, but I think just bear with me a bit lower and I'll give you more color as we progress.

[Werner Baumann, Chairman of the Board of Management & CEO]

That's a promise. Dieter?

[Dieter Weinand]

All right, larotrectinib. Yes, clearly the reimbursement will help speed up the testing although the testing was actually quite common in the U.S. already in all major cancer centers. It may enable now more broadly spread testing across facilities beyond the major cancer centers. As I said before, we expect it to be 0.5% to 1% of all patients across these 17 to 19 tumor types that we have now looked at to have that TRK fusion mutation. But as we also saw with other cancers once testing started like [indiscernible] on actually -- the epidemiology changed with the recognition that there's actually more patients than previously anticipated once routine testing started. Taking it up to accounting makes it very difficult to put our finger on a particular number, because I think the epidemiologist they're evolving with increased testing then you have pricing and reimbursement considerations. So I -- we -- I would not put yet a dollar number or euro -- sorry, euro number on the revenue potential at this point in time. So if I were to say we believe that there's significant potential, significant on mathematical need, and with the efficacy we have seen I believe that this product will -- once testing positive is very little reason why not to use product such as larotrectinib.

[Operator]

The next question is from Emmanuel Papadakis of Barclays.

[Emmanuel Papadakis, Managing Director]

Yes, it's Emmanuel Papadakis from Barclays. Couple of quick ones. You were kind enough in Q4 results to give us your best estimates for 2018, core EPS including Monsanto. You don't appear to have done that today. Should we assume that remains still a moderate core EPS decline that you envisaged at Q4 or is that changed? Second one was on the Leverkusen issue. You said there's no increase in the EUR 300 million estimate in terms of impact, but most of that is still to come. Perhaps you could just explain to us why that is mostly still to come and hasn't been more front-loaded. And if so, why you have such confidence that it will necessarily, potentially extend beyond that EUR 300 million? And then perhaps if I could sneak in a third, it would just be on -- you can perhaps refresh our memories on the shape and pace of Pharma leverage we might anticipate beyond 2018, once you are beyond that manufacturing-related pressure at the margin level.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, thanks Emmanuel. Maybe on the first one, Hanno on core EPS 2018 and Monsanto impact.

[Johannes M. Dietsch, Head of Finance Dept, CFO]

Well, Mr. Papadakis the guidance for core EPS 2018, including Monsanto's unchanged, we see a margin core EPS dilution, and that is because the additional profits coming in from Monsanto will not cover the financing cost in the second half of the year because of seasonal effects. For the full year -- we say in the first full year, it is core EPS accretive but not for the second half of 2018.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, thanks Hanno. And you're just playing [indiscernible] Emmanuel to make sure that kind of [indiscernible] your question. On the EUR 300 million, what gives us the comfort that it's going to be the EUR 300 million and what the phasing difference between quarter 1 and quarter 2 is about. Dieter?

[Dieter Weinand]

So we're making actually very good progress with the Leverkusen facility. We have very -- we had a very constructive dialogue with the FDA recently. We have met all of our commitments in terms of what we wanted to address and deliver and the timing thereof and that progress continues. So we are right on schedule with our corrective action plan relative to the one that [indiscernible] have we received. That gives us confidence that we will continue to execute on plans, and since we have fairly accurate projections of production and so on. We feel very comfortable with the EUR 300 million that we have projected and don't foresee any issue. Now why minor -- why is this they're phasing in the product supply? We had certainly some safety stock for some products as we depleted those. We will see an increased impact due to the enhanced procedures we have to put in place to address some of the warning letter observations. They would primarily hit us probably during the second and third quarter as we near the last quarter and hopefully it resolves most of the issues that needed to address. That would decline again and hence the phasing. Your last question was?

[Werner Baumann, Chairman of the Board of Management & CEO]

The last question was about once we put these manufacturing issues behind us in 2018, what's the perspective on margin development in Pharma going forward.

[Dieter Weinand]

Well, I always say we doubt our margin with the investment opportunities that we have, looking for sustainable success. And I would not predict any other margin to the guidance and will be the aspirations that we have previously outlined and we continue to deliver against them.

[Werner Baumann, Chairman of the Board of Management & CEO]

Yes, yes. Emmanuel, maybe also as a more general comment that relates to all of our businesses. We have communicated in one of the prior calls that this will give you a very comprehensive update on our businesses also mid-term aspirational targets as part of the Capital Markets Day that we are going to hold in the later part of the year, and then we will also address the question you have asked specifically on Pharma. Please understand that we don't want to do that on the fly so it's going to be I think comprehensive and then also quite informative for you.

[Operator]

The next question is from Marietta Miemietz of Primeavenue.

[Marietta Miemietz]

It's [ Marietta Miemietz ], Primeavenue. I have one question on Xarelto please and the pricing dynamics ahead of the COMPASS indication. So in Europe and some of the territories, you obviously got to give price concessions to get access. Now given the opportunity, the payers may ask for a big concession on -- because it's going to take quite a bit of time to build that franchise. So would you actually accept the price cut that could lead to temporary sequential sales declines in Xarelto in 2019, maybe even late 2018 or -- and is that actually included in your guidance or do you think that here you can sort of like negotiate some sort of a piecemeal reduction in price as basically the scale of the opportunity becomes clearer? And then I have a second question on the financial income, which looks very high even after stripping out the special items. So I was just trying to understand the reason and how we should think about the financial result now for the full year. And is may be an improved outlook on the financial results the reason you can actually maintain your core EPS guidance flat in euro terms, despite the incremental foreign exchange hidden dilution relative to your original guidance. Or is there something else happening below the line that is offsetting these incremental pressures. And my final question. Just trying to push my luck here. Can you actually give us a very rough view may be for the average margin on -- in a normal year of the roughly EUR 2.2 billion in sales that you are looking to divest to BASF from your Crop Science business. That would be very, very helpful.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, Marietta. Thank you. So the first question goes to Dieter on Xarelto. Followed by the financial income question from Hanno and then I'll address your margin question.

[Dieter Weinand]

So you're asking about Xarelto pricing. We have actually been very good at maintaining our pricing for Xarelto after since launch with, I would say, relatively modest impact than the international markets. As you know, most the international markets are governed by very formulated pricing regulations in Japan, for example, where you're getting every 2 year a price difference that can be calculated and our basic discounts we give to wholesalers and so on. And we have as you know the 2.5-milligram tablet already registered and priced in some 84 countries around the world. So the price has been established. Now there may be the one or the other country that we look at volume extension and come back to us and see what we need to do to renegotiate price in exchange for volume. The overall impact on Xarelto, you ask me if I saw a dip in Xarelto temporary sales, you have to also consider that the much higher doses the normal doses for SPAF and so on. We're making significant volume gains in China, as I alluded to, we are growing 15% in Europe. So the growth of Xarelto, it would offset any minor pricing negotiations for the 2.5 milligram I will anticipate. So, therefore, we expect this to be a growth opportunity not a negative impact opportunity due to repricing, because most of the markets already in a price -- since -- at a -- with a price stalls and have a very regulated pricing system.

[Werner Baumann, Chairman of the Board of Management & CEO]

Thank you, Dieter. Hanno?

[Johannes M. Dietsch, Head of Finance Dept, CFO]

Yes, [indiscernible] I mean, it's a -- [indiscernible] the financial result has quite some significant strings. We had minus EUR 300 million in Q1 last year and plus EUR 130 million this year. This included EUR 275 million from the accelerated book billing, sale of Covestro shares in Q1. Just EUR 275 million is positive on reported financial income. However, will be treated as special item when we calculate our core EPS. Secondly, we had EUR 80 million income from the at-equity reserve of Covestro where we recount now with 14.2% of Covestro at equity. So EUR 80 million will disappear as positive effect from the financial result, once all the shares are being sold with Covestro. And we had also somehow a better interest result due to the lower net debt of EUR 40 million and better hedging cost by EUR 30 million. That explains the swing of EUR 430 million and cost of the Covestro sale income of EUR 275 million. We are able then also to adjust our guidance for our reported financial results for the full year, down from EUR 1 billion to EUR 0.7 billion. Does it answer your question?

[Jo Walton, Managing Director]

Yes, I think it does.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, Marietta. Then let me come to your question on the divestiture package and the margin on that business. So if you go to the BASF press release as an acquirer of our business, they're talking about EUR 2.2 billion in top line for 2017, full year. And EUR 550 million EBITDA including certain research programs that they're going to take over. Yes. So that's the underlying margin of the business. If you flip to our side, what comes into play here as though is that we will actually be sitting on some of the infrastructure costs that was actually covered by that business before that we will have to deal with as part of the integration going forward.

[Operator]

The next question is from Neil Tyler of Redburn.

[Neil Christopher Tyler, Research Analyst]

Yes. This is Neil Tyler at Redburn. A couple of left please. Firstly on ag, the performance in Brazil specifically, you refer to that, have been recovered quite strongly. Can you help me understand whether you think that was driven more by Pharma profits, more by crop rotation or by your own market share. And -- that's the first one. And then secondly on -- or 2 parts on cash flow really. Firstly, the working capital improvement that you've seen do you -- principally is that a timing effect or is that a last year reflection of the events that you mentioned in the improvement you mentioned in the ag business. And secondly, from those proceeds, the EUR 7.6 billion, can you give us any indication of what you expect the leakage to be on things like tax and fees?

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, thanks. Just on the third question, you are referring to the leakage on the divestiture. The tax leakage?

[Neil Christopher Tyler, Research Analyst]

That's right.

[Werner Baumann, Chairman of the Board of Management & CEO]

Very good. So the first question goes to Liam and then number 2 and 3 is going to covered by Hanno.

[Liam Condon]

So thanks a lot, Neil. So we had a -- I'd say good growth in the first quarter now in Brazil, strong double-digit growth and, of course, this is what we're booking here is in market sales. But we -- we're looking very closely at how we perform in the market because we've changed our incentivization system, because this was one of the issues that we had in the past. At the farm gate, our sellout is also so very, very strong. So we actually believe that this strong result, which is on the back of strong fungicide and insecticide sales is on the back of a stronger Pharma profitability for sure but also a gain in market share. So that is our current assumption and we're assuming also that there will be continued acreage increase for soybeans, which is, of course, by far the largest crop in Brazil. And probably also the China, U.S. trade and [ SPAT ] or kind of a lack of conclusions about how that's going to play out, is resulting in increased demand for soybeans from China, or to China. So this we believe is all playing into our favor. And for us, the most important thing was that we got back to a normal healthy channel level at the end of the season, which we have confirmed through an external audit. So we feel we're in very good shape now in Brazil and overall, going forward, are looking forward to further growth for the remainder of the year. On the working capital side, this is basically, primarily a result of lower accounts receivable and lower inventories and also heavily impacted by the situation in Brazil last year. So for the tax-relevant question, I think Hanno will -- can better answer that one.

[Johannes M. Dietsch, Head of Finance Dept, CFO]

Yes. Okay, regarding the working capital improvement in Q1. First of all, Q1 is a quarter where we increase our working capital, and where the free cash flows is actually relatively low compared to the other quarters. In Q1, we had 2 special effects, number one was a onetime milestone payment on Adempas from J&J in the amount of USD 350 million. That is not PL-relevant, but it's -- appears in the cash flow statement.

[Neil Christopher Tyler, Research Analyst]

Is that $350 million, 3-5-0?

[Johannes M. Dietsch, Head of Finance Dept, CFO]

Yes, $350 million, EUR 294 million for Merck, yes, EUR 294 million Adempas [indiscernible] payment in euros and $350 million in dollars. And we had an outflow for Loxo, also on onetime payments in the magnitude of EUR 180 million, which is in the opposite direction. Without those effects we are pretty much on track for the level of previous year. And finally on the tax leakages on these divestiture to -- EUR 7.6 billion to BASF, we expect approximately the tax leakage of EUR 1.2 billion.

[Operator]

The next question is from Luisa Hector of Exane.

[Luisa Caroline Hector, Pharma Research Analyst]

It's Luisa Hector at Exane. Two questions, please. On Pharma, can you confirm that the manufacturing issues will not impinge on the FDA decision for Xarelto and to COMPASS. A filing there. And then secondly, just going back to crop and the situation in France. I just wanted to confirm that those items bar the weather, but the other 2 items were baked into your guidance at the start of the year or have they perhaps proven to be little bit worse than expected.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, Luisa. Dieter on Xarelto.

[Dieter Weinand]

Yes, I can confirm that there is no impact of the Leverkusen volume that are on the registration procedure in the U.S.

[Werner Baumann, Chairman of the Board of Management & CEO]

Okay, thank you that was short and crisp.

[Heiko Schipper]

And neonics and Basta were baked into our original forecast and the weather and the change in distribution system was not.

[Werner Baumann, Chairman of the Board of Management & CEO]

All right. But everything we know now is included in our, let's say, unchanged full year guidance.

[Operator]

Sir, we kindly ask for your understanding that we have to close the call now due to time constraints. So if you'd like to go on with any points you have to raise Mr. Maier.

[O. Maier, Head of Investor Relations]

No, if there are no last questions anymore, I think we would like to thank you everybody for participating in the call. Looking forward to talk to you soon. Thank you so much. Appreciate it. Bye-bye.

[Werner Baumann, Chairman of the Board of Management & CEO]

Bye-bye.

[Heiko Schipper]

Bye-bye.

[Operator]

Ladies and gentlemen, this concludes the First Quarter 2018 Results Investor and Analysts Conference Call Bayer AG. Thank you for participating. You may now disconnect your telephones.