Executives: Constantin Fest - IR Marcus Kuhnert - CFO Belen Garijo - CEO,

Healthcare
Analysts: Peter Verdult - Citi Simon Baker - Exane Wimal Kapadia - Bernstein Sachin Jain - Bank of America Gunnar Romer - Deutsche Bank Jo Walton - Credit Suisse Emily Field - Barclays Richard Vosser - J.P.

Morgan
Operator: Ladies and gentlemen, welcome to the Merck Investor Analyst Conference Call on the First Quarter Results 2018. As a reminder, all participants will be in a listen-only mode. I will now hand you over to Constantin Fest, Head of Investor Relations, who will lead you through this conference. Please go ahead, sir.

Constantin Fest: Many thanks, Alex, and a warm welcome to this Q1 '18 Merck conference call. My name is Constantin Fest, Head of Investor Relations at Merck. And for this call, I'm pleased to have with me here today, Marcus Kuhnert, our Group CFO; as well as Belen Garijo, CEO of our Healthcare Business Sector. So in the next half hour or so, we'd like to run you through the key slides of this presentation. And then, as always, we'd like to take you through your questions.

And with this, I'd like to directly hand over to Marcus to kick off this presentation. Marcus?

Marcus Kuhnert: Thanks, Constantin, and welcome everybody to our Q1 earnings call. The headline numbers seem to tell a different story, but actually Q1 2018 was a solid quarter for us. And let's have a look why. First, when we're looking at the organic sales growth of 3.5%, Life Science grew at an impressive rate of around 9% in Q1, and Healthcare posted its 27th consecutive quarter of organic growth.

This could more than offset the continued decline we saw in Performance Materials, even if our Semiconductor Materials business and OLED achieved double-digit growth rates in Q1. As we had already discussed in March, currencies were a major headwind for us this quarter, and reduced our net sales by minus 8% compared to last year, equivalent to as much as €305 million. Second, currencies were a very important driver for our EBITDA pre in Q1 2018 as well. Of the minus 18% year-on-year decline you see in the headline figures, around 10% were due to the unfavorable FX development. So, on an organic basis, EBITDA pre declined by minus 8% year-on-year or roughly by minus €100 million, pretty much all of which is due to the royalty income swap last year and the net effect of the milestone payments.

As always, with the publication of Q1 results, we provide a quantitative guidance for the year. It's a little bit more detailed this time, as you know, and we will discuss the details later in the presentation. For 2018 as a whole and excluding our Consumer Health business, which we are going to sell to Procter & Gamble, we expect net sales in a range of €14 billion to €14.5 billion, and an EBITDA pre of between €3.75 billion and $4 billion. EPS pre is expected to land between €5 and €5.40. Now let's quickly look at the 3.5% organic growth in the first quarter.

Organic sales growth in Healthcare and the Life Science was very sound yet again. Performance Materials sales declined by minus 12% organically, which is line with the trend we had seen in the previous quarters. The visible EBITDA pre decline of minus 18% includes, as already said, negative currency effects of 10% which hit all of our three businesses quite severely in the first quarter. The sharp decline in Healthcare's EBITDA pre that you see on the slide is exacerbated by the aforementioned prior year effects and milestones. Adjusted for this and currencies, you would see only a slight decline driven by the higher investments in healthcare.

Life Science managed to grow EBITDA pre from the businesses' organic growth and the ongoing synergy realization. But of course, here too, a significant share of this growth was eaten away by FX this quarter. Finally, PM suffers from the ongoing decline in our Liquid Crystals business and the adverse FX environment. Corporate saw an improvement over last year, most of which is due to higher FX hedging gains in Q1 versus last year. And now, on slide number seven, the regional distribution is basically largely unchanged compared to prior year.

Irrespective of currencies, our business remains fairly well balanced across the three regions, Europe, Asia Pacific, and North America. Noteworthy to say is that we have seen quite nice organic growth in the so-called mature markets, North America and Europe, which is driven by the strength all over the board of the Life Science business on the one hand, and by first sales of our newly-approved healthcare products, Mavenclad and Bavencio. Coming to the financials, I'm jumping to slide number nine. A couple of additional points, first of all -- so additional points means on top of what we had just said to sales and EBITDA pre. First of all, our operating cash flow obviously mirrors the EBITDA pre development and declined compared to the prior year by roughly €370 million.

Of this some €100 million were the cash flow we received last year for the royalty swap which is missing this year. And we also paid more taxes in Q1 2018 compared to the first quarter a year ago, and that amount to similar magnitude. However, note that this is a timing topic, or predominantly a timing topic, as these payments can sometimes shift between quarters. So we would expect here some relief for the second quarter. Last but not least, we have also had some bonus payments in the U.S.

in the first quarter earlier than last year which contributed as well to the lower operating cash flow which is also a timing effect. Secondly, net financial debt got further reduced by €170 million compared to the end of December 2017. So the deleveraging in the first quarter was not as prominent as what you have seen on the last couple of quarters, but that is owed to the effects that we just discussed on operating cash flow. I would want to assure you that deleveraging remains a priority for the group over the next couple of quarters. The current level of EBITDA and net debt gets us to a ratio of 2.4 times, which is marginally above the 2.3 times at the end of December.

Third point, concerning the headcount development, you may remember us taking action last year to meet our earnings commitments. And I also can assure you here that we remain very conscious and cautious in this respect, also in 2018. Slide number 10, very little to say on our reported figures, I think they are pretty straightforward. Our EBITDA pre for Q1 is €225 million lower for the reasons discussed. And EBIT is down by a similar range compared to last year's level.

The financial result obviously benefits from the ongoing reduction in our leverage. We expect to see the interest result this year in a range between €230 and €240 million. Just as a slight reminder, when it comes to deleveraging, we are paying back at first instance our variable interest-bearing pieces of our financial debt. Here the interest rates of coupons are close to zero. That means while we see the significant impact on the balance sheet.

We have seen over the last couple of quarters a significant impact on the balance sheet. The impact on the P&L is still relatively small. This is going to change in the next couple of quarters and over the next one to two years, because then we are starting to pay down our fixed interest rates bearing or carrying debt, which obviously is carrying much higher coupons, and would then with stronger impact on positive impact on our P&L. One additional comment on our tax rate, we had discussed the implication of the U.S. Tax Reform back in March, and you see now the 25% average tax rate in our P&L.

Given our setup on the U.S., our past acquisitions and some specific provisions under the new tax regime, our average tax rate from 2018 onwards will be slightly higher than what we were used to in the past. Now projected to land between 24% and 26%, so no change versus our comments from March, just to reiterate. And now, I hand over to Belen.

Belen Garijo: Thank you, Marcus. Hello everyone.

Let me start by providing additional color to the healthcare financials in quarter one 2018. We are in page number 11. There you see that we continued on a very solid performance trajectory, now counting 27 consecutive quarters of organic growth. Our top line grew close to 2%, and that was mainly driven by the solid performance of our Fertility franchise as well as the Consumer Health business, and also the increasing contribution of our new launches, which actually translated for the first time in the last three year in our European multiple sclerosis franchise returning to growth in relation to the Mavenclad launch in Germany. Mavenclad, together with Bavencio are performing on track and deliver combined €25 million in sales in Q1.

Bavencio generated €12 million mainly in the U.S, and we are expecting to reach mid double-digit sales in 2018. Mavenclad climbed to €30 million net sales in the quarter mainly from Germany, and we continue to see a very solid uptick both in the number of patients that are currently treated as well as in the number of patients who are planned to start therapy. As you will see in the next slide, Mavenclad continues to gain share from other therapies. And we are confident to deliver high double-digit sales in full-year 2018. Looking further at large established products like Rebif and Erbitux, we've seen no material changes in the trends versus previous quarters although it is very tangible that the growth trajectory of GONAL-f has improved.

All in all, the performance of our base business that we have seen in Q1 support the strong resilience of these base portfolio as we have seen in previous years. As a side note and as most of you know, we have also announced the signing of the agreement with Procter & Gamble to sell our CH business. And I will not further detail this since this was caveat of prompt discussion. Marcus has already touched upon the earning drivers in Q1 versus the one-time effect of last year affecting the EBITDA pre of healthcare in Q1. I will only highlight that if you exclude those onetime effects of 2017, our EBITDA year-on-year is flat despite the increase in R&D cost.

Moving in to slide number 12, there you have additional insights of our new launches and market uptick. We are showing the period between launch in September and December because this is the period for which we currently have fairly reliable data of the launch that is of public domain, so I am sure you can contract these. And as you can imagine these launches are very important steps towards delivering on our ambition of incremental €2 billion sales coming from our pipeline by 2022. The early launch uptick of Mavenclad in Germany qualifies as encouraging. And it does reinforce our confidence on the superior profile this brand, our launch readiness capabilities as well as in the potential opportunity ahead of us as we see Mavenclad being launched in other major markets over the coming months.

Mavenclad has established as a treatment options for patients in the high efficacy segment and is continuously gaining share from leading competitors as you see on the slide having created 11% of the segment of -- high efficacy segment in December 2017. Bavencio has now achieved a leading share in market sale, where it has emerged as the option of choice in second and first line combined having achieved almost 80% of the market in Merck sale which is the first indication that we launched. Moving to page number 13, you very well know that in 2013 we embarked on a journey of a major transformation with major focus on R&D. And this is paying off and materializing as pipeline optionalitiy with several prominent assets that emerge as a potential to be first-in-class and first-in-disease. You may wonder what is the impact of this on our financials, and I would say this is an obviously a good problem to have, but at the time that we'll ask for a very disciplined capital allocation as well as a major strategic pharma decision [ph] in order to be able to maximize the asset's potential in several indications at the same time as well as to secure our lead in attractive, but still very highly competitive segment like the TGF beta blockade or our rapidly-expanding multiple sclerosis franchise going from our existent interferon options to maybe to then BTK inhibitors.

With that, let me focus on the span of the major catalyst that will further inform our key development programs as we move further alone in 2018, most of which you have on the slide. First of all let me tell you that as you very well know ASCO is around the corner and the abstract book will be public tomorrow. We have a leading presence a record number of scientific publication about 50 submissions to this Congress and of course this will give us the opportunity to feature some of the data that have been generated lately on assets like TGF beta as well as tepotinib and we are expecting you to value the encouraging efficacy data for these two major compound of our pipeline. As you very well know that DDF space is heating up very quickly and as the industry looks for the next immuno-oncology backbone and we feel really privileged to be in the lead and with the advantage of offering a bi-functional option combining two very highly synergistic anti-cancer approaches into a molecule contrary to other options that are dosing different compounds separately. And in order to better prepare to keep our current first to market advantage as well as to maximize the potential of the assets, we are also considering partnering opportunities for the trial.

As I mentioned before, our focused strategy and disciplined approach to funding will add for very robust pipeline prioritization in terms of whether going to externalize the partnering or external funding what kind of co-development approaches are we going to look versus what we are going to keep in house. And eventually such deficient is not going to be static but it's fancy of emerging clinical data, the evolving market opportunity, internal resources et cetera. For BTK, which is also a very, very exciting opportunity and as you know we met the primary endpoint of Phase 2 trial in MS and for better drug, we are definitely considering partnering options, but we are fully committed to our focus indication MS for BTK a non-small cell lung cancer for beta trap. And as we explore partnering opportunities, we will continue to not waste any minute for this two development programs moving to the next milestones. You have also seen recently that we have announced another external financing agreement with SFJ to now develop Abituzumab in metastatic or colorectal cancer first line in combination with Erbitux, which maybe a nice lifecycle management opportunity for Erbitux in colorectal cancer and it's another illustration of our commitment to manage our pipeline optionality efficiently.

Let me conclude moving to slide number 14 with an outlook of what you can expect from the major pipeline assets in the rest of the year. First and foremost, the submission of Mavenclad in the U.S. is on track for Q2. As usual, we will only make it public once the FDA confirms the acceptance of the filing. Furthermore, based on the ASCO data for TGF-beta trap, we are planning to continue that program move to the randomized study phase against the standard of care in the appropriate earlier setting in non-small cell lung cancer by mid-2018 which we will specify part of there and give you more details in the coming first ASCO R&D update call in June 12 after the final data has been presented at the U.S.

committing. For our mitigate inhibitor, Q4 will be quite important. Not only because we are going to present Phase 2b study data but also because we will have their readout of the 14 weeks follow up during Q4 and these will further inform our Phase 3 design in multiple sclerosis. Not to forget towards that year-end beginning of next year. Two additional Phase 3 studies for Avelumab will be reading out.

As specifically he combination approach in renal cell carcinoma in first line is exciting and ovarian cancer will be all start moving out in Q4 of this year; all-in-all, speaking of 2018 being another critical year for our pipeline with major capital across all developmental space. With this, I want to hand it back to Marcus for him to continue with the other sectors.

Marcus Kuhnert: Thank you, Belen. We are on slide 15. Life Science had a very good quarter when you look on organic sales growth.

Research solutions and applied solutions achieve organic growth in the mid single digits this could demand across support. Process Solutions was again the growth driver of these sectors, and achieved 14% organic growth in Q1, which is in line with the rate that we already saw in Q4, albeit in both cases likely flatters by somewhat sluggish prior year base. We observed strong demand for a single used system cell culture media and process solution services. As into far 2017 any adjustments by key accounts were no issue. Profitability wise our EBITDA pre margin remains above the 30% level.

Organically EBITDA pre rose slightly in excess of sales but as I have highlighted earlier the current FX Environment also affects Life Science and was significant burden far EBITDA also EBITDA pre margin in Q1, 2018. Our synergy target for 2018 of €280 million is confirmed. In performance materials that safe decline organically -4% in Q1 and EBITDA pre is 26% lower. Other pillars alongside display developed however well in the first quarter and mitigated the decline in Display Materials. In Liquid Crystals market share adjustment has continued not worse but no better event and we maintain our assumptions for PM organic sales and EBITDA pre-development in 2018.

We also confirmed that EBITDA pre will reach its trough level next year in 2019. Like in the previous quarter's Performance Materials EBITDA pre and EBITDA pre margin were affected by the ongoing sales decline in Liquid Crystals and also by the unfavorable FX environment. In fact due to PMs Special regional set up you can assume that basically two thirds of the FX induced €1 million safe decline in Q1 fed through to EBITDA pre. On other words, FX depressed our margin in Q1 by some 300 basis points. I think we can be quick on the balance sheets here actually nothing spectacular had been, so any questions open please refer to it in the Q&A.

We jump immediately to the cash flow statement. The cash flow statement also entities the operating cash will be discussed earlier, so I'm not going into again into the details here and important is that the key fluctuation on operating cash flow is in other assets and liabilities. And some of these effects are related to phasing and actually expected to reverse in the second quarter and now to the guidance. Remember that in March, we adopted a new approach for our guidance and we now also provide the transparency on the organic and FX impact at EBITDA pre level. This is due to the rising volatility of currency rates as well as the big impact of this EBIT currencies have on absolute numbers like sales and EBITDA pre.

We see announced divestment of our consumer health business a couple of weeks ago and we also provide more details in the guidance on how our businesses are going to develop at constant portfolio and without consumer health. In a nutshell, the main earnings drivers for 2018 that we have collected for you on this slide remain basically unchanged versus our comments in March. Let me just give you a couple of additional details. First of all, we see the ever average Euro/U.S. dollar rate for 2018 now at a level between 1.19 and 1.23.

Here the developments in Q1 2018 was an average rate of around 1.23 were a little more negative for us than what we had expected. Even though that the spot rate at the moment is slightly more favorable, but when we look back the first three months, we saw a pretty highly devalued U.S. dollar. The FX headwind too burdened our businesses EBITDA pre or by the magnitude differs between them. So that is why we are going to give you business sector specific EBITDA pre guidance.

And I am very well aware that we are not yet reporting in the same manner. That means you will not yet find in our actual numbers the currency split on EBITDA pre per business sector. This is something that we will provide to you with Q2 onwards. And obviously then you will see also the numbers for the first half of the year and then you have Q1 on top of that. The FX hedging gains, I expected to help, but our hedge rates are fairly close to the spot rates and to the above range the magnitude will be rather small.

Hence corporate and other costs should remain within the previously indicated range of €320 million to €360 million. Let me make also one more comment to the BioMarin milestone payment of €50 million. So, this is the only, how shall I say, onetime effect that we have seen in the numbers of our first quarter. So there are no other "Funny things," included and let me just clarify on -- I think that the BioMarin milestone is not a funny thing, because for a pharma business it's part of our operating model. And hopefully, from time to time we are entitled to milestone payments.

And please remember that we always said that we will see less exceptional items in 2018 than in 2017, but we never said it will be zero actually. Coming to the guidance in slide number 21, so for the group and first of all, on a constant portfolio basis, we continue to expect moderate organic net sales growth of 3% to 5% mitigated by a minus 4% to minus 6% [technical difficulty] as currency effect, which will be particularly severe in H1 of 2018. So Q3 and Q4 will see a much more moderate currency effect. This leads to an expected net sales range between €15 billion and €15.5 billion. For EBITDA pre we forecast a slight minus 1 to minus 3 decline on a currency adjusted organic basis compared to 2017 and currencies we reduced EBITDA pre by another minus 5% to minus 7%.

Therefore, on a constant portfolio basis, and with our current FX expectations, EBITDA pre should be in a range of €3.95 billion to €4.15 billion. EPS pre for the year would be between €5.30 and €5.65. Please note that the consensus is also including the CH number. So the consensus numbers are including CH and on a constant portfolio basis. So, now as the next step we take account of the consumer health disposal.

We explained already back in April that with our Q2 reporting, CH will be shown as discontinued operation and this will retrospectively also apply then to Q1 as well as to Q2 2017, because from Q2 onwards we will have to show obviously comparable numbers. And so you will see then the full comparison also for prior quarters. On this basis, we expect our net sales for '18 to be in the range of €14 billion to €14.5 billion and EBITDA pre in the range between €3.75 billion to €4 billion. And it's also the fact that we believe that the CH comes between €900 million and the billion top line and €170 million to €200 million EBITDA pre will be divested to P&G. Earnings per share pre which per our division do not include discontinued operations are expected between €5 and €5.40 for the year.

Let me emphasize one additional important point namely that our underlying assumptions on organic growth remain completely unchanged. You will also see on the next slide that our three business sectors here -- actually, in order to save some time I would not go through the poser of this slide, because it's basically unchanged compared to what we have shown to you in March. I just would want to draw your attention for a second to the numbers. So here you see the organic projections for health care EBITDA pre -- minus 1% to minus 2% year-on-year and a minus 5% to minus 7% negative FX translates into a €1.77 billion to €1.83 billion EBITDA pre or excluding CH to a €1.58 billion to €1.65 billion. In life science we said organic growth of EBITDA pre on prior year's level, which will be around 8%.

FX is supposed to land between minus 4% and minus 6% and the EBITDA pre range therefore is €1.82 billion to €1.87 billion. And last but not the least for performance materials, we think that we will see an organic EBITDA pre decline around 15% with a negative FX effect between 8% and 10%, which translates into an EBITDA pre between €725 million and €765 million. With that, I want to thank you for your attention so far and we are now entering into the Q&A session.

Operator: Thank you. We will now begin the question-and-answer session.

[Operator Instructions] And we will take our first question from Peter Verdult of Citi. Please go ahead.

Peter Verdult: Thanks. Pete Verdult from Citi; two questions please, on the trap and performance materials. Belen, on 7824, I realize you are unable to discuss the ASCO date with this juncture.

So the question is more about the development pathway for the asset. The BASKA [ph] study allows for you to pursue a single-armed path registration cohort expansion with a randomized trial or by a market-driven tumor [ph] opportunity. So in addition to your comments on lung, are you able to say how the trap is going to be pursued in HPV associated cancers if at all. That's question number one. And then for Marcus on PM, I think in the past you've said that the ex-Surface Solutions business growing double-digit.

LCD is about 50% of sales to reconcile that to the 4% organic decline means that LCD revenue probably down 15% or more. I know you've reiterated your view in terms of the EBITDA impact, but can you just comment on whether the issues are still just China specific? Any sense on what you believe trough margins will be or can you point to any changes that have been made in pricing strategy or cost cutting or cost efficiencies over the past few months, thank you?

Belen Garijo: Thank you, Peter, for the questions. This is Belen. So, once again, TGF-beta is an extremely exciting area in oncology and we really feel privileged to be in the lead with its unique and highly innovative approach in terms of biology integrating the two mode factions in one single molecule. We are considering trap as a potential blood per molecule for several indications with our significant potential across different tumor types and different settings within those tumor types.

Therefore, with the data -- the non-small cell lung cancer data that you will see tomorrow, which we consider to be encouraging and a critical medical need that we still see together with a potential in lung cancer, lung cancer is going to stay our focus area. And we are really fully committed to continue the development to the next phase in a Phase II/III randomized study with registration potential against the existing standard of care, and in earlier settings of lung cancer. And we are planning to start this in Q3, which I'm not sure I said it before. HPV is an area where the biology of TGF data has been proven to play a critical role. And therefore we initiated a collaboration with the NCI study, which preliminary results are going to be shown at ASCO.

This study is still ongoing, and we are aiming to include 90 patients across different tumor types in those HPV associated cancers. We don't believe that on the basis of 16 patients we can obtain any registration in any indication, but we are committed to continue the study moving forward until we reach these 90 patients. And based on the results that we see of that study that is being done in collaboration with the NCI we will [indiscernible] and see what opportunity is.

Marcus Kuhnert: Okay, hi, Peter. I'll take over the PM question.

So before we start answering the questions just that we don't mix up the things, a clarification on the new names. So Display Materials now in the new structure is comprising of Liquid Crystals, photoresists, and OLED. Semiconductor Solutions is what we were earlier referring to as Integrated Circuit Materials and Surface Solutions is the former pigments business basically. So you mentioned that pieces of the portfolio outside of Liquid Crystals were growing double-digit. So, just to be clear, that was only the case by and then in Semiconductor Solutions, of the former Integrated Circuits business.

Pigments never grew double-digit. It was more in the high single digits area. You have done the math on the organic sales growth rates of the SPUs. I can tell you the minus 15 that you mentioned for Liquid Crystals is too conservative. So here we are a little bit better.

The reason is that we are a little bit worse at the start of the year, now in Q1 in pigments on Surface Solutions due to high comparable set we had in Q1 2017. You ask about the issues in PM, so while China is a major topic, obviously, because here the competitive environment has quite fundamentally changed. It would be too narrow to nail down the problem only to China. Actually, and we've said this earlier in calls as well, we are also facing a tougher environment with other customers due to the fact that many of the big panel manufacturers are now, after they have actually gone through a first capacity ramp up over the last couple of years, are now returning to a dual or even multiple sourcing strategy. That means we are struggling to defend the very high market shares we were enjoying for certain period of time in the past because that does not go well together with the strategy of the big panel manufacturers to have a more balanced supply going forward.

In terms of pricing strategy, yes, we have made some price concessions in the last couple of quarters in order to defend certain level of market share. However, on the other hand, we are well cognizant and aware that as basically when we think about PM or a general strategy in partner terms as a differentiator and quality leader, the price competition is actually not the area we want to engage in going forward. So that is the reason actually why we are working on a new strategy at the moment heavily, which we are going to introduce to you at the beginning of July because then we should have a status that we can communicate. And yes, also part of the synergy and part of the overall new setup of Performance Materials will be cost efficiency. So here we are looking, for example, in areas of R&D costs, we are looking in the areas of optimizing the global manufacturing footprint and supply setup.

But we should also not overemphasize the potentials that we have here. We have some potentials, but not overemphasize, because as you know, I mean, PM was very profitable in the past, which already points to the fact that we have been pretty lean in our structures here. But of course, we have also some room to improve. And for that we will give you also an update in July.

Peter Verdult: Thank you.

Operator: We will take our next question from Simon Baker of Exane. Please go ahead.

Simon Baker: Thanks for taking my question. Two for Marcus, please. Just continuing on Performance Materials, it sounds like with the problem spreading to China -- or spreading beyond China that there is potentially more uncertainty and less visibility going forward to the eye of an outsider.

Yet, your guidance for PMs is smaller at this juncture than it was last year. So I wonder if you could just talk through how the changes within display and performance materials have apparently given you more visibility on the outlook. And then secondly, just a couple of quick ones, I couldn't see anything in the notes in the report explaining the €25 million other adjustment within Healthcare. And secondly, I know you've committed to giving the EBITDA pre organic growth rates from Q2 onwards, but given that it seems today that the principal reason for weakness in Merck in the stock price today is misforecasting by us the FX impact between different divisions. I wonder if I could possibly chance my arm and ask what the Q1 organic growth rates for EBITDA were at this point? Thank you.

Marcus Kuhnert: Okay, so let me start with the simplest question first, which is your question about the others items in Consumer Health. These are divestment-related costs in the context of the disposal of our consumer health unit to Procter & Gamble. On your question on the problem of Performance Materials or Liquid Crystals spreading beyond China, so first of all, this is no news. We've said already earlier that in China we have new competitors; however this situation of the panel manufacturers moving to a more dual or multiple sourcing strategy was also basically communicated. So this is nothing new, and this is also fully incorporated in all of our forecasts that we have made last year on the trajectory to 2018.

So there's nothing new that would alter or add to further uncertainty or alter the expectations that we have. However, what is true is that currency effects are hitting PM pretty hard. It's the most effective business sector simply due to the fact that here we have the biggest currency disparity between sales, which are accounted for predominantly more than 80% dollar-efficient currency on the one hand, and the cost base which is to a big extent in euro. We have not compared the ranges of our guidance last year versus this year. We believe that the guidance range that we are giving for Performance Materials, so to be between €725 million and €765 million leaves us enough room actually to maneuver in order to land the year in the guided range.

And what gives us also a little bit confidence on that is that internally we see that our forecast quality, after having really taken a deep dive into the situation in PM over the last couple of months has markedly improved. So we believe we have now a significantly better understanding on the market dynamics and how we are affected by that than one or one-and-a-half years ago. And that makes us confident that the guidance range that we had given for 2018 is sufficient. Last but not least -- sorry, Simon, help me. What was your third question?

Simon Baker: I was just -- there was on -- I know you said that we would get the EBITDA pre organic growth rates in Q2 [indiscernible] them now for Q1.

Marcus Kuhnert: Yes, so unfortunately we cannot. What I can give you is the organic EBITDA pre development for the group. So here we have seen EBITDA pre declining by some 18%, out of which 10% basically is currency. So we have seen on an organic 8% decline in EBITDA pre for the group. Belen has already mentioned if we take out the one-timers and if we also take out the currency effect on Healthcare, the EBITDA in Healthcare is almost flat.

And then you can make, I think, a good judgment or a good estimation what is going to happen in Life Science and in PM. As said from Q2 onwards, we will provide you with the organic and FX picture for the other businesses as well. And we also said, and I mentioned it in the presentation, that for PM basically two-thirds of the top line FX effects is setting through to EBITDA pre. I think this should provide you a pretty reliable picture on Q1 FX effect on EBITDA pre.

Simon Baker: Great.

Thanks so much.

Operator: We will take our next question from Wimal Kapadia of Bernstein. Please go ahead.

Wimal Kapadia: Hi, thanks very much for taking my questions, Wimal Kapadia from Bernstein. So just the first on surface solutions within PM, it actually declined in the quarter.

Now I appreciate the high comparable year-on-year, but should we think of a declining trend as the trend moving forward? And then tied to that, can u talk a little bit about the margin outlook for this subdivision, should we think of this business as relatively stable margin or one facing pressure? And then my second question is to Belen on tepotinib. Now I appreciate you can't say too much in terms of ethical abstracts, but can you give any context around what you personally believe would be a good outcome in terms of overall response rate. So when I think at some of your -- so the competitor products that have shown some small subpopulation data for MET ex14 patients, you see a novel response rate of around 40%. So is that what you are looking for, do you think that will be a good outcome for your data? Thank you very much.

Marcus Kuhnert: So, Wimal, I'll start with your surface solutions question.

So the pigments decline is owed to the high comparables of the first quarter. In terms of sales momentum as well as in terms of margin, we do not guide on sub segment level, but there is no reason to assume at this point in time that we would see a significant break of the trend of the development that we were used to in the past.

Belen Garijo: Let me take the second questions on tepotinib, and again, thank you for the question because I didn't have the chance to speak about this exciting compound for too long during the presentation. So, first of all, this ASCO will be the opportunity to see -- to show the first clinical data of our lead indication in non-small cell lung cancer Met-Exon 14 on which we have very promising efficacy. Today, for instance, certain CMEDs [ph] are from ALK inhibitors are moving in the range of 40% responses in comparable settings, not being fully comparable, in the ballpark of this.

So you have this in mind when you see our data because on the basis of the data that you will see, you will see why I qualify this as promising. Also, you have to understand that for tepotinib we already developed a very solid biomarker approach, and we are operating with a liquid biopsy approach which is also giving us the opportunity to accelerate enrollment. There is no drugs approved in this space, it's a very powerful niche. We got fast-track designation in Japan and we aim to secure the ongoing study as very efficient study also in other geographies.

Wimal Kapadia: Could I just follow-up and ask that is the data good enough to be filed earlier or in this year?

Belen Garijo: What I can say at this time is that we aim to secure the ongoing study as registration of study once we have obviously completed enrolment and have engaged into more advanced discussions with the registration, with the regulatory authorities.

Wimal Kapadia: Great, thanks very much.

Belen Garijo: Yes.

Operator: We will take our next question from Jain Sachin of Bank of America. Please go ahead.

Sachin Jain: Hi, it's Sachin Jain from Bank of America.

Questions on the same topics if I may, and just firstly on TGF-beta again just similar to the question for tepotinib just setting expectations, prior mono-data and second line have shown response rates of 15% to 20% in all comers single digit response rate from PD-L1 negatives, do you view that as a fair benchmark and then as you think do your registrational study in lung, could I confirm your thinking about first line lung as the second and you said versus standard of care given that is changing quite rapidly, what do you view as the standard of care in that setting and then just back to PM, just to clarify the comments, so the $200 million to $300 million decline that you previously pointed to in the full-year you clarified at the top end of the range, have the FX development changed to beyond $300 million and thus we think about the decline into 2019, are you willing to frame that or how dependent is that on the cost offsets that you may be able to get from strategic review that's ongoing? Thank you.

Belen Garijo: Hi, Sachin. Thank you. I think when you look at the data, you have to take as a reference some of the already public studies in this context, I would mention keynote 001 and keynote 010 and you would see that our data compares positively against those two references. And if you take my answer, I think this would also address your second question for the next development phase in terms of the standard of care.

Sachin Jain: Thank you.

Belen Garijo: Is this answering your question?

Sachin Jain: Yes, thank you.

Belen Garijo: Yes.

Marcus Kuhnert: On your question on PM, so the range set we have given to you in August was excluding currencies, so it was taking the FX assumptions that we had in August 2017 currently we see the $200 million to $300 million sales impact end of 2018 versus end of 2016 more at the higher range and would additionally be burdened by negative FX effect. So this would come on top, but this is also included in the current guidance of the business sector.

When we look on 2019 of course new strategy and also the efficiency measures we work out market et cetera everything we are working at the moment on will help us to actually turnaround the business from 2019 onwards. So that means that we still expect to reach the thing in EBITDA pre in 2019 and that beyond we should see increasing absolute EBITDA pre-numbers going forward.

Sachin Jain: Thank you. Just as to avoid confusion, could you clarify what the additional burden of FX is versus the $200 million to $300 million? Thank you.

Marcus Kuhnert: Yes, for 2018 we said 8% to 10%.

Sachin Jain: Thank you.

Operator: We will take our next question from Gunnar Romer of Deutsche Bank. Please go ahead.

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

The first one would be on Applied and the acceleration that you're seeing here, if you can comment on what's been driving the acceleration here and to what extent this sustainable and then the second question also Life Science and specifically the guidance if you can provide some additional color here because I'm struggling a bit in terms of the implied margin, when I look at your guidance it seems that's implying about 50 basis points of margin improvement year-over-year via the remaining synergies suggested margin should extend by at least 100 basis points. So I'm just curious whether there is other parts within Life Science where you are facing some margin pressure, so just help us understand what's going on in terms of the underlying margin development that would be very helpful and then last but not least again on Performance Materials, you talked about price concessions earlier, I think historically prices were down low single digits to mid single digits for that business, can you potentially quantify the concessions that you have been making or are making and how we should be thinking about ASPs going forward here? Thanks.

Marcus Kuhnert: Coming to your first Life Science question in applied actually we've seen very good performance more or less across the board, so the major growth drivers advanced analytics here and also bio systems and regulated materials as well as Lab Water has been the growth drivers in this segment in the first quarter. Consider at the moment the Life Science market in a very good condition, the demand is robust, we do not see any major key account issues anymore. Yes, so obviously you are never in a perfect world, so you always have one I think customers might have weakened quarter but we so big we are so well diversified that this can be an easily balanced out and overall the market is in very good shape, the order books are in good shape, so here we think that the current gross momentum is sustainable.

When we look on the implied margins please do not forget that we encounter really significant negative effects in the first quarter and you're absolutely right when looking on organic sales growth and the synergy realization we should expect a better margin but we really had an X. topic in Q1. And this is also going to carry through into Q2 however on a slightly lower basis Q3 and Q4 should then see a much small related environment when it comes to FX because remember in July last year, the dollar and many other emerging market currencies started rapidly devaluate, so the major part of the burden is in H1 and afterwards we will see some release here. Operating leverage under top line of Life Science works also the synergies are going to come we will see less to announce this FX effect going forward. On Performance Materials the price contents are no obviously cannot fully quantify it took the range of a negative price effect are little good more pronounced, so that means as let's say market environment at the moment.

But I also said that we would not enter into a strategic game where we are going to try to defend market shares with price concessions now going forward over a longer period of time, so this is not going to work out. We are basically we need to bank on innovation. We need to leverage quality and this is actually part of our new strategy so and we then we will provide you much more insights and later how this is going to work out. So the price effects when we were entering into battles to defend market shares were more pronounced and then mid to high single digit but as I said this not sustainable way going forward and that is also not the picture that you have in mind when modeling our future development going forward.

Gunnar Romer: Thank you and just a quick follow-up, so on Life Science basically you're saying underlying margins are resilient and you should see some operating leverage on top.

And there's nothing strange going on in the underlying business so it's basically the effects, which is driving the difference here?

Marcus Kuhnert: That's right.

Gunnar Romer: And in terms of the Performance Materials strategy update what kind of format will that be please?

Marcus Kuhnert: And it will be a came to market call where Kai Beckmann and eventually some of his leadership team will update you about the new strategy. But we will provide more details at a later point in time. I only can tell you it will be in July.

Gunnar Romer: All right, thank you.

Operator: We will take our next question from Jo Walton of Credit Suisse. Please go ahead.

Jo Walton: Thank you. Can I just ask on the older products in the healthcare business? The strong performance in GONAL-f, how sustainable to is that for the rest of the year? Could you also remind us of the timeframe that you'll be able rollout Mavenclad into the rest of Europe? Will we see material sales effectively outside of Germany through the rest of this year? And on the performance material side, I wonder if you can help us -- maybe this is something we have to wait for the strategy day for, but is there any evidence of quality suppliers within China being able to make half of these of liquid crystals. You talked about some of your customers moving from single source to more balanced supply.

So, I just wondered if there had been an improvement in the competitors' offering. And if there is any timeframe that we should be looking for announcements from your customers about some of the adoption of new crystals that you have that would give you a stronger competitive edge?

Belen Garijo: Thank you, Jo. Let me take Mavenclad first because I mentioned during the presentation that the majority of the sales in Q1 are coming from Germany. However, U.K. is now launching.

And you may have seen that we obtained NICE approval in the first round, which is a big success. And it's also giving us a comparative advantage versus existing competitors. Then, we have also obtained markets -- final marketing authorization. And we are launching in a smaller market. Our expectation is that from now till the yearend, the majority of the major European markets have joined.

Canada is also being launched outside of Europe. And smaller market which we are not going to really move the needle, but again just to repeat Germany, U.K. now launching a smaller market Scandinavia, other markets, and then from now till the yearend, other major markets in Europe and Canada picking up. Now on GONAL-f, if you look at the quarter the main driver of the quarterly growth has to do with the CVS Caremark contract in the U.S. And to a certain extent, this is going to be offset by the increasing erosion Europe, so we confirm our guidance that we will stay on mid single-digit growth for the full-year fertility growth -- the fertility franchise.

Jo Walton: So this is an improvement in your formulary position rather than an inability of your competitors to supply?

Belen Garijo: For the quarter, yes, we have a more favorable positioning in the formulary. And actually, we have replaced one of our major competitors in the listing of CVS Caremark in the U.S.

Jo Walton: Okay. Thank you.

Belen Garijo: And this is a public domain.

Marcus Kuhnert: On your PM questions, so quality supply in China, answer to your first question is yes. So, this is exactly one of the problems that the competitors -- the Chinese competitors that they have really made progress over the last one-and-half - two years. And they are meanwhile capable to provide I would say reasonably good quality which is absolutely sufficient for example to cover the mass markets especially in China. And the mass market segment in China is still by far the biggest segment. So these are real competitors meanwhile.

On the other hand, we are firmly convinced that also in the future, innovation will play role in this business. And when we look on new crystals, new modes, new offerings, we are pretty sure that in the foreseeable future, we will not see any innovations or any new mode from one of our customers. We have just launched SAVA. And we have also some other encouraging things in the pipeline, however, not yet as mature as SAVA. But we will give you also more insights on our pipeline and on our R&D focus areas when we are going to present our strategy in July.

Jo Walton: Thank you.

Operator: We will take our next question from Emily Field of Barclays. Please go ahead.

Emily Field: Hi, yes, thanks. I was just wondering just in the Mavenclad share cake in Germany if you could quantify what share is coming from other orals versus more legacy therapies? And then also just on R&D and healthcare, it's obviously up year-on-year basis but down 150 basis points sequentially as a percentage of sales.

So, should we kind of model going forward the rest of the year levels more similar to the back half of 2017? And then just on process solutions. Obviously, it's had a couple of strong quarters benefiting from the key account issues experienced earlier last year. And I just wanted to confirm that sort of once we lap that past Q3 that we should expect the segment to grow slightly above that market rate of a high single digit. Thanks.

Marcus Kuhnert: Emily, I start with your question on Process Solutions.

Yes, just as a short recap, Process Solutions had a quite little bit lackluster start in 2017 amid some issues with some of the global key accounts. We are at this point in time not quite sure how long this is going to take. There were also a multitude of reasons, increased biosimilars competition, there was some inventory programs on the customer side et cetera, et cetera. So fortunately, it did not take as long as we originally anticipated for said quarter. 2017 onwards, we saw strong recovery and the growth momentum was an ever increasing growth rate over 2017.

And we are now in Q1 2018 with a growth rate of process solutions of 14%. Basically we have confirmed the level of Q4 2017. And as I said earlier, we have see a very robust demand in the market. We see high demand from all pharma companies behind single use products, behind cell culture media, behind process solutions. So, this is a very robust growth trend.

We see full pipelines in the pharma companies, which also adds to the fact that monoclonal antibody market is going to democratize further. That means while today -- and biggest molecule actually account for some 80% of the overall business, this is going to shrink to roughly the third over the next three to five years with another 10% coming from biosimilars. But some let's say 60% actually contributed by new molecules, new monoclonal antibodies which are currently still in the pipeline of the pharma companies. So what I want to say is that, of course, it's dangerous and difficult to project more than one or one-and-half years going forward, but for the time being confident that the market momentum is going to continue and that process solutions will remain a very strong growth driver of our business going forward.

Belen Garijo: Emily, let me continue with the Mavenclad's question.

So, for our German launch what we have today is the source of patients indicating that 80% of our patients of -- Mavenclad treated patients are coming from switches. And around 20% newly treated, so previously naïve patients. Those who are coming from switches are coming mainly from Gilenya and other high efficacy agents. But if you look back at the chart, we are showing in the percentage and you can easily identify that the majority of the patients are coming from the Gilenya share on the switches. Now can I confirm your question on the R&D spending to make sure I give you the right answer?

Emily Field: Yes, yes.

No, I was just comparing you know, obviously it's up on a year-over-year basis, but down you know, on an absolute level sequentially. So I was just wondering do you expect it to kind of continue to tick up over the course of the year as spending did last year.

Belen Garijo: Yes, I mean as we communicated last year, and on the basis of the guidance that we gave late last year.

Marcus Kuhnert: If I may head, of course we in the current FX environment this is helping us a little bit, this is reducing a little bit the R&D cost, not too much, because we are also incurring significant portion of our R&D activities and cost in non-U.S. dollar.

But we will see some relief here as well. So it will be a very controlled increase over last year, but basically the plans are still intact, what we said earlier.

Emily Field: Okay, thank you.

Operator: We will take our next question from Richard Vosser of J.P. Morgan.

Please go ahead.

Richard Vosser: Hi. Thanks for taking my questions. Two questions please; firstly on Viventia, could you talk about the split of the product between first and second line in renal cell carcinoma, perhaps given the penetration you know, close to 80% already and those combined, talked about the gross that you see in 2019? And then second question, just on the [technical difficulty] trials, perhaps you could talk about what is different with your biomarker, we've seen [technical difficulty] in the past. Could you also [technical difficulty] combinations with EGFR inhibitors trial that you have done and whether you are concerned about the T790M mutation impacting your results? Thanks very much.

Belen Garijo: Thank you, Richard. And sorry for these constant interruption, I hope I actually got all your questions. Let me start by Viventia and then I will ask you to perhaps repeat the questions again to make sure I can assist those correctly. So, we cannot make a distinction on first and second line, because actually on the label we have first and second line. We have a broad label in the U.S.

So that's why I said first and second line combined, right? And the penetration that we have in the IO, eventually the one I showed is now giving us a leading position of almost 80% market share. That's the way we are [indiscernible]. Then, could you repeat your second question related to a broad label in 2019, I got.

Richard Vosser: Yes. I will repeat that.

So what I was saying, there's been a lot of previous failures with CMAC inhibitors, and they have all used biomarker-driven trials to choice CMAC high. Perhaps you could talk about first of all, what's different around this biomarker and how you are selecting the patient? And secondly, perhaps you could just tell what you have learned from the combination trial that you have done with an EGFR inhibitor in patient -- excluding patients with the T790M mutation? And finally, whether you are concerned about escape through the T790M pathway impacting the results or the efficacy of the CMAC inhibitor in lung cancer?

Belen Garijo: Yes. Let me comment on the higher market approach. I said it's a very highly selective, and a very solid biomarker. And no doubt this has been absolutely critical to early characterize the efficacy or the potential efficacy of this compound and the data will be shown at the ASCO meeting.

You will see that tomorrow on the abstract. The second element that is important for this compound is that we are operating with a biopsy -- tissue biopsy, which is facilitating tremendously the enrollment of the patients in the right side with less invasive techniques. On all the other questions, I would actually encourage to reserve these for your conversation with the R&D folks in June, once you can also see these in relation with the clinical data. Do you have another question on the top of Evobrutinib?

Richard Vosser: Absolutely fine, thank you very much, Belen. Thanks.

Belen Garijo: Thank you, Richard.

Constantin Fest: Thank you. I believe this was the last question that we could take in this call. And with this, I am happy to hand over to Marcus for the closing words.

Marcus Kuhnert: Yes.

Thank you all for joining us on this call. And we have to catch our plane now, and Belen and I, we are looking very much forward meeting you during our upcoming road shows. Thanks again for dialing in. Have a great afternoon, and good-bye.

Operator: Ladies and gentlemen, thank you for your attendance.

This call has been concluded. You may disconnect.