Executives: Constantin Fest - Head of IR Stefan Oschmann - CEO Udit Batra - CEO of the Merck Life Science Marcus Kuhnert -

CFO
Analysts: Simon Baker - Exane BNP Paribas Sachin Jain - Bank of America Matthew Weston - Credit Suisse Daniel Wendorff - Commerzbank Gunnar Romer - Deutsche Bank Peter Verdult - Citi Richard Vosser - JPMorgan Vincent Meunier - Morgan

Stanley
Operator: Dear ladies and gentlemen, welcome to the Merck Investor and Analyst Conference Call on the Second Quarter Results 2016. [Operator Instructions]. May I 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, Merriam, and a very warm welcome to the Q2 2016 Merck conference call. My name is Constantin Fest, Head of Investor Relations here at Merck, and I'm delighted to have with me here today Stefan Oschmann, our Group CEO; Udit Batra, CEO of the Merck Life Science business sector; as well as Marcus Kuhnert, the Group CFO.

In the next 20 minutes, we'd like to run you through a few of the slides of the presentation, and then we'd be happy to take all of your questions. Also, please keep in mind that we have about one hour for this call, as we need to catch flights for the upcoming roadshows. And with this and without any further delay, I'd like to directly hand over to Stefan.

Stefan Oschmann: Thank you, Constantin, and good afternoon or good morning to all of you. I will be starting on page five of our slide deck.

And as you've seen this morning, Q2 was again rather strong for us, both from the financial and the operations perspective. In healthcare, that we filed cladribine tablets with EMEA. And we've published very good clinical data for avelumab for MCC. Life science continues to grow very nicely and is well on track with the Sigma integration. And you also see from the numbers today that performance materials was managed well through another quarter of destocking in liquid crystals.

And similar to Q1, a lot of the growth in sales and earnings was obviously due to the Sigma acquisition. But, also, and this we all know is even more important, due to a very sound business performance. Therefore, we upgrade our full year guidance and expect EBITDA pre of 4.25 billion to 4.4 billion and EPS pre of 5.85 to €6.1. Going to the next slide, slide number six, Marcus is going to tell you more about the financials later on. But, I will try to summarize a couple of points here.

In Q2, Merck achieved organic net sales growth of 5%, driven by healthcare and life science. In healthcare, we saw the same trends prevailing as in Q1. Rebif in North America was organically stable, while fertility, and especially Gonal f benefited from strong demand and a competitor's outage in the U.S. Life science grew organically by 8% in Q2, driven particularly by process solutions. With this impressive momentum in the last four quarters and the resulting high base, the second half of 2016 will likely be a bit slower for us.

In PM, the destocking in liquid crystals continued, but profitability was very well managed and held up nicely. EBITDA pre exceeded again the €1 billion mark, driven by solid demand in all of our businesses, driven by a favorable product mix, Sigma synergies, and around 30 million disposal gain in healthcare. Next chart, chart number seven, regional split doesn't differ so much from Q1. With the inclusion of Sigma now, North America accounts for 26% of our sales, and Europe and Asia Pacific for roughly one third each. When you look at which of the regions has been the most important growth contributor for us in Q2, then it was North America followed by Asia-Pacific, despite the destocking we have seen in liquid crystals during the quarter.

But, you will see this more clearly on the next page. N Looking to the details here, you will notice that Europe and North America maintained the organic growth trajectory from Q1. This was due to the good growth of our fertility business in North America, which made another big contribution in Q2, and organic growth in this region, where it was stable, especially due to Rebif. Europe grew pretty well, driven by life science. For the Asia-Pacific region, healthcare was the biggest driver.

And the destocking effects we have seen in the liquid crystals value chain could be mitigated. And for the detailed financials, I would now hand over to Marcus.

Marcus Kuhnert: Thank you, Stefan. And good afternoon, good morning, also from my side. I am on slide ten now.

So, for Q2 2016, the picture actually does not look so much different to what we have seen already when we looked on our Q1 numbers. Sales and earnings grew strongly, and margin improved further. First and foremost, this is, of course, again, due to the Sigma-Aldrich consolidation. And also, we are benefiting during the whole year from the end of our commission payments for the copro -motion of Rebif in the US. But, also, the ongoing good organic growth of the businesses contributed notably again in Q2, as we have just seen, so with healthcare and life science being the major drivers.

The lower financial result is a key reason why actually the EBITDA growth does not directly fall through to earnings per share. And we will discuss a couple of more details on the next slide when we look on the development of the financial items. Net debt is stable. And you will see when you look into the details that cash flow was affected by high tax payments, higher working capital, as well as the dividend payments in the second quarter. Going to the next slide, looking on the reconciliation between EBIT and earnings per share, so when we look on the EBIT number, we can see that EBIT increased by 10%, which somehow is a little bit an under proportionate increase compared to the rise, strongly rising EBITDA.

And this is on the one hand due to the higher depreciation and amortization from the Sigma acquisition. We have seen some integration costs in the range of €70 million in the second quarter. And also, the EBIT contains roughly €17 million impairment from a change in the competitive landscape. We had to reevaluate our intangible asset that we have capitalized end of 2014 for the copromotion right in the context of the Pfizer collaboration. This is, by the way, also the reason a slightly higher tax rate in the second quarter.

So, on the other hand, I would like to reassure you that our guided range of 23% to 25% for the full year 2016 remains unchanged. Coming back to the financial result that I briefly mentioned on the previous chart, this, so, the financial result has significantly come down from minus €41 million last year to now minus €121 million. And the reason is not what somebody might assume at first glance, due to higher interest payments in the context of our raised indebtedness from Sigma-Aldrich. So, this effect was rather minor. The main reason actually is the lift in value of our share-based incentive program following a very favorable development of our share price and also an outperformance of our benchmark index, the DAX, which ultimately has burdened our financial result.

However, let me assure you that our financing costs for Sigma are, as I already said, fully in line with our guidance for the interest result of the year, which is expected to land between €270 million and €300 million. Now, we have a closer look on the three business sectors. And I will start with healthcare. So, healthcare had a very strong quarter, net sales growth organically of 7%, which is even stronger than the plus 5% that we have seen in Q1. And when we look at the main drivers, roughly 75% of the organic growth are actually contributed by the fertility and general medicine, cardiometabolic care franchises.

Further, Rebif was again organically stable, driven especially by very nice development in North America. The demand dynamics for our fertility products, and here, of course, especially for Gonal-f, remain strong the second quarter. And the competitor outage in North America helped again. I would like to make one note of caution here. So, as of today, none of the competitors is yet back on stage, so to say.

But, obviously, we cannot predict whether, when, and how aggressively they might return. So, I would advise not to extrapolate this growth into the second half of this year and to always keep in mind that, in 2017, we will obviously run against very tough comparables. EBITDA pre grew very visibly due to the good organic growth, but also due to favorable product mix. So, just remember the good performance of Rebif and Gonal-f and, of course, also due to the lift in our net commission income and expense from Pfizer and Xalkori. Please note also that we have realized a roughly €30 million booking on the disposal of the minority share in a company from our Merck Ventures fund, which is included in the EBITDA pre, as this is part -- let's say, the venture fund activities are part of our normal operating business.

With that being said, I would like to hand over now for the life science deep dive to Udit.

Udit Batra: Thank you, Marcus. And it's a real pleasure to discuss the life science results with you. Really, the headline is it's been a really good quarter again, sales at €1,413 million, with an organic growth of 8%, again and this is now the fourth quarter in a row where we have exceeded 8% organically as a growth rate. Let me give you a few highlights of the growth.

From portfolio perspective process solutions continues to drive the business with another stellar quarter at 13.5% organic growth, with continuing solid demand for our cell culture media and single-use systems. Another outstanding contributor is the services business growing close to 20% with high demand for bio-safety testing and this is the bioreliance business of Sigma-Aldrich. Applied solutions was in the mid-single-digit range with very good performance from analytical reagents and continued good performance, mid to high single digits, from biomonitoring. And research solutions tracked very well with the market at low single-digits in terms of organic growth. And here, the business was driven by our biology portfolio.

So, let me turn now to the geographic perspective. Process solutions had robust growth across all regions and really outstanding performance in China and Korea, which were well into the double-digit range. Research and applied had China in double digits and some emerging markets, especially in Latin America and Southeast Asia, double-digit growth, but really nice performance from a geographic perspective. Really, if there is a soft spot, it is in Japan. That continues with a soft academic market and really a flat business growth.

And finally, from an end market perspective, bioproduction and testing remain the largest drivers, both in pharma and especially in emerging and small biotechs. Biotech research from a research market perspective continues to outpace academia. But in general, the research markets are, as I mentioned, low single-digit. And the applied end markets are in the mid-single-digits. So, that would be a perspective from portfolio, geographic, and end market perspective.

And given this solid track record so far, we will raise our forecast to mid to high single-digit organic sales growth for 2016. And I want to make a brief comment here. Because we have a challenging base to compare against from now on, especially Q3 and Q4 of last year, we take that into account and expect the growth rates to be slower for Q3 and Q4. The Sigma portfolio has made a very good contribution to the growth and also to the profitability and now to the margin. The EBITDA pre reflects this and the continued delivery of the synergies.

You can see that in the strong development of the EBITDA pre at 29.1%, so really good organic growth, with process solutions being really the key driver and margin expansion due to product mix, solid cost discipline, and synergy development. Let me now turn to page fourteen and give you a brief view on where we are on integration. We really think of integration in three terms, generation of value, how the organization is being implemented, and the process harmonization. So, first and foremost is to maintain the sales momentum of the business during an integration, and that you can see from the organic growth. And I won't comment anymore on that.

Second, the synergy execution is very much on track. And some measures are listed on this slide. We have been very successful with our headquarter measures. Roughly 50% of the headcount measures have already taken place. We implemented four site closures and have really evaluated a few more, plus the distribution network.

And also our procurement actions are progressing very nicely according to plan. And this is also evident in the EBITDA pre that I showed on the previous chart. And you can also see some obvious gains from the expanded customer and portfolio access. And we have mentioned before as a prime example is the e commerce platform, where roughly 50% of the products in North America and over 30% of the products in Europe are already on sigmaaldrich.com. This is really a remarkable achievement by the team.

Secondly, on the organization, we've implemented the new structure. And it has been live since April and functioning rather well. We've also implemented a very systematic change management program. And I can tell you, after having visited so many sites in Sigma-Aldrich, legacy Sigma-Aldrich, culturally the two companies are very much alike. We are driven by our technical and customer orientation.

So, the culture integration, which is usually the toughest in an integration, is actually going well very, very nicely and well ahead of what we would've expected. And finally, it takes the longest to harmonize processes. For instance, we want all legacy Merck Millipore to move to the Sigma Aldrich ERP platform. And this is something that will take a few years and won't happen overnight. And we're working on other processes, like pricing, customer excellence and the like.

So, in summary, very good organic performance, good development or margins, and the integration remains very much on track. With this, let me hand it back to Marcus.

Marcus Kuhnert: Thank you very much, Udit. So, we are now concluding the deep dive or deeper dive sessions on the business sectors with having a short glance on performance materials. As Stefan had mentioned already in his opening remarks, performance materials have navigated quite well through the second quarter, which was effectively a full quarter now of destocking in the liquid crystals value chain.

And as a result, performance materials posted an organic sales decline of minus 4.7%. But, you will also notice that the EBITDA pre margin has held up very well at around 44%. And there are several reasons for this. First of all, our four pillar strategy in performance materials, which we have introduced to you during our last Capital Markets Day, is proving quite effective, providing a good degree of diversification. And all other segments, except for display materials, have shown actually a nice growth in the second quarter.

Secondly, obviously, also, active cost management plays a role. And a favorable mix effect within the businesses also helps. So, just to give an example here, so in pigments, we have seen a shift from mica to Xirallic. In the display materials area, the so to say little bit older technologies, TN TFT, is suffering at the moment more than the more modern technologies, which in general also have higher margins. And I would also like to mention, of course, a smaller piece of the Sigma synergies, so for the SAFCI tech business, which attributed to performance materials and also helping us to keep the margins at the usual or used high level.

However, contrary to our view in May, the liquid crystals inventory correction is continuing into the second half of the year. And we now see for the full year 2016 a moderate decline in organic sales. Nevertheless, we confirm our EBITDA pre guidance in a range between €1.1 billion and €1.15 billion. And we are also seeing now some first positive macro signals. For example, the inventory levels have come down significantly now in the second quarter.

So, if we exclude the 32 inch displays, which are still at quite elevated levels, we believe we are now around between two and four weeks, roughly above historical averages. And we have also seen that the negative price development, the price declines of the TV panel prices, that this has somewhat stabilized now since a while. With that, I would like to go now to slide number 16, to the balance sheet and be very brief here. Actually, not much news to share, slight decline in the intangible assets from the planned and scheduled amortization as for the Sigma acquisition. And on the liabilities side, we have seen a decline in financial debt following our deleveraging.

Equity is basically constant because profit after tax is eaten up by currency effects by increase in pension liabilities and the dividend payments. And other than that, there's not much to say here, except that, of course, we stay tuned and very much focused on bringing down the debt level in our balance sheet going forward. And that brings me also to the next topic, our cash flow statement on page number seventeen. Also here, very briefly, healthy operating cash flow, of course, driven by the good development of EBITDA pre, which was a little bit offset by higher tax payments in the quarter. And you also have to bear in mind that the second quarter is a quarter where we are paying dividends and also the employee bonuses.

CapEx rose slightly, partially also due to Sigma. And all in all, I think we had another healthy cash flow generation. The investing cash flow of last year contains the first realization of the hedging instruments for the Sigma-Aldrich financing. And the financing cash flow is negative, which you actually should expect also over the next quarters to happen because this is actually reflecting our deleveraging. With that, I would like to hand back to Stefan for the guidance 2016.

Stefan Oschmann: Thank you, Marcus. I'm now on page ninteen. And let's go to our full year guidance. We expect net sales of €14.9 billion to €15.1 billion, which is slightly above our previous guidance range of €14.8 billion to €15.0 billion. While our guidance for the exchange headwinds of minus 3% to minus 5%, and our expectations for Sigma sales contribution are unchanged, our organic growth has been considerably better in Q2, as we have just discussed.

And factors for this are US price increase for Rebif as of July, which contributes higher sales, a more favorable product mix, the 30 million disposal gain in healthcare, and new royalty income after a favorable patent decision in the US. With all that together, we now see EBITDA pre at €4.25 billion to €4.4 billion. The guidance takes account of the expected increase in R&D and prelaunch costs, as well as a continuation of the liquid crystal destocking process into the second half of 2016. Let's now look at the assumptions for our three business sectors on the next page. Healthcare, our EBITDA pre guidance lift is due to the following reasons, firstly, good growth and mix in Q2 and another 5% Rebif price increase in July in the US.

Secondly, also included are 30 million disposable gain in Q2 and royalty income on a patent granted in the US as of H2 2016. We see underlying trends, mix, R&D, and marketing and selling investment unchanged. We discussed fertility already. So far, the competitor has not returned yet. But, we cannot predict how and when this will change.

Either way, you should consider that we will have a high comparable in this business for 2017. Life science, Udit explained all the detail. Healthy demand leads to an upgrade of sales growth guidance and should continue to drive sales and earnings growth. Please note that, with the higher prior year base, growth in H2 could be lower than in H1. On PM, moderate organic sales decline.

We see the liquid crystal channel destocking to last into the second half. But, we see first positive macro signals. And we confirm our EBITDA pre guidance range. With this, we would conclude the presentation and would now be open for your questions. Thank you.

Operator: Thank you. [Operator Instructions] The first question comes from Simon Baker, Exane BNP Paribas.

Simon Baker: Thank you for taking my questions. A few quick ones, if I may. Looking at the costs taken for the Sigma integration in the first half, it looks like the 190 million that you'd previously targeted for 2016 is either very H1 loaded or maybe exceeded.

So, I was just wondering if you're proceeding more quickly and therefore spending more quickly on the Sigma integration and what that means to the timing, both of costs in 2017 and 2018 and also when we'll start to see the savings that they generate. Secondly, going back to display and liquid crystals, Marcus, you did give us some detail on inventory levels. I just wonder if you could give us a little bit more in terms of the overall level, not just the ex-32-inch panel, at least some idea of what that constitutes of the total, when you expect that to normalize, and at what level. And then finally, I just wonder if you could give us an update on your -- and a recap on your biosimilar strategy. There was some mention in the half-year report, but just an update on where you stand on your plans for that business would be appreciated.

Thank you.

Stefan Oschmann: Thank you. Udit?

Udit Batra: Thank you for the question. So, I'll start with a commentary on the way we're executing the synergies. As I mentioned, there are some concrete initiatives that we have implemented.

And I mentioned the headquarters, also the headcount actions. More than 50% of the headcount actions that we have targeted for this year have already taken place. In addition, we have been proceeding with site closure at a very, very good pace, probably a little bit ahead of plan as well. So, it's no surprise that you see a bit of the one-time costing coming through faster than we would have planned. Marcus, did you want to elaborate on that?

Marcus Kuhnert: Not necessarily.

So, I fully share your point. So, first of all, the synergy build is more or less linear as we have communicated to you in -- during the last year's Capital Markets Day, while the integration costs by nature are a little bit frontend loaded because we can actually launch and start some activities early on. And so, this is the normal picture. Also, in the second quarter, we have an inventory step up included, which has contributed to the numbers that you are seeing.

Stefan Oschmann: On biosimilars, the organization is meeting the defined operational milestones.

We have two compounds in Phase -- sorry we have one compound in Phase 3. And you can see that on the chart that you have in front of you on the healthcare biopharma pipeline.

Marcus Kuhnert: So, I take the question on inventory levels. So, as I said we are currently seeing the first positive macro signals, which means as we have anticipated, the inventory levels have started to come down since the first quarter of this year. We were at a quite elevated number by the end of 2015, beginning of 2016.

This has now undergone a quite significant correction, as I already mentioned during my presentation. We believe at the moment we might be two to four weeks still in excess of long-term averages. We see one area in TV panels, which is the 32-inch TV panels, which still show quite elevated levels. So, the two to four weeks is without the 32 inches. Including them, we are still higher.

We expect, as we said, this correction to go on into the third quarter. And then we believe, actually, during the second half of this year, that we should be back then to the normal, so to say.

Operator: The next question comes from Sachin Jain, Bank of America.

Sachin Jain: Hi. A couple of questions, please.

Firstly, just to follow up on the inventory, just so I understand and apologies for this, but I'm just checking the first quarter transcript. You referenced four weeks of inventory at that point of time. And if you're two to four weeks ex the 32-inches, then I'm just struggling to rationalize the set of comments. And maybe I've misunderstood and wanted you to just clarify. Then onto the questions, so the top end of life sciences full year 2016 guidance of high single digit obviously assumes that the 8% can broadly continue.

I wonder if you could just rationalize that comment versus the slowdown into H2 on the base effect that you're also mentioning. Also, on organic growth, I wonder if you can just touch on the organic growth within Sigma-Aldrich. That sits within portfolio, but I wonder if you can just disclose that. And then two product questions. Marcus, if you could just clarify what's assumed within guidance for going left for the year.

In your comments, it sounds as if you're assuming immanent competition. Wonder if you could just clarify that. And then on Rebif, if you could just clarify the size of the Russian tender, was that material to 2Q? Thank you.

Udit Batra: So, Sachin, I can start with the life sciences question. This is Udit, and then I'll pass it over to Marcus for the inventory.

I think your question, if I understood correctly, is the second half guidance, why we believe a bit of slowdown versus first half. So,

two comments: one, from an absolute value perspective, if you look at our guidance, the second half from an absolute value perspective will be higher than the first half, yet the comps from last year are much stronger. You will remember that we started to see 8 plus percent growth in Q3, Q4 organically. And that is a higher base. So, you will see a little bit of a slowdown because the base is higher.

Your second question was on the growth from Sigma-Aldrich. You're absolutely right that the organic growth refers to Merck Millipore as a competitor. And the Sigma-Aldrich growth, to give you a bit more color is rather similar. If you just look at what we are seeing from that part of the portfolio, it is about 8% if you remove the one-time impact or one-time gain that we would have had in the Roche portfolio that Sigma had brought in. So, you should expect a similar 8 percentage growth, 8 percentage point growth on that portfolio.

Those are the life science questions. And let me pass it over to Marcus. Your line was not clear. So, they're struggling to really interpret your questions. But, we will try our best.

So, I pass it over to Marcus.

Marcus Kuhnert: Yes, so, thank you. Sachin, indeed, I'm not sure that we captured all of your questions here because, indeed, the line was a little bit broke. So, you asked on the inventory levels and performance materials again. So, could be that I referred to earlier on the number excluding the 32 inches.

As we said, including this panel size, the inventory levels have been higher. And we have seen a quite significant destocking now in the second quarter of 2016. And as just pointed out, we believe that this process is going to continue into third quarter. And then we should, in the course of the second half 2016, reach normal levels again.

Sachin Jain: Maybe I can just clarify the question, Marcus.

It was, on the first quarter call, you'd referenced a four week inventory number. You're referencing a similar number now. I'm just trying to work out where the destock is giving similar numbers, assuming I've understood the two sets of numbers correctly.

Marcus Kuhnert: Yes, as I said, so we are currently, we are at a level of between we would say between two and four weeks. We have been in between higher than the four weeks.

And from this even higher point, the destocking has started. And as I said, it has come now significantly down. And we are on the way back to normal. You asked further on the to give some more information on Gonal f guidance. So, I would hand over to Stefan for that.

Stefan Oschmann: Sachin, Gonal f, we see a mix of different types of impact. On the one hand, we see very good fundamentals. There's real good market growth, driven primarily by China. On the other hand, we see the effect in the U.S., which is driven by the outage of our competitor. We have we just cannot predict when our competitor will be back on the market.

And the third type of impact that you might see is the impact of new biosimilars. We see that in Europe. So, going forward, you should expect biosimilars to take some share.

Marcus Kuhnert: Okay. So, I take the question on Rebif.

So, on Rebif, we believe actually that the development in North America has somewhat stabilized. So, as Stefan pointed out, we have been able to do another price increase in July, which should benefit us over second half of the year. The competitive situation in Europe, however, is still tough. Please bear in mind that the Q2 numbers are including a tender in Russia. So, if you take out this tender, which will obviously then will be missing in the third quarter, if you take this out, then the development in Europe is basically on the level what you have seen in prior quarters, maybe a little bit better.

But, we are still seeing quite significant declines in volume, which can contrary to the U.S., not mitigated and balanced by price increases that we have been able to undertake in the US. So, then you can make your own math where this leads you to. This would be our forecast on Rebif at the moment.

Operator: Next question is coming from Matthew Weston, with Credit Suisse.

Matthew Weston: Thank you very much.

Three questions, if I can. The first, coming back to Gonal-f and fertility, I understand your caution. What I would be very interested in is any past experience that you have had. As I recall, Ferring has been out of this market a number of times with stocking shortages. And so, I just wonder if, in the past, whether or not we've seen competitors come back into the market aggressively, whether it be price, sampling, or discounts, and whether or not historically you've been able to keep any market share that you have gained while your competitors are out of the market on a more sustainable basis.

Secondly, just with respect to healthcare R&D, at the beginning of the year, you gave us a range for incremental R&D spending that was likely required with avelumab. It looks like we're coming in very much towards the bottom end of that incremental spending. Can I just check that the first two very stable levels of R&D we've seen in the first two quarters are representative of what we should expect in second half, or whether or not incremental spending on avelumab or elsewhere may lead that to increase? And then finally, the upgrade in healthcare guidance, you mentioned this royalty on a new patent granted. Can you give us some indication on what the IP is, what the magnitude of the step up is? And most importantly, how sustainable is it? Is this just a one-time gain for past catch up royalties, or is this something which is going to be with you for a number of ongoing years?

Stefan Oschmann: Thank you, Matthew. Let me start with the fertility question.

Yes, we've seen such situations before in the fertility space also and also in other areas. It's impossible for me to predict what our competitors are going to do. But, yes, we did in the past experience aggressive tactics to get back into the business that had resulted in a transitory effect. But, we were able to maintain our market leadership. Very difficult, again, for me to say what kind of tactics our competitors would apply.

But, we expect them to fight for market share.

Marcus Kuhnert: So, I would take the second question, Matthew, on the healthcare R&D part. So, actually, at this point of time, we still stick to the statements that we have made beginning of the year on the guidance of the development of the R&D costs. So, if you do the math, if you take Q1 numbers, Q2 numbers, and if you project them towards the year end, that would, let's say, give you a number which is at the lower end of the corridor that we have communicated at beginning of the year. So, we said between 200 million and 300 million above the levels of 2015.

Just let me make another comment that the R&D cost is not so easy to predict because there are a lot of moving parts, so to say, be it the sequence of activities, invoicing, timing, etc. So, but, we feel still comfortable with the guidance that we have given at the beginning of the year, although I note that, if we would make the pure math -- and I do not believe, by the way, that H2 will be significantly higher than H1. So, I do not see a big back loading here. And then the math would lead you to the -- rather to the lower half of the corridor.

Stefan Oschmann: Matthew, let me give you a bit more information on the royalty situation.

So, part of our guidance upgrade for the full year of '16 is due to this new royalty income in the second half. And this is due to a patent that granted in the U.S. in the June of this year. It is related to the interferon business. And yes, this will also have an impact going forward.

Matthew Weston: Thank you very much. Any indication on the magnitude of the income? Are we looking low double-digit millions? Are we looking bigger numbers?

Marcus Kuhnert: 10 million to 15 million per quarter, roughly.

Operator: Thank you. The next question comes from Daniel Wendorff, Commerzbank. Please go ahead, sir.

Daniel Wendorff: Two remaining, if I may. And they both relate to the life science division. Udit, you mentioned the process solutions business was also very strong due to single-use product and cell culture media. Is that cell culture media part, is that already related to the Sigma-Aldrich acquisition, question number one? And second question would be relating to the organic growth in the process solutions division. Can you potentially quantify percentage wise what comes from already marketed products, which have been on the market and just for a few years, and they're just growing very strongly? And what percentage of that growth comes really from newly established products or newly launched products? Thank you very much.

Udit Batra: Very good question, Daniel. And I'll take both of them. On the first one, yes, indeed, the cell culture media I was referring to is the Sigma-Aldrich piece. If you just take a look at the combined process solutions growth, it is roughly 13.5% in this quarter. And year to date, we have a similar sort of growth as you combine the two businesses.

And the two strongest ones, as you mentioned, are the single-use portfolio as well as our services segment, which I mentioned earlier. But, the cell culture media is indeed referring to Sigma-Aldrich. Now, in terms of the organic growth of process solutions, marketed products versus new products, if I understand you correctly, you mean our products and not our customers' products, as in mAbs versus not. So, let me try to answer question on our products first. As you know, in process solutions, it takes us 8 to 10 years to really have a product pickup.

So, it's not really relevant to talk about launches in the last year or so. What we see for the products that were launched about 8 to 10 years ago, they constitute about 20% of our top line on an ongoing basis. And if you just look at from a customer basis, really most of the growth that we see is from marketed product. This is 80% of the growth that we will see, even in the next five years, we expect from marketed monoclonal antibodies. And the new products will contribute a bit lesser.

I hope that gives you a better clarity. I've tried to answer it from both perspectives.

Operator: The next question comes from Gunnar Romer, Deutsche Bank.

Gunnar Romer: Udit, as we have you on the phone, just let me ask you a few questions on life science. Firstly, starting with the guidance, I appreciate you have increased the sales guidance.

But, you haven't touched the absolute earnings corridor. Just wondering what's behind here, why you're becoming so to say, a bit more cautious on the margin. And then secondly, regarding process technologies in particular and following up to Daniel's questions, still nice growth, but not as much as seen, for example, for one of your main competitors Sartorius. And they have even seen further acceleration sequentially in that business. That just leads to the impression that you may be losing share.

So, just wondering whether you can put this into perspective. That would be very helpful. And then on healthcare, decent performance of Erbitux in the quarter. Just wondering whether you can share your expectations for the second half on that one. And then just to be clear on Gonal-f, what are you factoring into your guidance now for the second half? Do you expect the growth rates we've seen in the first half to continue, or do you factor in that we're already seeing a deceleration here in the second half? And then last but not least, on performance materials, I was just wondering whether you had an update for us on the OLED pilots as well as the SAVA launch.

Thank you very much.

Udit Batra: So, let me start, Gunnar. Thank you for the two questions. Let's start with the competitive growth rate. Let me just give you the punchline first.

We're definitely not losing share. If anything, we believe that we are gaining share across the key segments. Let me talk about just a bit of clarity on our overall business. The process solutions business is roughly 80% of the business is exposed to biologics, not all of it. And if you just take out bioproduction, and if you take a further apples-to-apples comparison, you would compare our process chemicals and systems part of our business and our process solutions services part of our business.

And on a year-to-date basis, the growth of those two segments is between 17% and 20%. So, I think that's not too shabby and quite comparable to any competitor. And what we're seeing is, as new molecules are coming on the market, we have more than our fair share of steps in the different processes. So, I feel very comfortable with the development of the business. The second question was similar to the second half sales.

As I mentioned earlier, the comps were versus last year are more difficult. And this is the reason why we feel very comfortable that we will continue to grow at similar rates, but a bit slower rates than last year, given the comps are higher. And if you just look at an absolute value perspective, the growth -- the total sales in the second half of the year will be a bit higher than the first half of the year.

Stefan Oschmann: On your question regarding Gonal-f, we have now included an impact of the competitor outage in H2. But, we're somewhere in the midrange.

We don't expect it to have a duration until year end. And we think this is a good approximation. On Erbitux, as you know, this is a true product. We see slightly organic growth. But, midterm, you should expect sort of stable-ish revenue development at best.

Udit Batra: Just coming back, this is Udit again. Coming back to your EBITDA pre question, I was just reminded. I think your question was also on the margins. If you just look at the organic sales rates from mid-single digit to mid-high single digits, let's say 5% to 7%, that implies a delta of about 17 million in sales. And with the EBITDA margin of 29%, that leads to about 20 million more EBITDA pre.

And that's well within the range of 1,620 to 1,670 of our EBITDA pre. Just wanted to make sure I came back to that and not just at the sales.

Marcus Kuhnert: You asked also for the update on OLED and SAVA. So, the OLED pilot, I think you are referring the printing technology pilot. So, here we continue to work on this pilot.

We are assessing at the moment the results. And this will still take a while until we come to tangible results that we can communicate. Basically, the same story for SAVA. So, in SAVA, so we are currently working on basically two new technologies. SAVA is one.

Blueface is the other one, whereby the first one, so SAVA, is more concrete. Development goes here in the right direction. If we have news to share, we will let you know.

Stefan Oschmann: Just maybe one more word on OLED. I've recently been on a tour, and I've also met several of our key customers in this area.

As OLED is becoming more and more the standard technology for mobile devices. And we see a significant pickup in OLED lighting. But, the jury is still out as to whether OLED is going to be the major technology in large displays. That hinges on the practicability of the printing technology. We feel that we are at the cutting edge in this area.

We're currently testing feasibility. We basically assume that the methodology as such works. But, there is a big still a big step to be taken from a sort of a pilot proof of concept into mass production.

Operator: The next question comes from Peter Verdult, Citi.

Peter Verdult: Good afternoon.

It's Peter Verdult, Citi. Just two questions. Marcus, just on performance materials, if I go back to the Capital Markets Day in December, the breakout session, the team at performance materials were pointing out that even the oldest LCD technology was still generating a margin around 30%, from memory, on EBITDA. I was wondering, is that still the case, or if you don't want to go there or give that level of detail, could you just remind us of the relative profitability's of those four pillars in performance materials, display, pigments, ICM, and advanced technologies, to give us a bit more of a flavor there? That's question number one. And then secondly, for Stefan, just on the BTK inhibitor, you also laid out your plan in autoimmune diseases.

I just wanted to understand, in terms of the potential partnership that you've talked about in the past, is that only going to be on the table if you want to pursue indication in oncology, or is it simply a gating factor where the Phase 1 data needs to be generated for the partner to meet your valuation? Just want to understand what the gating factors there are? Thank you.

Stefan Oschmann: So, let me start with the BTK question. You've rightly pointed out that we have two compounds, two lead compounds, in development, one in the immunology indication and one in the liquid cancer indication. We had communicated in the past that, given we reach the right milestones, that we would be open to partnering. That would have a similar, mixed rationale as when we did the Pfizer deal with avelumab.

We would want to be, we would be seeking for a partner with the relevant clinical development expertise, presence in the strategic US markets, and with the right financials. We will take these decisions as we see the data.

Marcus Kuhnert: On Peter, on your questions regarding the margin, so when I recall the Capital Markets Day, I do not think that we have provided detailed margin data on the level of product groups or segments. But, let me make a couple of comments here. So, first of all, display materials obviously is still the segment with the highest profitability within performance materials.

This has at the moment obviously suffered a little bit from pricing pressure as well as from declining volumes. That's quite normal. The fact that we have still been able to keep margins stable tells you the story that the margins in the other segments have developed quite favorably. So, and that is actually for especially for integrated circuits and for pigments. You will also note that advanced technologies is still in its infant stages remaining of the businesses.

So, here, we also said that, with the ramp up of OLED is getting more and more profitable or, let's say, the bottom-line contribution is expected to increase now. And we are also benefiting from our more diversified setup at the moment as liquid crystals at the moment only accounts for slightly more than 50% of the overall business and is well compensated by the other segments. And yes, so, margins are in good shape so far.

Operator: The next question comes from Richard Vosser with J. P.

Morgan.

Richard Vosser: Hi, thanks for taking my questions. First question, just on Rebif, just going into 2017, we're seeing some of the formulary pronouncements coming out from some of the US payers or PBMs. Could you just give us an idea of how they're thinking about Rebif and the interferons more widely into 2017? Of course, you've had a price rise for 2016 for the second half. But, how is 2017 looking? And linked to that, I think we're going to have, potentially have a launch of ocrelizumab into the space in 2017 as well.

Is your expectation that that will go into later lines of treatment and so that Rebif and the interferons will be largely untouched, so your thoughts there? And then second question or second area of questions, just on performance materials, could you just give us an idea of how, what proportion 32 inch televisions are? I would've thought they'd be quite a huge proportion of the volume, probably over 50%, so just some idea there. And you talked about maybe glimmers of positive elements on panel demand. But, could you give us some more color on the fundamental demand by geography of the large TV panels, maybe US, Europe, China going forward? Where are we with penetration and where are we in the replacement cycle and area? Just some color there would be great. Thank you very much.

Stefan Oschmann: Yes, thank you, Richard.

Well, let me start with your questions regarding Rebif. So, if you look at interferon performance, class performance, we see that interferons as such are somewhat losing share. But, we see that Rebif is performing well in terms of share within the interferon class. We have no reasons to believe that there would be a fundamental shift in payer perception as to the value of interferons going forward. And yes, we believe that, given the data that we've seen, that ocrelizumab will be in later stages, will be primarily used in later stages of the disease.

Marcus Kuhnert: So, on your PM questions, so first of all, the overall proportion of TV screens is still the vast majority of the business. So, between 75% and 80% actually is coming from TV screens here. The 32-inch panel is actually the single biggest group in that area. And it is a quite significant portion of the market still. However, the share is declining as the 32 panels are a little bit outdated with regard to the trend in the market to go to even bigger TV panel screens.

It is so regularly declining step by step. When we look on the elements of panel demand, we can or we see that, actually, the volume development is driven actually by area rather than by number of units. So number of units are at best stable. The volume demand is still driven by the area, which is increasing behind the trend of growing TV panel sizes and also growing of the affluence of emerging market population, who are ordering more and more TV panels. When we look on the demand patterns at the moment, so the only thing that we are seeing is that there is some uptick, especially in the emerging markets now behind the emerging Olympic Summer Games.

And what we also see is that the TV replacement cycles are getting shorter because -- due to the nature Internet of Things, so all the devices getting more and more intelligent. Simply, you would not wait today anymore 10 years before you buy a new TV screen, as already the next year's generation might have completely different and fancy features. So, many people are buying much, much earlier. So, that's also driving positively demand.

Stefan Oschmann: I didn't address your question on our assumptions Rebif pricing going forward.

And I need to be -- by definition, I need to be a bit cryptic on that. We've always stated that we price our product in line with value. And value is relative to other therapeutic options. So, as we cannot predict how competitive pricing is going to develop, we cannot make any forecast on this. However, we will continue our policy.

Operator: The last question comes from Vincent Meunier, Morgan Stanley.

Vincent Meunier: The first one is on the pipeline, can you please give us an update on the upcoming decisions for atacicept and also for any update on sprifermin, if possible? Second question, would you anticipate other disposal gains in the remainder of 2016? And the last question is on Xalkori implements. So, this will have an impact on the cost base in the U.S. I can imagine. And would you need now to add one or more other products to leverage these operations in the U.S?

Stefan Oschmann: Thank you, Vincent.

So, on atacicept and sprifermin, we are very close in both cases to completing the Phase 2 program. We expect the data readout in the second half of 2016. And that will trigger decisions as to whether we go into Phase 3. So, there is a first readout will be on atacicept, and sprifermin will come later in the second half of the year. You had a question on pipeline that, Vincent, could you do me the favor -- yes, further disposals.

Okay. So, we do not expect anything right now. Such things can happen when we have exits of assets that we own in our venture fund or businesses that we own. As you know, as a general comment, we have traditionally always been an active portfolio manager. We always looked very actively at whether we are the best owners of any business.

And with us having moved something like 40 billion in assets either purchased or disposed of over the past 10 years, I think we have a credible track record in that respect.

Marcus Kuhnert: Your last question was on, how does the Xalkori collaboration affect the cost base in the U.S. in 2016? Here, actually, we have done our homework. So, that means we have already built up the necessary infrastructure to keep the collaboration agreement running with Pfizer. This was already done actually end of last year.

In the second half, no more incremental costs expected from that end. And also, the overall buildup of infrastructure behind Xalkori was, I would say, limited.

Constantin Fest: And I think this was the last question. With this, I'm happy to hand over to Stefan for closing words.

Stefan Oschmann: So, again, thanks to all of you for making yourself available for this call.

Again, Q2 was a very good quarter for us, a very good quarter. We're pursuing our priorities in the three businesses aggressively. And that is in healthcare to keep the momentum in the currently marketed product and to deliver on the pipeline. In Sigma-Aldrich, it is to have a smooth and effective integration of that business into our life science business. And in performance materials, it is about keeping, defending leadership in the display area and continuing our innovative businesses in the other areas.

Thank you very much. And I'm looking forward to seeing you, many of you again at the upcoming events.

Constantin Fest: Thank you.

Operator: Ladies and gentlemen, thank you for your attendance. This call has been concluded.

You may now disconnect.