Merck KGaA

XETRA:MRK

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to the Merck Investor and Analyst Conference Call on the Third Quarter 2018. [Operator Instructions] Please note that at our customer's request, this conference will be recorded. [Operator Instructions] Dear ladies and gentlemen, welcome to Merck Investor and Analyst Conference Call on the Third Quarter 2018. [Operator Instructions] May I now hand you over to Mr. Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

[Constantin Fest, Head of Investor Relations]

Many thanks, Andrea, and a very warm welcome to this Q3 2018 Merck conference call. My name is Constantin Fest, Head of Investor Relations here at Merck. For this call, I'm really pleased to have with me here today Marcus Kuhnert, our group CFO; as well as Kai Beckmann, our Performance Materials CEO, who will share a bit more color on the business during this presentation. We're also very much delighted to have on this call for the Q&A but also the respective sector overview slides Belén Garijo, CEO of Healthcare; and Udit Batra, CEO of Life Science. So in the next half hour, we'd like to run you through the key slides of this presentation. And then, as always, we are happy to take all of your questions. And with this, I'd like to directly hand over to Marcus to kick off this presentation.

[Marcus Kuhnert, CFO & Member of Executive Board]

Thank you, Constantin. And good afternoon, and warm welcome also from my side to our Q3 earnings call. Operationally, Q3 was a good quarter with 8.8% organic sales growth across the entire group. Healthcare and Life Science were the largest contributors, but also, Performance Materials saw organic growth in the third quarter. And Kai will discuss the details later in the call. Group EBITDA pre grew by 3.7% organically year-over-year, driven by Life Science and Healthcare, which more than offset the decrease in display materials and the roughly EUR 50 million milestone payments for Bavencio we received last year. Currencies were again a burden for us in the third quarter, but to a lesser extent than in the previous quarters. They reduced our net sales by around EUR 76 million versus last year and EBITDA pre over proportionally by EUR 97 million. This seems somewhat counterintuitive at first glance, but you are familiar with the currency markets dynamics in recent months. For example, the Latin American currencies continued to devalue significantly. Therefore, the currency burden for us at EBITDA pre level will actually be more pronounced than we had anticipated so far, even though euro/U.S. dollar has improved as expected. I've seen that, over the morning, there were some questions on what led us to our FX guidance. I would not go more into the details here during the presentation, but, of course, I'll happily answer all the remaining questions later in the Q&A. When it comes to the organic development of net sales and EBITDA pre in 2018, we raised our 2018 guidance for net sales. Here, we expect slightly higher organic growth of 4% to 6%, and we confirm our organic guidance for EBITDA pre. It means a slight organic decline of minus 1% to minus 3%. This should lead to an EPS pre between EUR 5 and EUR 5.30. When we look on Slide 6 into the details, you would see that Healthcare had a very strong quarter. We also saw another visible pickup in momentum compared to an already strong Q2. Sales of Mavenclad and Bavencio continued to rise, and our opportunity in General Medicine franchises grew yet again strongly. Life Science posted almost 10% organic growth year-on-year, driven by very good demand across the board. Udit will elaborate in a minute. Performance Materials might have been a slight surprise for you this morning with an organic growth of 3.4% in Q3. Here, we benefited from new liquid crystal panel plants that are being brought onstream while Semiconductor Solutions and OLED remained in line with their growth run rates of previous quarters. The 3.7% growth -- organic growth in EBITDA pre is equivalent to around EUR 37 million and consists of almost EUR 40 million organic decline at PM but, at the same time, a EUR 15 million growth at Healthcare and a roughly EUR 50 million growth at Life Science. In CO, we had to digest hedging losses, especially from the more favorably developing U.S. dollar and the devaluation of the LatAm currencies not being hedged. This was overcompensated by a onetime gain, the realization of a receivable that goes back to the time of the generics divestment. We'll give you more details later in the presentation. Little to say on Slide 7 on the regional distribution of our sales. No major shifts from previous quarters. Nice organic growth in all regions, and the growth in Asia Pacific is driven by all 3 business sectors. And one additional point. I mentioned the currency topic already in my introduction. The devaluation of major LatAm currencies in the third quarter accounted for a significant share of the FX impact you have seen in our sales line, and it was actually more pronounced than we had expected still in summer. Because of our setup and structures in the region, such a significant devaluation reduces our sales line, and a significant share of this also falls through to our bottom line as we have not much cost structures in Latin America, so not much natural hedge. And we have, especially in Brazil and in Argentina, hard-currency liabilities in our affiliated companies there. This is particular topic, by the way, in our Healthcare business and the main reason why we adjusted our FX guidance for Healthcare but also for group EBITDA pre. With that, we jump to Slide #9, to the financial overview. A couple of points on the headline figures. Due to the strong organic sales growth we have seen this quarter, investments in working capital were around EUR 100 million, which is the main reason for the slight decline in operating cash flow compared to the third quarter. But with the free cash flow in Q3 of almost EUR 500 million, net financial debt as of September declined accordingly compared to the end of June. On Slide #10, a couple of words on our reported figures. Our EBITDA pre for the third quarter is some minus EUR 60 million lower for the reasons discussed before, and EBIT declined by EUR 371 million compared to last year. The difference between the 2 is last year's sale of our biosimilars activities to Fresenius, which led to a disposal gain of EUR 321 million reflected in EBIT in Q3 2017. The financial result is slightly better compared to last year due to the ongoing deleveraging efforts and also slightly higher interest income, and we continue to expect the interest result this year in the range of between EUR 230 million and EUR 250 million. And now I would hand over to Belén for the deep dive on our business sectors.

[Belén Garijo López]

Thank you, Marcus, and hello, everyone. We gained very good business momentum and delivered a very solid performance in Q3 for Healthcare. First of all, on the top line, the almost 10% year-on-year growth rate is the highest actually that I remember in the last 5 years, and it complements very nicely the trajectory of the now 29 consecutive quarters of organic growth. Bavencio and Mavenclad bring a combined EUR 45 million in sales and accounted for almost 1/4 of the Healthcare organic sales growth in Q3. Needless to say, that on the basis of this operational performance, we are on track to reach the sales target that we have communicated to you for 2018. On the in-market portfolio, Rebif and Erbitux developed as expected, and Fertility and our General Medicine business grew fairly strongly, mainly in growth markets, specifically in China. Now before you get carried away and extrapolate these growth rates, you know that our own focus and strong name on the emerging markets footprint can lead to some volatility from one quarter to the other. And in Q3, we have a couple of positives coming together in several countries, like some tendered business in Russia or in the Middle East. In China, the demand continues to be universally strong in the quarter in those franchises that I mentioned before, namely the Glucophage franchise and Fertility. Let me now move on the EBITDA pre that is declining by EUR 16 million year-on-year as reported, to mention 2 relevant observations here. So last year, we received EUR 50 million milestone payment for Bavencio, and actually, the currency burdened our EBITDA pre by EUR 31 million year-on-year. So if we adjust for these 2 factors, our EBITDA pre is actually raising by EUR 65 million year-on-year or 16% versus the same quarter of 2017, which is a considerably improved trajectory than in the first half of 2018. Therefore, we are in a position to confirm our guidance for organic EBITDA pre of minus 1% to minus 2% for the full year 2018, with a slight upgrade of our organic net sales growth guidance to 4% to 5%, based on the business momentum that we see in several of the franchises plus the launches. With this, I would like to hand it over to Udit for him to touch on the Life Science business. Udit?

[Udit Batra, CEO of Life Science & Member of Executive Board]

Thank you, Belén, and a warm welcome to all of you from my side. Happy to be here again to talk about Life Science. Now again, it's been a very, very strong quarter, as you must have seen with the results this morning. And I'll remind you this momentum started in Q4 of 2017 when we grew close to 9% and 8.8% or 7% -- 7.5% and now close to 10% organic growth, so really a strong trajectory being built here. And it is somewhat of the same sort of drivers. We see business momentum across all the 3 business units. Process Solutions, from a portfolio perspective, led the growth with 16% organic sales growth. But you will remember Q3 last year was at a low base, but that, overall, is really being driven by a sustained strong demand from biopharmaceutical manufacturing. Applied Solutions, slightly shy of 8% growth. And here, the standout performance is from our Lab Water franchise, here closer to -- almost double-digit organic growth, with the Milli-Q IQ platform performing extremely well. Switching to Research Solutions. From a portfolio perspective, quite an endearing growth rate here, 4.3% organic growth, and I'm especially pleased to see how our e-commerce platform is helping us build the momentum both in our chemistry and reagents businesses. From a geographic perspective, Asia Pacific remains the largest driver, overall in mid-teens organic growth, but again, the standout performance being in Process Solutions, which grew almost 30% versus last year. North America and Europe are in the high single digits, so really nice momentum across the different regions. And from a customer perspective, pharma biotech is the standout performer with mid-teens almost in the growth rate; diagnostics in the high single digits and industrial and testing somehow in the mid-single digits. EBITDA pre came in at EUR 460 million, and this has a margin of about 30.1%. And organically, you see a quality growth. So here, you see the EBITDA pre growing close to 12% versus a sales growth -- organic sales growth of 10%. There is an adverse FX impact in this EBITDA number of approximately EUR 16 million year-on-year. Year-to-date, this number is closer to EUR 65 million, but in Q3 itself, the FX impact reduced EBITDA by about EUR 16 million year-on-year. And similar to Healthcare, LatAm currencies impacted us quite a bit. But of course, the overall magnitude is much less pronounced than you see in Healthcare. Without this LatAm effect, the Q3 EBITDA pre margin would have been about 30 basis points higher at 30.4%. So in all, an extremely, extremely good quarter with solid top line momentum and a quality growth on the bottom line from an organic perspective for EBITDA pre as well. With that, let me hand it over to Kai Beckmann, who's going to talk to you about Performance Materials.

[Kai Beckmann]

So Udit, thank you, and good afternoon, everybody. Let me add a couple of words and a few more slides on Performance Materials. So in Q3, we saw net sales grew organically by 3.4%, by the way, which was a nice surprise for a change. So yet again, Semiconductor Solutions and OLED grew as expected, and unlike in the previous quarters, however, liquid crystals posted slight organic sales growth in Q3. I will come to the special situation in the liquid crystal business in a minute. EBITDA pre declined organically by minus 16% year-on-year to a level of EUR 203 million, which is a margin of 32% -- 32.5% to be precise. This is largely the result of an unfavorable margin mix and the continued price decline in liquid crystals as we projected it in summer. The currency burdened a bit for PM in Q3 and reduced EBITDA pre by a mere EUR 6 million. This is compared to last year. For 2018 as a whole, we now expect about organically stable sales, of approximately plus, minus 1% year-on-year and while EBITDA pre is expected to decline organically by minus 14% to minus 16% compared to the prior year. And now switching over to Slide 14. And you may remember, in the summer, we promised to provide you with more transparency on our business units, our business in Performance Materials. On this slide, you can see the sales breakdown for Q3 2018. Our semiconductor business achieved almost double-digit growth in Q3 again, which is pretty consistent with what we have seen in the previous quarters. Service solutions accounts for 19% of our sales in Q3 and is slightly down versus last year. Display Solutions benefits from continued good demand for UB-FFS and OLED materials. But on top of that, the more established LC materials saw an uptick in Q3. Let me explain what was driving this in a bit more detail on Slide 15. You may remember the chart that we showed a bit more than a year ago. It gave you an overview on the planned production capacity buildup in the global display market. Now we are seeing, in the recent months, some of these projects being started in China. With our market position, we were selected as a supplier of choice to help ramping up some of these new capacity. This temporarily leads to better volume for us in more mature -- especially in more mature technologies and supported us in Q3 2018. I deliberately say temporarily because we have seen in the past that after a ramp-up phase, customers adopt dual sourcing, and we also believe that the overall panel production capacity situation might lead to consolidation sooner or later. Therefore, we confirm our view that the LC materials market is set up for a decline in the mid- to high single digits until 2025. Nevertheless, for 2018, this means that we lift our organic sales growth expectations for PM. Now on Slide 16, a couple of more words on the semiconductor market after the recent news in the sector. This news is mostly linked to price reductions of the produced end product, of the chips. However, demand of our products is linked to wafer area that is measured in million square inches. As you can see on the slide, this continues to trend upwards. And for 2019, industry forecast see wafer area growth at around 5% over 2018, and as a result, this is exactly in line with our expectations as presented in our July capital markets update. We see that growth going forward. And with that, I hand back to you, Marcus.

[Marcus Kuhnert, CFO & Member of Executive Board]

Thanks, Kai. We go to Slide #17, having a short glance on the balance sheet. Just briefly, a couple of comments. Our equity ratio now has further improved and stands at 43%. Net financial debt declined by more than EUR 0.5 billion compared to June. Our pro forma net-debt-to-EBITDA ratio has declined slightly to a level now of 2.5, and we are very confident that we will achieve -- that we will undercut the target of 2 by year-end, helped, of course, by the successful closing of the divestiture of our consumer health business to Procter & Gamble, which is supposed to happen in the fourth quarter of this year. A final word to the cash flow statement on Slide #18 before we come to the guidance. Operating cash flow is on prior year level, a little bit below due to an increase in net working capital, predominantly behind the increased growth momentum of the businesses and slightly also increased by currencies. The EBIT effect of the sale of our biosimilars divestment is reversed in the line other operating activities, and this is finally shown in the investing cash flow. And last but not least, the higher number in the financing cash flow -- the higher negative number of last year is due to the fact that we have had a bond repayment of EUR 700 million in Q3 2017. With that, we come to the guidance, and I jump to Slide #20. Given the fairly strong third quarter, we lift our expectations for the organic development of net sales slightly and confirm our guidance for the organic EBITDA pre development, that is we expect 4% to 6% in sales and minus 1% to minus 3% in EBITDA, respectively. With respect to our FX assumptions, we continue to forecast a minus 3% to minus 5% impact on net sales versus last year and now an 8% to 10% hit at EBITDA pre level. So with that being said, and this corresponds then with EPS pre in the range of EUR 5 to EUR 5.30. As I said, I will address any currency questions later in the Q&A. Going to the last slide, to 21. For reasons of consistency and transparency, we provide guidance on organic and FX impacts on net sales and EBITDA pre for all of the 3 businesses. In Healthcare, we expect a 4% to 5% organic net sales growth, as Belén already outlined. This is new and upgraded. EBITDA pre is expected to decline by minus 1% to minus 2% on a currency-adjusted basis. This is unchanged. And the negative FX effect driven predominantly by the devaluation of LatAm currencies is now estimated to be between minus 9% and 11% versus last year, which is new. Main drivers: organic sales growth in the base business, contributions from new launches, BioMarin milestone, adverse mix, higher marketing and selling costs, higher R&D budget despite the biosimilars divestment but depending on data and prioritization and the absence of the 2017 one-offs. In Life Science, demand is expected to remain solid throughout our businesses. We expect an upgraded net sales growth of plus 7% to plus 8%, significantly above the medium-term market growth of 4% per annum and also above the accelerated market growth rates of this year. The expected Sigma-Aldrich-related synergies of EUR 280 million for 2018 are confirmed. On an FX-adjusted basis, EBITDA pre is expected to rise by roughly 8%. So the increase on prior year level, this is unchanged, this we confirm. And so we confirm also the FX expectation on EBITDA pre between minus 3% and minus 5%. Also, this has not changed. Finally, on Performance Materials, we expect organically about stable sales, between minus 1% and plus 1%, as Kai just outlined, this is new and driven by the temporarily very favorable situation in liquid crystals; while EBITDA pre will decline organically between 14% and 16%, which is an unchanged assumption. The ongoing sales decline in liquid crystals has continued to burden our margin mix and cannot be compensated by the good performance we continue to expect for the 3 other PM pillars going forward. FX will reduce EBITDA pre in the range between minus 6% and minus 8% versus 2017. Also, this assumption has not changed. So now I come to the FX piece. I will address it now at the end of my presentation. Let me say a few words of clarification. And eventually then, we can focus on other topics in the Q&A. So first of all, the guidance is fixed, and we had to fix the guidance until the end of October. And that was reflecting then a view that was strongly influenced, obviously, by the first 9 months of the year. Indeed, since then, we have seen a recovery of the Brazilian real over the last couple of weeks after the election, which is now better than our implicit assumptions for Q4. This represents, from our point of view as of today, a slight upside for the first quarter, but don't forget 2 things. First of all, we are not only suffering from the Brazilian real but also from the Argentinian peso, and that development has also been very bad in 2018. And secondly, the changes that are still relative -- are still relatively small when applying it to year average rate. What we see, however, as an upside and where our most recent FX guidance is, status of today, conservative is actually the U.S. dollar. At the very moment, we are still within our guidance range. But if the dollar stays where it currently is until year-end, we have an upside. The same is, by the way, valid for 2019. If the dollar stays at a level of 1.12, 1.13 where we are today, we have, for sure, an upside here from the dollar in H1. So I hope this clarifies what guided us when we were adjusting the currency assumptions. We were strongly driven by the first 9 months because it was done on the basis of October, and we just saw a couple of days of recovery of the Brazilian real. If this picture, however, continues, what we see today in terms of spot rates, we have some slight upsides for the fourth quarter. With that, I would hand back to Constantin for opening the Q&A.

[Constantin Fest, Head of Investor Relations]

So first question, please. Andrea, we would be ready to take your first question. Thank you.

[Operator]

[Operator Instructions] We will now take our first question from Wimal Kapadia from Bernstein.

[Wimal Kapadia, Research Analyst]

Wimal Kapadia from Bernstein. Just 2, please. For the first, a question on PM margins. So for 2018, we've seen a decent top line upgrade driven primarily by the temporary benefits in China for liquid crystals. However, why has EBITDA not moved with this upgrade given that your FX guidance for the division remains unchanged? So I guess I'm asking are those revenues coming in at 0% margin? Or am I completely wrong in my thinking? And I guess a follow-up to that is, has the margin environment deteriorated even faster than you had anticipated? My second question is for Belén on tepotinib. So Belén, you outlined in the slide deck we're going to see the interim from the Phase II study in 3Q '19. I guess, will we see any incremental data from the study before then? And is the interim enough for filing? And then I also just wanted to get your thoughts on the recent capmatinib data from Novartis. Do you see this as a threat for tepotinib?

[Marcus Kuhnert, CFO & Member of Executive Board]

Thank you for your questions, Wimal. I'm starting with the first one on the PM margin update. So let me say that nothing has changed in our expectations regarding what we have communicated in the summer to you in terms of the midterm margin development. We are fully on track, and we have no reason at the moment to do any update on these expectations from July 3. Concretely, on the gross margin effect, what we have seen in the third quarter was the usual and continued price decline in liquid crystals, which is in line with our midterm expectations but, of course, has burdened our margin. Secondly, due to the strong OLED growth that we have experienced in the third quarter of significantly in excess of 20%, we have seen a remarkable shift in our product portfolio towards products with lower gross margin. Remember that OLED was just cracking the breakeven this year. So we have experienced a negative business mix or portfolio mix effect in our third quarter growth composition. We were also seeing somewhat softer net sales a little bit in Surface Solutions. And very importantly to manage -- to mention, we also have, on the one hand, higher R&D investment to prepare our growing businesses for future growth, so, for example, semiconductor projects like direct sales, assembly, [ directrix ] or deposition materials, which we support with R&D investments. At the same time, and eventually, Kai can elaborate on this a little bit more in detail, we have -- obviously, we have started some restructuring efforts; for example, optimizing our global production network or adapting our R&D footprint. We have communicated with the German workers council, but obviously, it will take some time until these effects will actually reduce our fixed cost base and be finally become visible in the P&L. And maybe, Kai, you want to add something.

[Kai Beckmann]

Thank you, Wimal, for the question. Maybe let me add a few words to what Marcus already outlined. We highlighted in our July update we want to reduce our cost base in certain areas, and unfortunately, of course, most of our cost base is in Germany. That requires some preparation and some implementation time. We started the negotiation with workers council on this one. This is all embedded in our long-term plan. So the cost effects only kick in, in 2019. However, on the positive note, as what Marcus already said, we could accelerate R&D investments on the semiconductor side with the additional growth that we were able to deliver in Q3, financed by that. And this, at the end, results in the margin picture as you have seen. So it's a positive thing that we were able to accelerate R&D investments into the growth areas. I hand it back to Marcus for the other questions.

[Marcus Kuhnert, CFO & Member of Executive Board]

I think tepotinib...

[Belén Garijo López]

Yes, Wimal. First of all, not many changes since we last spoke. As you know, our goal is to secure the ongoing study as a registration study, and now we are moving into the pivotal phase to recruit up to 120 patients after the interim readout of the 60 patients included in the [ solid blast ], the liquid biopsy. After enrollment is completed, we are expecting a follow-up of at least 6 months, at least 6 months. And of course, then, if you assume the couple of months for statistical analysis and all these kind of things, then you go to early 2020. So we don't expect a submission before 2020, and we will continuously report on the interim data as we have additional relevant analysis. Regarding your question on the Novartis trial, GEOMETRY, they have, first of all, included differently from our own patient base, an enriched patient population. Then there is a high discontinuation rate that we need to further understand. And to actually conclude on the competitive assessment, we need additional insights on duration of response because, so far at least, we have not seen any duration of response data. And this is important to, well, have a better understanding. So despite a favorable overall response rate, we have seen that there are those confidence interval that may indicate that this product efficacy in the MET exon-14 may not be that far from our own results, but it's still to be seen.

[Operator]

We will now take our next question from Mr. Matthew Weston from Crédit Suisse.

[Matthew Weston, Managing Director and Co]

Three questions, if I can. Udit, looking at the Applied Solutions growth. We're now, for this year, running at about 7% organic. We always used to think of this business historically as a kind of 3%, 4% growth business underlying. You highlighted Milli-Q as a growth driver. Is that something that you see as sustainably driving a higher single-digit growth rate for applied or we're just in a transient launch phase that will level off in 2019 and moving forward? And then, secondly, for Kai, with respect to this issue of the LCD companies and the panel manufacturers using you as preferred supplier during the rollout phase. As I recall historically, that was a role that you were able to keep for at least 2 to maybe even 3 years post the launch of the plants before they considered additional suppliers. We realize the cost pressures in that market. But do you think some things have changed such that, that duration isn't possible? And if it's not, why can't you sign some long-term agreement that keeps you in that position if they need your help to get started? And then finally, if I can sneak another one in. Marcus, I just note, within the guidance section of the quarterly report, the reference to why you're reinvesting for growth. One of the comments that's made is investing in digitalization initiatives as well as IT infrastructure to drive future growth, greater efficiency and future savings. I wonder if you could highlight which divisions are going to benefit most from that and when you see those future savings potentially being realized.

[Marcus Kuhnert, CFO & Member of Executive Board]

Okay. I would suggest Udit starts, and we go the sequence that you asked. Udit?

[Udit Batra, CEO of Life Science & Member of Executive Board]

Sure. Matthew, good to hear you again. And thank you for the question, and really happy to field a question finally for applied. Look, you're absolutely right that a lot of momentum is seen due to Lab Water this year. And year-to-date, organically, Lab Water is almost double-digit, close to 9% organic growth, and this is largely due to the Milli-Q IQ hardware and now more consumable placement. But that said, the applied business also, from a portfolio perspective, has Biomonitoring, which is hovering around 6% to 7% organic growth. It also has diagnostics, which is also hovering around that sort of area. So in the short term, we see momentum across the board. Now what I would caution against is speculating that this is a high single-digit market. Applied, in general, is a mid-single-digit market. We are seeing nice momentum due to our innovation and recent launches. It's mid-single digit, really largely driven by testing in -- under regulated conditions. So simply said, you're absolutely right. There is momentum now. We have reason to believe that the innovation is going to continue to drive it for the short term. But in the mid- to long term, I would think this is a mid-single-digit market. And you can expect us to outpace it, but it's a mid-single-digit market. Marcus?

[Kai Beckmann]

I believe I'll take it over, Udit. Thank you for the PM question, Matthew. Thanks for that. And you were referring to the ramp-up that took place some 2 years ago. Please remember, 2 years ago, these were all new players on the display side. These were their first factories that they were ramping up, and I think there's a learning curve behind this one. Now with the new factories, it's not their first time that they do that, and they want to be much faster back to dual sourcing. That's what we see. And we do, of course, whatever is possible to secure sales as long as possible, and -- but there's a limit to that. I hand it then to Marcus.

[Marcus Kuhnert, CFO & Member of Executive Board]

Your third question, Matthew, so here, I would like to mention the following things. So first of all, please keep in mind that still a part of our overall digital initiatives that we are undertaking for the group are still shown in segment corporate. So that means we have digital initiatives running there where we are completely working on, let's say, new digital business models for all the 3 sectors, which are still part of segment corporate because we also still have a chief digital officer actually which has an overarching responsibility for the group. So not all digital projects are already fully allocated to the business sectors. That's why we mentioned it under CO. But the benefits, you already see today in the enhanced growth rates of our 3 businesses. Secondly, in terms of IT investments, we are working on a data strategy for the company. So that means we are dealing with a question on how does our potential data and systems infrastructure and future should look like in order to be able to fully leverage new digital technologies; for example, connecting data, applying digital technologies like advanced analytics and big data analytics in order to improve decision quality and to enhance -- to reduce the manual workload, which is still quite significant when we have to, let's say, collect data and numbers from all kind of different legacy systems. So investments here shall facilitate the use of data, shall enhance decision quality, shall free up time for more value-enhancing activity and also, as a prerequisite on our journey to bring -- to harmonize processes and to leverage our shared service centers.

[Operator]

[Operator Instructions] We will now take our next question from Mr. Gunnar Romer from Deutsche Bank.

[Gunnar Romer, Research Analyst]

Gunnar Romer, Deutsche Bank. The first one would be on the group guidance, in particular the organic guidance that you've provided. I've seen you've upgraded the sales outlook slightly but maintained the EBITDA guidance, which in turn, obviously, suggests slightly lower margins organically. Just curious, from a high-level perspective, what is the main driver here? Is it higher cost or investment? Or is there anything at work when it comes to mix and pricing? So any comments on that would be much appreciated. Second, a question for Belén. Strong performance in Fertility and Glucophage. Just curious on your comments around the sustainability of that performance that you've seen in the third quarter. And then on Life Science, for Udit. On the outlook for the current year, you're basically guiding 7% to 8% organic sales growth and 8% EBITDA growth, which is slight -- suggesting slight margin expansion. However, the synergies that you're realizing still from the Sigma-Aldrich acquisition should give you already 5% growth. So if I strip that out, it suggests that underlying margins are contracting by over 100 basis points, and probably, this is due to a step up in investments. So I was wondering whether you can comment on the nature of these investments and how we should be thinking about them going into 2019.

[Marcus Kuhnert, CFO & Member of Executive Board]

Gunnar, thank you for your questions. I would start to give you a little bit the bird's eye perspective on the guidance topic that you have mentioned. And obviously, the last part of your question is part of the answer because this is the Life Science part that I would leave to Udit. From a group perspective, it is indeed, basically, 3 different areas which are, by and large, valid for all the 3 business sectors, but obviously, in a different kind of intensity or maybe also in a different kind of split and importance. The 3 areas are investments. So this is especially true in Healthcare, as we have talked about, launch preparation for Mavenclad in the U.S. and R&D pipeline development. This is true for Life Science, strategic investments, and Udit will address this in the third question. And that is also valid in Kai's area, as we have just seen that we are continuing to invest R&D, for example, in the semicon space to keep the high growth rates intact. So investments is one thing. The second thing is FX, which also basically hits all of the 3 business sectors, however in different intensity, most important one -- or most severe impact in Healthcare, as already discussed; moderate one in Life Science; and rather a slight impact in Performance Materials. And the last effect that I would say also plays a role on group level are portfolio mix effects. Also, this we have addressed in the prior questions. With that, I would hand back to Belén for the second question.

[Belén Garijo López]

Yes. Gunnar, thank you for your questions. So first of all, Fertility is growing by 18% on the quarter and is growing in all regions, especially in North America; in Asia Pacific, specifically China; and also in Europe. This is a combination of a solid Gonal-f that is showing double-digit growth, supported by an increasing demand in North America and APAC. Of course, I am talking about organic figures. And actually, an expansion of the Fertility portfolio, which is accelerating the growth especially in China and in Europe, and I am speaking mainly about the contribution of the Pergoveris Pen. Then, on the General Medicine franchise, Glucophage is the main growth driver, and the majority of this growth is coming from China. That is on the in-market portfolio. On the top of this, we see an increasing contribution of the Mavenclad and Bavencio launches, which year-to-date have already delivered above EUR 100 million combined and are trending very well to the guidance that we have given to you of achieving EUR 120 million this year. So our impression is good. We confirm the guidance as we have given for the 2 franchises, Fertility and General Medicine. And we are confident that the growth of these franchises is indeed sustainable.

[Marcus Kuhnert, CFO & Member of Executive Board]

Udit, question on Life Science margins for you.

[Udit Batra, CEO of Life Science & Member of Executive Board]

Sure thing. Thank you, Gunnar, for the question. I was absolutely anticipating it, and it's a good question especially as we have been performing so well over the last 3 to 4 years, both in terms of sales and EBITDA pre. And you see that the top line has been outgrowing this quite a dynamic market, with EBITDA pre already at the top of the peer level with the EUR 280 million of synergies that are being delivered. Now to sustain these margins, as you have rightly pointed out, and our ambition to be above market, some investments are needed, and I've talked about these in the past. Just to outline a few of them. These are e-commerce. We've talked about this in the past. I mentioned Asia in the last call as well, China in particular where we have our Nantong facility, which is starting up, a single-use investment in Wuxi, end-to-end biomanufacturing in Shanghai. Then the third area is in contract manufacturing. This is the investments that we're making in viral vectors for gene therapy as well as ADCs. And then finally, in single-use products, which there is not a quarter that goes that we don't comment on this. So you see that all of these 4 dimensions of investments are definitely going to fuel our growth, and I think you would agree with me that we should invest in these areas. And going forward, I think -- I will address this since this must be on your mind as well. Going forward, we will continue to invest, but despite these investments, given our cost focus and the history that you've seen in the last 3 to 4 years, you should expect a 20 to 30 basis point annual expansion in EBITDA pre. I mean, that's not really a bad assumption. So in summary, overall, if I were to summarize, I mean, we have -- we want to have a dynamic sales growth with these leading EBITDA pre margins. This requires investments, and I've mentioned a few areas. And 20 to 30 basis point expansion in EBITDA pre going forward on an ongoing basis is not a bad assumption. For this year itself, I think what you need to keep in mind is there is already, Q3 year-to-date, roughly EUR 60 million to EUR 65 million FX impact that Marcus has already mentioned. So I hope that addresses your question.

[Operator]

We will now take our next question from Sachin Jain from Bank of America.

[Sachin Jain, Managing Director]

Sachin Jain from Bank of America. Three questions, if I may. First, just to kick off on that last topic. The sustained investment in these various areas, you referenced in the slides, as starting to see leverage. So maybe you could just comment on the sustainability of that and I guess, the sustainability of the 7% to 8% top line you're guiding for, for this year. And then to follow on from the comments on top line versus margins. Consensus is at roughly 5% top line CAGR for Life Sciences, 7% to 8% on EBITDA. Should we think about this as the mix shifting and that you deliver sustainably better top line with less margin expansion? So that's sort of both questions related to the same point. Second question is on PM. In the July strategy update, you pointed to a low single-digit decline in PM into '19. Given the capacity situation, does that remain the case or you already anticipated the capacity sort of benefit you would get? And then final question for Belén. On the news flow slide, Phase III readouts, I note a number of Bavencio reads that, I guess, we'd expected are absent, so ovarian, bladder, gastric, switch maintenance studies and then the mono lung study. So I wondered if you could just update on that.

[Marcus Kuhnert, CFO & Member of Executive Board]

Udit, do you want to start?

[Udit Batra, CEO of Life Science & Member of Executive Board]

Sure. Sachin, thanks for the question. Just extending from what I told Gunnar. Look, take a step back, I mean, these are -- life science in general is a 4% to 5% market -- about 4% to 5% growth -- organic growth market in general and low single digit for research, mid-single-digit for applied and high single-digit for process, and I would reiterate this from a mid-term to long-term perspective. That said, you're absolutely right, we're seeing some terrific momentum in the short term. And this is largely driven by 2 factors: one, we have a portfolio that is advantageous, really weighed towards bioprocessing where we are a leader; we also see our applied portfolio with recent launches in innovation really kicking in. So it is a choice of portfolio that helps us and then of course, outperformance in those individual areas. For instance, in bioprocessing, we are definitely leading the market. And there's good execution across the globe. So I would be reticent to say 7% to 8% is a long-term number. I would just simply say, if the market grows at 5%, you'll see us at slightly higher than 5%; if the market grows at 7%, you'll see us slightly higher than 7%. So I think with our advantageous portfolio and execution track record, I can safely assume that we will outperform the market and the midterm market is 4% to 5%, not 7% to 8%, at least that would be my view. From an investment perspective, I'll reiterate what I told Gunnar, I think you should expect us to continue to outpace the market and EBITDA pre is already at the high end in the market. But that said, even with the investments to fuel this outperformance on the top line, as I mentioned with e-commerce with Asia, especially in China, with viral vectors, with single-use products, you should expect still leverage on the P&L and a 20 to 30 basis point EBITDA pre expansion is what we aspire for with solid cost control and operating leverage. I hope that addresses your 2 questions.

[Kai Beckmann]

Sachin, I take then that the PM question. And if you take the absolute number that resulted from our projections that we shared in July, these numbers are still balanced. We take the current effect, as I said, as temporary which we, by the way, appreciate. It's not a bad problem to have, but we do not project it on 2019.

[Belén Garijo López]

So are you finished, Kai?

[Kai Beckmann]

I'm done, I'm done.

[Belén Garijo López]

So Sachin, thanks for the question. Let me take you through the news flows of Bavencio. So the second line ovarian is around the corner, okay? So we're expecting to make this public in the coming weeks, as expected. And keep in mind, this study is informing the first line of ovarian cancer study, which is going to be really now, this September also as expected. Plus 2 months of statistical analysis. This is -- we consider this to be a Q4 milestone. That's why you don't see it on the slide because we are not focusing on Q4. For non-small cell lung cancer, we keep October, as you see on the slide. I believe -- no, this slide has not been shown. As you have seen during the Capital Markets Day, and exactly the same thing, if we calculate sometime for the statistical analysis, this is going to be a Q4 2019 event. No changes versus before. Then I believe you also raised a question about bladder? And then...

[Sachin Jain, Managing Director]

[indiscernible] listed on -- sorry.

[Belén Garijo López]

Yes? So the date on bladder was based on the initial protocol assumptions, right? And of course, we are updating time lines, depending on when events will occur. So on this one, we will keep you posted as we have further visibility on those topics.

[Operator]

We will now take our next question from Richard Vosser from JP Morgan.

[Richard Vosser, Senior Analyst]

Perhaps, one on Healthcare milestones. I think there was some talk over the last few quarters about potential for some in-licensing -- or out-licensing milestones from your side in Healthcare in 2018. Could you talk about whether we should fully expect those and maybe allied to that, the ongoing discussions you're having around TGF-beta and evobrutinib? And then potentially on evobrutinib, I think the 48-week data was in-house when we spoke to you last at the Capital Markets Day, so maybe you could update us on how the side effect profile around the liver and how the efficacy has held up with that product and your thoughts there? And then finally, another pharma question. Just thinking about Mavenclad and the continued uptake throughout the remainder of this year and into next year in Europe, perhaps you could give us an update of the rollouts across new geographies or new countries in Europe and how the uptake is going in Germany and other countries of the established launch?

[Belén Garijo López]

Thank you, Richard. So let me start by the one-timer in Q4. Indeed, we have a small one-timer, expected to happen in Q4, as we discussed during the Capital Markets Day, and this is not partnering related. So we are still expecting this to occur and it's not actually changing our perspective of the [indiscernible], at this time. Moving into the partnering, we are really on track. And no new news to tell you about this. And on BTK, we are currently analyzing the 48-weeks data at this time, and we are aiming to go into H1 2019, perhaps H2 to -- no, no, sorry, let me clarify. H1 2019, perhaps Q2, to be disclosed, right, in the right scientific congress. Remember, there were 3 major decisions to be taken for Phase III based on the final analysis of the 48-weeks data. First of all, what is the target-facing population? And there, we have a debate with our advisers on whether we focus on RMS versus PMS. And that's quite an important decision. And we are also, obviously, defining in this process what could be the comparator [ M ] aiming for a superiority study and of course, in RMS, we are expecting to use an active comparator, and this is another decision, another major decision. On the dosing, well, that's the third major decision. In the fourth -- in the 24-weeks data, you have clearly seen that the 75 milligram BID has shown a higher efficacy than the QD. And we have no evidence to date of those related side effects. And this is -- which we are expecting to be further illustrated by the 48 weeks. On Mavenclad, we have -- we are really meeting our expectations. As I mentioned before, the launch is on track. Today, the product is approved already in 40 countries and is reimbursed -- is already reimbursed in the majority of those. So the launches are progressing well, not only in Germany, but also in major markets like the U.K. Spain has been launched. It's ramping up with national reimbursement, but of course now, capturing the regional reimbursement that is required. And we are definitely quite confident that we will deliver on the high double-digit perspective by the end of the year 2018. Then we completely focused on increasing the readiness in the U.S. And well, there nothing has changed. We are well on track. We have gone through several discussions with the regulatory agency and we have achieved already and put behind some milestones, and important milestones, like the manufacturing site, audit and all these kind of things. Nothing that have changed, a perspective that we've been sharing with you in recent months.

[Operator]

[Operator Instructions] We will now take our next question from Ms. Luisa Hector from Exane.

[Luisa Caroline Hector, Pharma Research Analyst]

Just one left on avelumab. Any comments on the renal landscape post-ESMO positioning of your data? And how soon you think you can file?

[Belén Garijo López]

Thanks, Luisa. Nothing new. Well, we are expecting to see some additional competitors' data being published in the coming weeks. And of course, once we have more visibility on the KEYNOTE's data, we'll be able to better understand how do we compare against those, but not before this is shown because very important to be seen is how the patient population in our study compares with the patient population of the KEYNOTE study. And this, we haven't seen yet, as you know. So no changes.

[Luisa Caroline Hector, Pharma Research Analyst]

And the filing?

[Belén Garijo López]

And the filing?

[Luisa Caroline Hector, Pharma Research Analyst]

The filings, yes.

[Belén Garijo López]

Filings, well, we are aiming to file ASAP, as you can imagine. And it's going to be initially in the FDA -- with the FDA in the U.S. We are considering to do it, let's say, by year-end.

[Operator]

We will now take our next question from Ms. Emily Field from Barclays.

[Emily Field, Research Analyst]

Just some very quick ones. Erbitux is particularly strong this quarter in Europe. Is that a one-off? And sort of, we should expect a return to the trends that we've been seeing in recent quarters? And then with Mavenclad, in the U.S., is that going to require a significant amount of prelaunch investment? Or sort of is the Rebif commercial infrastructure still in place and sufficient? And then just with Life Sciences, I know you called out that China has now -- is a contributor to top line given the investments that you've had. Is that business profitable? And assuming it is not, over what time frame do you foresee that becoming a profitable business?

[Belén Garijo López]

So let me take the first portion of your question, which is Erbitux. So as I say mentioned in the presentation, in Q3 we have some positive impact of business -- of tender business, mainly coming from Russia and Middle East. So we have not fundamentally changed the perspective and the outlook that we have communicated before of Erbitux of low single-digit decline because, of course, in Europe, we see kind of a stable volume. But price goes through a further erosion as we have communicated before. Then of course, yes, there is incremental investment already factored in our plans for the preparation of the launch in the U.S., mainly medical affairs and market access-driven investments. And we are aiming to launch in the U.S. with a dominant share of voice and this will, of course, partially come from the existing structures that we have behind Rebif. But yes, we need [ some incremental ] investment. Then your last question is related to the China business. Well, the contribution to growth of the Glucophage business in China is significant, but it's not the only one. We have also a very strong Fertility business, as I mentioned before. We have an emerging business in oncology with Erbitux, and we are looking at China as one of our significant contributors as we move further along. Because now Erbitux is reimbursed, is included in the essential drug list and reimbursed in the provinces. So this is the perspective that we have in China.

[Operator]

We will now take our next question from Luke Sergott from Evercore ISI.

[Luke England Sergott, Associate]

Just a couple of quick ones on Life Science for Udit. I know that the instrument growth you guys called out has been exceptionally strong, I guess, the second quarter in a row. Is this playing some mix dynamics on the margins? And as you place the instruments, you get the consumable pull-through? And then how we should think about that through 2019? And then, I guess, as you're a little further on Process Solutions, kind of, where are you placing the majority of those single use? Are they within biotech, large pharma, CMOs, as they build out capacity? And then any regional dynamics as well?

[Udit Batra, CEO of Life Science & Member of Executive Board]

Sure. Luke, thank you for the question. Just a correction. I think it wasn't instruments, we don't have much of an instruments portfolio. It was hardware placements. And indeed, we saw some substantial hardware placements in Q2, which I called out. And in Q3, as you look at the numbers, especially in Process Solutions, the hardware placements are continuing, but the consumables have already started to come through, plus you already see the downstream processing also growing rather nicely. So just to give you some facts. The single use in hardware business is growing close to 30% and the downstream processing, which is our classical consumables business, especially in filtration, it's even in excess of that, right? So these are pretty, pretty heady numbers. I don't want to give you many more specifics because you'll ask me later, "Why is it not 25? And why is it 30? And why is it 35?" But these are good numbers, I think, you will agree with me. From a hardware placement perspective, we are seeing the placements across the board, yet there is a definitely larger volume of placement in Asia Pacific due to the increased biosimilars demand, especially in China and in India. But that does not preclude the fact that there are some large pharma and emerging biotechs also getting into the area. So we play a big role in placing our hardware in established pharma who are getting in the single use. There was one in Singapore. Another one opening in Rhode Island. So many others are getting in. And for smaller biotechs also increasingly we see the hardware placement. I hope that addresses your questions.

[Operator]

We will now take our next question from Mr. Peter Verdult from Citi.

[Peter Verdult, Director]

. Peter Verdult, Citi. Two questions, firstly for Udit. Forgive me for coming back to the margin outlook at Life Science. I'm not asking for guidance, but I want to make sure I understand the way you're thinking and to correctly interpret your previous comments during the Q&A. Just in the event that the trends that we're seeing now do extrapolate into 2019, I'm not saying it's going to happen, but if they do, would it be fair to say that the margin expansion expectations that you laid out earlier would look conservative? I'm just trying to balance the sort of investments you're going to make versus what the growth might deliver in terms of margin expansion? And then just a couple for Belén. One is just to come back to a previous question, on Bavencio in first-line renal. When might we see that OS dates are mature. I know it's an event-driven study, but I'm just trying to get a handle as to when we might see OS dates are in first-line renal. And just can you remind us on Mavenclad in the U.S.? Is the idea here just to switch 100% the promotional efforts from Rebif to Mavenclad at launch? Or would there be significant promotional spike or investment that you will undertake should you get approval?

[Marcus Kuhnert, CFO & Member of Executive Board]

Udit, will you start with the Life Science, please?

[Udit Batra, CEO of Life Science & Member of Executive Board]

Sure. Thanks, Peter. I was expecting this question from you. So look, Peter, it's -- I will repeat what I said earlier. We -- as you know, we have pretty dynamic top line growth and this requires investment and this is going to take across the board. I mentioned the key drivers. The EBITDA pre is already at the high-end in the industry. And that said, what I have confirmed today is that our ambition is to continue to expand it by 20 to 30 basis points even at that higher level, with strong cost control by balancing the investment needs to maintain this dynamic top line growth. I would not call that conservative. I think that requires, because we are such a high level in EBITDA pre that requires very strong cost management while balancing out the investments. So I don't think I can provide you any more specifics. But I would definitely not call it conservative at this stage. I think it's quite a good number. And Belén?

[Belén Garijo López]

Yes, thank you. Peter, listen, on first-line renal, as you rightly said, this is going to be event driven at this time, I don't want to disclose any additional information on our plans for renal because you have to understand that we are under very dynamic competitive pressures. So we will tell you as this happens and until then, I will not -- I have nothing else to discuss. On Mavenclad U.S., yes, we are ramping up now as I mentioned before to gain dominant share of [ poise ] at the time of launch. For this, we are not reallocating 100% of the existing Rebif resources behind Mavenclad, but a majority, a significant percentage of this. At the end, when we have prepared for launch, the focus of the MS franchise and the teams will be quite a lot behind Mavenclad, if you know what I mean. In practice, the Mavenclad is going to be a primary focus of this franchise in the U.S. Is this answering your questions?

[Peter Verdult, Director]

Thank you very much.

[Operator]

We will now take our next question from Daniel Wendorff from Commerzbank.

[Daniel Wendorff, Analyst]

Two remain on the Life Science business, please. On Process Solutions, when you look at the growth you have achieved in each quarter and this year, can you potentially be a bit more detailed what comes from the market? What's coming from new product introductions on your side? Any more color you can provide I would very much appreciate. And second question is on the Research Solutions business, which in my view again, showed quite a nice growth for such a mature business. Is this just driven by e-commerce platform? Any more color you can provide here would be much appreciated.

[Udit Batra, CEO of Life Science & Member of Executive Board]

Excellent. Daniel, thank you. Let me start with Research Solutions because I love it when there are questions on Research and Applied as well. You're totally right, we're very happy with the momentum we are seeing here. And I would -- it's of course, e-commerce. E-commerce grows almost 1.5 to 2x the rate the off-line business is growing. Yet that said, there are some other fundamental drivers. About a year ago, 1.5 years ago, we had really -- we had really deeply examined our chemistry business, which is a significant portion of Research Solutions and the old Sigma-Aldrich business. And we introduced a cheminformatics platform to help our customers do retro synthesis. And this is allowing many of our customers to come in and basically design their organic chemical synthesis on the platform itself. And of course, when they design it, the e-commerce platform is right there to order the reagents. That's just an example of the innovation on the chemistry business. Similarly on the reagents business, which is mid-single digits to high single digits this year, year-to-date, we re-examined our antibodies platform. We have a very wide platform, but some parts of it were not super competitive and we introduced some new ideas there as well. So there is innovation driving that business from a portfolio perspective. From a geographic perspective, China is leading really the charge, high single-digit growth for the Research Solutions business. It's really prevalent year-to-date. So regionally, as well as portfolio-wise, we see nice momentum regionally from China and portfolio-wise from innovation and e-commerce. I hope that gives you color on Research Solutions. From a Process Solutions perspective, I mean, the drivers are similar but they have really kicked up -- they have picked up momentum. I think we have talked about single use in the past. I mean, there, we continue to introduce new products. Recently, we introduced the Pellicon Capsule that really went and took tangential flow filtration to a disposable level. So tangential flow filtration is an area where we concentrate monoclonal antibodies. That's the step. And in the past 15 to 20 years, we've really led that market. We've reexamined it and we introduced a disposable capsule instead of cassettes, which are open. So those are just examples of innovation. Innovation is absolutely contributing to our leadership there, as is the breadth of the portfolio and the fact that we are offering the end-to-end service. I think I would divide it into those 3 elements. And we can quantify that for you down the line. But for now, I would say all 3 drivers are relevant. The portfolio breadth, the fact that we have innovation across this portfolio breadth, the global presence and the end-to-end contract manufacturing piece as well. So I hope that gives you more color on what's driving Process Solutions.

[Operator]

We will now take our next question from Mr. David Evans from Kepler Cheuvreux.

[David Paul Evans, Senior Equity Research Analyst]

So one to Belén first. It seems the Healthcare base business just keeps growing faster than the market models every quarter. As you look at the Healthcare product sales growth in 2018, are there any individual products or areas that you would caution are likely to slow down in 2019, 2020 versus current rates? Equally, any others from your base business where sales should really pick up? And then secondly, maybe for Marcus. I know we touched on this, but in terms of sales guidance being raised everywhere but not EBITDA so much, is there any way you can quantify how much the increased cost coming in are discretionary? How much is being used to invest in future growth, maybe how much is product mix? Or just lower-margin business?

[Belén Garijo López]

David, thank you for the question. So first of all, I spoke about the growth drivers in answering the question of your -- of one of your colleagues before. I will repeat that at the end. Our perspective towards 2022 is very aligned with the guidance, with the high-level guidance that we have been giving to you before. So Rebif will continue to decline in line with the interferon market. Erbitux, which is actually showing a very nice growth in the quarter is influenced by this tender business and we don't see any major change on the trajectory of a low single-digit decline towards 2022. Fertility is very strong, as you have seen in the quarter. I've mentioned the reasons why. A strong Gonal-f with double-digits in all -- in the majority of the regions, particularly U.S. and China. Expansion of the franchise of the Pergoveris Pen, et cetera, et cetera. And we confirmed the mid-single-digit growth towards 2022. We are extremely confident that the general medicine franchise will also deliver on the same basis I have mentioned before, mainly the uptake of our Glucophage business in China. And we expect to keep this business running at mid- to high single-digit growth. This is exactly what we've shown to you before and we are gaining confidence that in-market portfolio will stay as such. Then the increasing contribution of the launches is very important. And those are already making 25% of our quarterly growth and we are very well placed today to deliver on the EUR 120 million of 2018 sales that we have communicated to you before. Is this answering your questions?

[David Paul Evans, Senior Equity Research Analyst]

Yes, that's great.

[Marcus Kuhnert, CFO & Member of Executive Board]

David, on your question regarding guidance. As we have discussed already earlier in the call. The picture's quite heterogeneous when we look from one business sector to the other. And let me reiterate there are 3 effects which, by and large, are responsible for the fact that we do not increase proportionately EBITDA compared to sales. One is FX. Here, we are very precise. Looking at the presentation, you have an EBITDA building bridge for each and every business sector and also for corporate, where we are making the FX effect explicit. And you will see that in all 3 business sectors, we have a clearly over-proportionate impact on the bottom line compared to the top line effect, which by nature, drives down the margin. On top of that, we also see a quite negative FX result in CO in the third quarter, which is containing the negative currency effect from our regular hedging activities. That's due to the fact that those currencies we are hedging and where we still have relatively high hedge ratios from the first half of the year, namely the U.S. dollar and the 4 big Asian currencies, produce now negative hedging results as the FX environment has significantly relaxed in Q3. And as I said, the Latin American piece, which we do not hedge at all, because hedging would be prohibitively expensive, but we have these transactional effect, hard currency liabilities, et cetera, that are hitting our bottom line here in the area of the segment coverage. So that is the FX piece. On the business or portfolio mix effect piece, I would say there's nothing so much special in Healthcare. We have, by and large, already in the past, a slightly negative mix effect. A little bit pressure on gross margins from the decline of Rebif. Because this is one of our most profitable products in the whole group. And we also see this effect of negative business mix effect, especially in Performance Materials where we have a 20% plus growth in OLEDs, which had just hit at the breakeven this year. And here, you can also make your math how much this could be translated into an absolute EBITDA number, if you will, let's say, play a little bit with the numbers, yes? We have significantly above 20% growth in OLED. Yes, and last but not least, as we have already outlined is the investment portion. With Kai mentioning higher R&D expenses, especially dedicated to semiconductor, you'll find the number or the increment over prior year in the PM P&L. Udit was very explicit that we are investing in China or in Asia, in e-commerce, in gene editing, cell therapy, ADCs and single-use products. And also Belén said it very early in the year, increased investments in R&D and in marketing and selling to prepare for the launch of Mavenclad in the U.S. So these are the effects, at which in total, bring us to the guidance that we have released today.

[Operator]

The final question for today comes from Ms. Marietta Miemietz from Primavenue.

[Marietta Eva Miemietz, Founder & Director]

A couple for Belén, please, then one for Marcus. Belén, just following up on the fertility dynamics that we touched on earlier. So obviously, the growth dynamics right now are far above the mid-single-digit growth you're guiding for in the midterm. So I'm just trying to get a feel for how quickly we should expect that growth to decelerate to sort of a more sustainable mid-single-digit growth rate and what the gating factors are. And one way to look at it is to say that the excess growth right now is coming mainly from a bolus of Chinese patients, most of whom will get pregnant with their second child in the next several quarters. And then the growth goes back down to mid-single-digit quite fast. Is this actually -- is this excess growth more sustainable? And second question on JAVELIN Renal 101. I was actually quite surprised at ESMO by how authoritatively the discussion said that whilst it would become standard of care in the favorable subgroup, it just wouldn't surpass ipi-nivo in the intermediate and poor risk subgroup. So with the caveat obviously that cross-trial comparisons are very dangerous and don't really support any conclusions, would you actually say that at this stage, we really have enough data to say that -- i.e. to agree with the discussion or is the jury out? And have you actually got the numerical data for just the intermediate and poor risk groups in JAVELIN for a similar cutoff and maybe presented in a similar format as ipi-nivo that would be really, really helpful. And then, Marcus, sorry, to bore you with more currency questions. But I was just wondering, for the corporate line, if you could actually give us the net hedging losses year-to-date and also what we should expect for full year 2018 if currencies stay at current levels or at the levels that you baked into your guidance, really up to you. And then just to understand the Argentina effect in the corporate line. So do I understand this correctly that absolutely all nonhedged foreign exchange losses that are not related to customer-facing activities or revenues are booked through the corporate line? And can you just remind us exactly what is behind this Argentina situation? What the nature of the loss is? Because you mentioned liabilities, but I would think that actually you would get a gain on the liabilities, not a loss. And is this actually -- can you quantify the effect roughly? And is this really a one-off? Or should we really expect potentially significant losses to occur again in the corporate line every time one of the Latin American currencies or maybe also the Turkish lira kind of goes into crisis mode?

[Belén Garijo López]

So Marcus, do you want to take the question first, the currency first? Yes? No?Okay. So Marietta, look, on the growth pattern of our business, we're extremely confident to deliver as we have communicated to you during the Capital Markets Day and other meetings, and I, 10 minutes ago, went through the guidance. So allow me not to go through this again. In China, which is a major contributor to the growth of our Fertility business, yes? There is a market component of this, but we see a -- well, the market component has to do with the 2-child policy. This is, yes, driving the market a bit farther. But we have been always growing above the market in these geographies. So we see Fertility as once again, as a significant contributor to our growth delivery mid-single-digit growth. This is China, which is the most important contributor. But we also see a nice uptake in other growth markets which may be smaller while the business is resilient in the U.S. Of course, in Europe we are -- we have been taking a big hit from biosimilars. This mostly eroded our price. There is a component of franchise expansion and I spoke before about Pergoveris Pen. Gonal is strong, but also the new launches, mainly the Pergoveris Pen are helping us to better compete in several geographies. So we see this as sustainable growth and really, we think -- we have regained confidence that we will deliver by 2020, to mid- to single-digit growth. Now...

[Marietta Eva Miemietz, Founder & Director]

Would it be unreasonable to assume, let's say, high single-digit growth for 2019 and 2020 before it comes down to mid-single-digits? I mean, I'm just trying to understand whether there's any particular reason why we should see a sort of a crash into mid-single-digit growth already next year.

[Belén Garijo López]

So, I think, once again, remember in 2016, we had a major opportunity to deliver growth because of the competitors' situation and the U.S. market going through some supply challenges. So that, 2016, was very strong. Obviously, that raised the bar and 2017 was leveling that up. In 2018, we are ramping up. We don't see any major competitors, challenges on supplies -- on supplying any market. So we have kind of now taken a path of sustainable mid-single-digit growth globally. And the contribution to growth of the different geographies actually has changed in recent years. So your second question was on...

[Marietta Eva Miemietz, Founder & Director]

On JAVELIN Renal 101.

[Belén Garijo López]

.You were mentioning the discussion. I spent a significant amount of my time talking to the principal investigator, to Motzer, who also presented the data during the study. And actually, it stated very clearly that he considered this data to position avelumab as a new standard of care in this population. Remember nivo-ipi are not approved in the favorable prognosis patient segment. And they are not approved in Europe, either. So yes, indeed, this is the competitive situation in the U.S. It's going to be different from the competitive situation in Europe because this combination is not yet approved. But the jury is still out and we have important competitors' data to see also in coming weeks or months. And once we have the complete picture, we will be able to more precisely calibrate and basically better position the standard of care in both populations, because this is very, very important for the renal cancer segment, which is still a very highly underserved disease.

[Marcus Kuhnert, CFO & Member of Executive Board]

So Marietta, I take your currency question. So first of all, you asked net hedging losses year-to-date. So after the first 3 quarters, we have net hedging losses of minus EUR 20 million in our P&L. The dynamic is that we were still significantly positive in the first quarter as we have been experiencing strong currency headwinds, especially in the first 3 months. Remember, we had more than EUR 300 million adverse FX effects from currencies in Q1 with the FX impact of more than 8% negative. Q2 was then significantly down and so was Q3. Again, the total is, as I said, minus EUR 20 million. When we look forward, please keep in mind -- so the guidance for the full year, keep in mind that the trajectory is different. In '17, we have had depreciating foreign currencies against the euro all over the board. So that means we had a significant positive hedging effect in the last quarter of 2017. 2018 will be just the opposite because we have seen and we discussed it earlier in the call, the U.S. dollar, currently between the 1.12, 1.13. The Brazilian real has somewhat recovered after the elections. So here, we will see a significant negative effect from hedging results in the first quarter and also keep in mind that the average FX rate where we have concluded our hedges so far, is around EUR 1.20 per dollar. So that we will be generating with the current spot rate significantly negative hedging result in the first quarter. We expect the overall amount, I would say today, most probably in the mid-double digits negative for 2018. A couple of words on Argentina, which was the second question. The Argentinian peso has significantly deteriorated year-over-year. I'm just looking on the numbers. So quarter-on-quarter, Q3, the Argentinian peso is down by 83%, so it's depreciated by 83%. In the Q4, what we see so far, so spot rates year-to-date is even more than 100% depreciation. By the way, we will introduce hyperinflation accounting in Argentina, still this year. So the currency environment there is a really bad. On the effect, we have, as I mentioned, hard currency liabilities in Argentina. How do they arrive? Now think about for example, intercompany loans. The KGaA gives money to affiliated companies in Europe. They are recording this in their local balance sheet as a liability. And of course, if the local currency depreciates, it produces a loss because what happens is that the euro liability appreciates, if the peso goes down and the counter booking is then expensing your P&L when the liability gets increased. So we have recorded losses there and it was -- in every quarter, it is, let's say EUR 10 million roughly, or maybe even a little bit more. So the effect is quite [ feel-able ]. What is booked in corporate are all our activities that are centrally decided and are related to hedging measures. So as you know, we have a hedging strategy in place. We hedged our net currency exposure for our most important currencies, which is U.S. dollar, which is the 4 big Asian currencies, which had been in the past the British pound in the aftermath of the Brexit, a decision of the U.K. and finally, the Swiss franc. Transaction exposures are booked in the EBIT in the business sectors. And that is how it works. So the hedging -- the real hedging activities and its result are posted in EBIT or EBITDA of segment corporate. I hope that I have tackled all of your questions on currency and Argentina.

[Marietta Eva Miemietz, Founder & Director]

Yes. I was just wondering if there's anything beyond Argentina that should be on our radar in that regard? Or is that a very unique situation to Argentina that you make these intercompany loans?

[Marcus Kuhnert, CFO & Member of Executive Board]

Yes. I mean, if we would see those really significant fluctuations in the currency, yes, we might be exposed to some fluctuations. We are thinking about opportunities, how we can mitigate this in case that the currency proves to remain as volatile in showing these fluctuations as in the past. You have for example, altering the financing structure, thinking about local financing, whatever. Yes, so these are measures that we would consider if we see that we don't get rid of this kind of currency fluctuations in Argentina. We will keep you posted on that. Okay, as you have been the last one, Marietta, the last question. Allow me to speak the closing words. I want to thank all of you for joining this call. And we are very much looking forward to meeting many of you during the upcoming road shows and give a warm goodbye here from the Investor Relations team, Belén, Udit, Kai and myself. Thanks for dialing in and have a great afternoon.

[Kai Beckmann]

Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.